Discover 101 Amazing Real Estate Tips and Secrets
Asset Protection for Real Estate Investors
The first 10 years of my real estate investing I ran my business as a sole proprietor because I
really didn't know any better. Luckily, I survived with only minimal damages, but there comes a
point when it is time to assess the best legal structure to use for real estate investing.
If you ask 10 experts you are likely to get 10 different opinions. With that in mind, I'll share my
opinion and experience. Remember: free advice is always worth what you pay for it.
If you are a beginning investor, it's probably best to not worry about asset protection until you
actually have a few assets to protect. Why spend time and money setting up a business entity
and creating tax reporting requirements unless you need to? It's like buying full coverage auto
insurance on a beat--up Gremlin...what's the point?
Once you have assets and something to protect, then it's time to set up your business
structure. Question # 1: what is your net worth? Question # 2: do you have assets that are at
risk? If the answer to either of those questions is, "Yes," then you need to take the next step.
Assuming you want to set up an entity for wholesaling properties, the most popular are an LLC
(Limited Liability Corporation) or a C Corporation. There is much debate about which one is
better, but I prefer the C Corporation because the first $50,000 is taxed at 15% and you can
have a kick-butt employee welfare plan to write off many expenses. With an LLC, the income
is passed through. If you start making money, you'll wish you could pay only 15% on some of
it! Trust me on this one.
Why is the tax issue such a big deal?
Here's a simplified example. If you make $100K personally you are taxed on the full amount
(35%) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars.
However, with a C Corporation if you could make the same $100K on paper, but have $50K in
allowable expenses that you can write off. So you get taxed o