Purchasing Investment Properties with Entities
When considering borrowing money to finance an investment property, many, especially newer investors, view the process from a personal perspective. They expect to be taking out a traditional loan.
Seasoned investors, however, understand that sometimes borrowing through an entity is a better choice than co-mingling personal finances with investment activities. This is particularly true for those who understand the benefits and are willing to handle the extra legwork and expenses that setting up an entity like an LLC can entail – and whether the circumstances are best for personal objectives.
Borrowing though an entity for investment purposes isn’t right for everyone, but for those interested in risk mitigation and expanding operations more broadly, setting up an entity to use for purchasing and holding can be a good strategy. This is what you need to know about home loans to entities.
What Is a Home Loan to an Entity?
As the name implies, a home loan to an entity is a loan provided to a non-person, like a company or trust. For many investors, the most common entity used is a limited liability company, or LLC. LLCs are relatively simple and affordable to set up and can easily be used for real estate purchases. Therefore, they are popular among investors with plans for extensive holdings who want to avoid in tying real estate to personal finances.
Whether or not an entity is the best choice is another matter entirely, however. Investors considering this route should consult with their accountant or attorney, including with respect to the costs, the utility, and the benefits to be had by starting an LLC or other similar entity for the use of real estate purchases. For someone who wants to buy one rental property or has the opportunity for a single fix and flip, going through the legwork of an entity may not be worth the time and effort, though there are use cases for one entity per property. For those who have big plans and require more flexibility in financing, an entity can be a great call.
The Benefits of Home Loans to Entities
The popularity of setting up an entity for investment purchases is wholly related to the benefits, of which there are many. Those evaluating this option should keep these points in mind, regardless of real estate objectives.
Separate Liability Per Property
When borrowing through an entity, it’s best to create an entity specifically for each property that you purchase, though less volume investors may consider keeping one entity for investment purposes. This can spread liability and can also help with keeping finances separate. The main benefit is that if one property is causing trouble, it will not affect other properties.
One of the primary reasons for utilizing an entity like an LLC to own and finance real estate is risk reduction. As the name implies, an LLC is limited in liability. Rather than putting yourself on the line, your business entity is on the line.
When you borrow money as an individual, the loan is linked to your personal finances. If you cannot pay it back, miss payments, or otherwise make mistakes in borrowing, your own ability to borrow and make financial choices can be compromised. LLCs provide that protection. Banks can “pierce the corporate” veil that can make you personally liable, but it has strict steps. Some banks may also require a personal guarantee, but that won’t take away other advantages of using an entity for a property.
Easily Add Partners or Modify Business Ownership
Going solo can be a good option for those with specific investment goals, like buying a single property. However, in those circumstances, altering or changing ownership of a property can be very stressful and challenging.
By using an entity, however, it can be much easier to modify business ownership in a way that does not involve putting an investor on a mortgage or a deed. This is due to the ways in which entity ownership works, and how easily another party can buy into an existing business entity. Further, getting out of an investment should you want to leave a property in the hands of a partner can be easier, too. When an entity owns the property, it is not attached to you, even if you choose to walk away.
Significant tax benefits are available when purchasing a property with an LLC. The main reason is the elimination of double taxation. Without an LLC, the business profits pay tax and then the personal level is taxed. With an LLC, however, the income can be passed through just to the personal, thereby reducing taxes.
Setting up an entity isn’t right for everyone, but it can open numerous opportunities for those who choose to go this route. From a borrowing perspective, there are many advantages to consider, from an easier time obtaining financing to reduced personal liability on several fronts. Prior to leaping into investing solo, investigate the process of setting up an LLC and do the due diligence into how such a structure can best benefit you.
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