When you are the investor who is putting money up to purchase residential rental properties that people are staying in, you are putting yourself on the line in terms of liability. However, the good news is that there are measures that you can take to ensure that you are protecting yourself from liabilities and limit what you yourself are responsible for.
The following are 5 ways that you can maximize your profit and protect your investments while minimizing the liability you on you as an individual at the same time:
Create Paper Trails & Document Everything – Preferably Through A Property Management Company:
Documenting everything you do and dating the documents helps you provide a “paper trail” to provide evidence that you have followed the required steps and done everything “by the book” in the case of an issue arising.
Hiring a property management company to manage your residential real estate investments for you. These companies are professionals trained to know the laws by which you must operate and are able to guide you on your way through all the laws and the “red tape” surrounding everything from purchasing properties to filing taxes to filing for evictions when tenants simply do not obey the rules or pay the rent on time.
Using one of these companies ensures that you are less likely to have an issue with the law. It also gives you the assurance that you are following the laws in place to protect tenants from illegal actions and ensures that you are not doing something wrong without even knowing it. These companies oftentimes have years of experience in the industry and can help teach you the right way to do things while handling the nuances of day-to-day operations for you while you focus on increasing your wealth and engineering further business growth.
Utilize A Land Trust When Purchasing Properties:
The problem with using your actual name on the properties that you invest in is that these records are visible and open for the entire world to read. If you use your own name on the properties you invest in you are making yourself a very easy target for anyone who wishes to come after you such as (past or present) tenants, lawyers, and attorneys.
The way around this?
Use a land trust: a land trust is an effective and simple way to keep your ownership of all of your residential rental properties private and to keep your ownership of these properties. This trust is a form of revocable, living trust that is used to take the title on a piece of real estate. This helps the investor who doesn’t want to be seen by the public to keep a very low profile and allows them to make it so that their properties and wealth as well as investments are not as easily discovered.
Determine Which Type of Corporation Gives You a Tax Advantage:
Considering your investments as a corporation will be an effective tool to help you with the buying and selling (also known as “flipping” of properties. If you do indeed do this sort of business then having your business set up as a corporation so that the it can be the beneficiary of your trust, which will help limit your liability. However, if you are labeled by the IRS as a “dealer” there will be a 15% tax rate on your profits to cover what is known as a “self-employment tax” which is paid by anyone work works for themselves in any sort of business dealings.
Understand If An “S” or “C” Corporation Suit Your Needs Better:
If you are filing as a corporation, you will need to know if you are going to file as either an “S” or “C” corporation, it will largely depend in your business’s needs. One is not largely “better” for residential real estate investors than the other. It’s a matter of doing the research on the IRS website and determining which class of corporation will better meet your residential real estate investment needs.
Consider Joining a LLC:
A Limited Liability Corporation (LLC) is another tool that you can use to help limit your liability as an individual investor through a statute that is passed by each individual state. Each state will have different rules as to how their LLC’s will operate, however, the most states do not restrict ownership and participation so this allows investors and corporations to participate in the LLC and to file for LLC status and protection.
Generally, the only types of entities that cannot be LLC’s are entities such as banks or insurance companies. LLC’s help by providing businesses with perks such pass-through taxes while most have no residency requirements. You are offered legal protections and limits the liability you personally have by owning the business (in this case rental properties) that you own, which in turn will protect your financial assets. LLC’s also give your company or corporation increased credibility so that suppliers and other business partners are more likely to wish to work with your company knowing that you are authentic and real (not a scam).
These are 5 of the actions that you can take or consider to help limit your liability as a residential real estate investor while still helping yourself grow your business and increase profitability without saddling yourself with additional liability.
In the end, working with industry professional who can help guide you also ensures that you are doing things properly, without causing issues for yourself that may come back to you in the future.