There has been a huge shift in the number of people buying houses through their businesses instead of as individuals. Recent numbers indicate that a growing number of funding applications for real estate are from limited liability companies or other corporations. Once you dive deeper into the subject, the reason why becomes very clear.
Table of Contents
Buying a house through a legally structured business umbrella can be advantageous in several ways. While not necessarily suitable for purchasing primary residences, this strategy works well for the purpose of buying houses as a business with the intention of profiting from them. This could be via fixing and flipping, holding and renting, or another real estate investment method that generates income for your business as a whole.
But why buy a house through your business in the first place? How different is it from buying a home as an individual? The first and foremost reason is risk-protection. As safe as investing in real estate is, having the barrier of a legal structure between your business investments and your personal assets ensure that there is a divide between the two that will protect you from repossession should you go into debt. Another key reason has to do with tax – the right ownership structure could have a huge impact on the amount you pay year-on-year. Along with some of the other key benefits, it’s not surprising that this method of investing is becoming so common.
When you are planning to buy a house as a business, there are several additional considerations you’ll need to take into account if you’ve only bought a home as an individual before. This is how to buy a house through your business the right way.
Trader Or Investor?
When looking at business structure options that are best for you or your partnership, it’s important to start by finding out if you’d be classified as a trader or investor. This largely has to do with the goals you have for your investments in real estate, which we’ll discuss in a bit more detail below.
If you purchase property with the goal of rehabbing it and selling it for a profit thereafter, you’d be classified as a property trader. For traders, setting up a limited liability company or LLC is recommended. This is because trading real estate as an LLC will see you work with more advantageous tax rates compared to other legal structures that can be used in real estate.
On the other hand, if you plan to buy property and hold on to it for a few years such as with a rental home, you’d be classified as an investor instead. In this case, if you were working solo you’d operate as a sole proprietorship, or with a partner you’d register an LLC or another type of legal structure.
But why does this matter so much? Well, the profits earned from trading is treated as normal income, while profits from investments can be considered to be capital gains. This leads to a huge difference in tax rates, and in how losses are treated. Income losses can usually be offset against other streams of income or capital gains, while capital losses are typically resolved against future capital gains.
From there, it’s time to focus on which business structure is best for your business based on the goals you have. Setting up a legal structure and using it as a foundation to buy real estate will come down to a handful of essential factors that will dictate your ability to invest successfully.
What Are Your Investment Goals?
After deciding which legal structure you plan on using, you’ll need to sit down and plot out what your investment goals are. Is your plan to earn property income that will cover your living costs? Do you want to build an extensive investment portfolio, benefit from home appreciation, or become an expert house flipper?
Depending on the investment and structure you have chosen, you may not have funds that are coming in consistently or be liquid enough to access when you need it. On the contrary, some investments will see you tie up funds for the long-term, especially if you’re planning to benefit from appreciation.
One of the most important parts of setting your investment goals is to think about how you will finance them. If you’re planning on using external funding like loans, you’ll need to go the extra step to find potential lenders that specialize in your type of real estate, in the location you are aiming for, and that are willing to fund businesses. This can prove more challenging than you might think.
If you’re planning on using your own funds to purchase these properties, there is an urgency regarding how you handle your finances. All purchases made for the purpose of the business must be done through the business, and your personal expenses should be kept completely separate. You don’t want any confusion to come up regarding the ownership of assets should legal issues arise for your business.
A useful tip is to document all of the financial payments and earnings that come into your business, especially if you plan on putting some of your personal funds in as a loan.
Real Estate Buying As A Business
Once you’ve reached the stage where your business is ready to buy homes, it’s time to get to the part where you make offers and acquire properties. Compared to buying a property as an individual, the buying process for businesses is slightly more convoluted.
Amongst the reasons why buying property as a business is more complicated is due to the flexibility it introduces. Since the legal structure is authorized to buy homes, what is stopping its partners from buying themselves primary residences for their own use? Ideally, you’d want to add certain limitations to your articles of incorporation that put forward rules about the kind of properties that can be purchased by the business and by which members.
The Benefits Of Buying Homes As A Business
There are several ways in which buying homes as a legal structure can be beneficial to those interested in expanding their reach in real estate.
The first is privacy; if you don’t want your personal contact details to be listed in public records, buying a home as a business gives you a sense of anonymity that individual buyers don’t get. This solution is often used by higher-end buyers to ensure they can’t be traced.
The biggest advantage however is definitely the level of risk protection that comes from acquiring assets under a legal umbrella. If the property is owned by a business, it’s the business that is liable when things go wrong instead of the individual. This means should an injury take place on the property, you won’t personally be liable and your assets will not be at risk.
While we all want to believe that legal issues only happen to other people, it pays to be prepared for all potential outcomes. Homeowners insurance might cover a portion of the damages should you have a legal issue, but without an LLC or similar structure in place, your savings, other investments, and private residence could be at risk. If you have that protection already in place, only the LLC, C-Corp, or S-Corps’ assets can be used to pay off damages. That’s why keeping your personal and business finances completely separate is so essential. This type of protection also applies to rental/tenant relationships.
One of the main reasons why many investors choose to set up a legal structure to buy property is for tax benefits. If you have an LLC, depending on how many partners you have, your income will be taxed on your personal tax return which can offer more favorable rates than those put to corporations. This is because the IRS considers an LLC to be a pass-through entity. LLC’s can also save on taxes in other ways, such as through self-employment taxes.
The Disadvantages Of Buying A House Through A Business
The biggest challenge you will face when buying a house through a business will be finding a lender. Not all lenders finance business-centric real estate loans, and even if you find one that does you still have to get over the hurdle of being brand new and unproven. Regardless of your ultimate goal for real estate investing, the chances are good that you’ll need to use external funding for a property purchase at some point. As a result of these challenges, you’ll spend more time tracking down the right lender, and you may even need to put extra money down to secure your loan.
The other disadvantage is the time, effort, and cost that goes into managing a structured investment business of this nature. Structuring a partnership will involve annual fees after the initial startup cost, and that doesn’t cover the costs of accounting you may incur to keep track of the business’ assets versus your own. Many legal structures are subject to reporting, and members will need to make sure that they are adhering to tax and regulatory requirements in their state.
Buying a house through a business might be a bit more convoluted than buying property as an individual, but those extra steps are worth it for the benefits that are involved. The fact that more people are using the umbrella of a business structure to power their real estate investments is not surprising considering how much risk-protection, tax advantages, and privacy comes from buying a business.
Most investors choose to use the LLC structure due to how easy it is to organize and because it offers significant tax benefits that other corporations do not. But there are several options out there and it’s worthwhile for you to go explore and find out which one is best suited to your investment goals.
That being said, this strategy is not suitable for all types of real estate investments and there are clear drawbacks that will need to be weighed carefully. It’s always advisable to do your own research and seek advice from a legal expert prior to registering to ensure that you are meeting all the legal requirements.