Why You Need A Legal Strategy for Real Estate Investing
Legal considerations are crucial for real estate investors to protect their interests and ensure compliance with relevant laws. We recently got together with our good friend, Bonnie Galam. As an attorney, Bonnie not only owns her own law firm but is a real estate investor herself! Bonnie is the perfect person to help bridge the gap between the legal and practical aspects of real estate. Here’s 3 legal tips to consider for your real estate investing:
Your legal strategy needs to be more than an LLC
Remember that ‘bulletproof’ doesn’t exist
Don’t wait until you have X number of properties before you start thinking about the legal stuff
#1 Your legal strategy needs to be more than an LLC
Forming an LLC (Limited Liability Company) is a common and advantageous legal structure for real estate investments. An LLC can act as reactive protection, think of it as your defense strategy, and includes benefits like:
Asset Protection:
One of the primary advantages of an LLC is the asset protection it provides to its members (owners). In the event of legal claims or financial issues, creditors generally can't go after the personal assets of the LLC members; they are typically limited to the assets held by the LLC.
Flexibility in Management:
LLCs offer flexibility in terms of management structure. They can be member-managed, where all members participate in decision-making, or manager-managed, where specific individuals are appointed to manage the day-to-day operations.
Pass-Through Taxation:
LLCs are generally taxed as pass-through entities, meaning that the profits and losses of the LLC are passed through to the individual members' tax returns. This avoids the double taxation often associated with corporations.
Tax Deductions and Benefits:
Real estate expenses and deductions may be more easily managed within an LLC structure. This includes property-related expenses, mortgage interest, property taxes, and depreciation, which can contribute to reducing the taxable income of the LLC.
Transfer of Ownership:
LLCs offer ease of transferability of ownership interests. Members can buy, sell, or transfer their interests in the LLC without disrupting the ownership structure or triggering adverse tax consequences.
Professional Image:
Operating real estate investments through an LLC can lend a professional and organized image. This can be important for attracting investors, partners, or tenants, as it demonstrates a commitment to legal and financial structure.
Estate Planning:
An LLC provides a mechanism for effective estate planning. Members can plan for the orderly transfer of ownership to heirs, ensuring a smooth transition in the event of death.
Privacy Protection:
In some cases, using an LLC can provide privacy protection for real estate owners. The LLC can be listed as the owner of the property, maintaining confidentiality regarding individual ownership.
Multiple Properties under One Entity:
If you own multiple real estate properties, placing them under a single LLC can simplify management, accounting, and legal compliance, streamlining your overall real estate portfolio.
Although an LLC and insurance can help protect you when things go wrong (reactive), it’s important to try to prevent things from going wrong in the first place! You must become aware of the laws in your jurisdiction in order to understand what you can and cannot do as a landlord and real estate investor. For example, you can be preventative when working with a contractor and knowing what you can/can’t legally say to your tenant. Many of these legal mistakes are not things that your LLC or insurance will cover. So make sure that you go beyond setting up an LLC and have a baseline understanding of preventative measures you can take to save you headaches and money! Need more help? Head over to Bonnie Galam to create a secure and streamlined rental portfolio so you can avoid legal headaches and increase profits! Make sure to use code WIIRE10 to save 10% on her programs.
#2 Remember that ‘bulletproof’ doesn’t exist
The term "bulletproof" doesn't exist in real estate or any investment, for that matter. Real estate investments, like any form of investment, carry inherent risks and uncertainties. While there are strategies to mitigate risks, no investment is entirely without the potential for challenges or losses. Here are 2 game changing steps to consider:
Actually review your bookkeeping - see where the money is going! Again, review your financials and find opportunities to improve them.
Try Baselane, the #1 banking platform built for real estate investors. It’s banking, online rent collection, bookkeeping, analytics, and more - all in one place. Join more than 40k real estate investors who trust Baselane to manage your rental property finances with confidence. Click here to open an account!
For Contractors - make sure your contractors are insured and licensed . Look at the licensing on your state attorney general’s office to check if it’s active. Have your contractor send a copy of their insurance. It is for everyone’s benefit!
#3 Don’t wait until you have X number of properties before you start thinking about the legal stuff
Addressing legal considerations from the beginning, even when you have just one property, are crucial for building a solid foundation and protecting your interests. Here's why it's important to think about legal matters early in your real estate investment journey:
Risk Mitigation:
Identifying and addressing legal issues early helps mitigate risks associated with real estate investments. This proactive approach can prevent potential problems from escalating and impacting your investment.
Legal Structure:
Determining the appropriate legal structure for your real estate investments is essential. Whether it's forming an LLC, partnership, or another structure, making this decision early ensures that you benefit from liability protection and other advantages from the start.
Contractual Agreements:
Properly drafted contracts are fundamental in real estate transactions. Whether it's lease agreements, purchase contracts, or partnership agreements, having legally sound documents helps protect your interests and sets clear expectations for all parties involved.
Regulatory Compliance:
Understanding and complying with local, state, and federal regulations is crucial. From zoning laws to fair housing regulations, adherence to legal requirements is necessary to avoid potential legal issues down the line.
Tax Planning:
Early consideration of tax implications allows you to optimize your real estate investments from a tax perspective. Planning for deductions, understanding depreciation, and implementing tax-efficient strategies can positively impact your bottom line.
Title Issues:
Addressing potential title issues early in the process ensures that the property has a clean title. This is crucial for a smooth transaction and prevents complications during future sales or refinancing.
Insurance Coverage:
Securing appropriate insurance coverage is a key legal consideration. Adequate property insurance, liability coverage, and other forms of insurance protect your investment and mitigate financial risks.
Tenant Relations:
Establishing clear and legally compliant tenant relations is essential for successful property management. This includes developing well-crafted lease agreements, understanding tenant rights, and adhering to fair housing laws.
Having a clear exit strategy from the beginning allows you to make informed decisions about your real estate investments. Whether it's selling, refinancing, or passing properties to heirs, a well-thought-out exit strategy can help you achieve your long-term goals.
Professional Advice:
Seeking advice from legal professionals early in your real estate journey ensures that you have the right guidance for your specific circumstances. Legal professionals can help you navigate complexities, avoid common pitfalls, and set the stage for successful investments. If you need help when it comes to a legal strategy for your rental portfolio, head over to Bonnie Galam and use code WIIRE10 to save 10% on her amazing programs!
By addressing legal considerations early, you not only protect your current investments but also set the stage for a successful and sustainable real estate portfolio. Consulting with legal professionals, including real estate attorneys, can provide valuable insights and guidance tailored to your individual needs and goals. Need more help? Check out our resources below. Happy investing!
Resources:
Get started with Baselane, the #1 banking platform for real estate investors
Visit Bonnie’s website and use code WIIRE10 to save 10% on her programs
Listen to Bonnie’s episode on our podcast and leave a review :)
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