I'm a huge fan of the investing philosophy of "Buy low, sell high" (as are most investors), and I've come to a point in my life when I actually have some cash to do just that. Since real estate has been on the decline for a while now, I figure it's a good time to jump in to the real estate market. To that effect, a partner and I are buying an investment property with the intentions of renting it out for a profit.
So far we are still in the early stages of negotiations. The property is a short-sale, which means we should get it for a very good price, but the bank that owns the mortgage has to be willing to take a loss on difference between what the seller owes and the sales price. The seller has accepted our offer this week, but we still have several months for the banks to make up it's mind about the disposition of the house.
Actually,the first step in the process was establishing a Limited Liability Company(LLC). It is our LLC that will be buying the property, not my partner and I. Since we are the only two members of the company though, it is close to the same thing. The importance of the LLC is mitigate some of the risks of owning and operating the property. If a person were to be injured on the property and sue the owners of the house, the owners could end of losing everything they own to pay off any judgments against them. That includes the rental house, their personal houses, other savings an investments. In today's litigious society, this is a remote but very real risk. By making the LLC the owner of the house, we limit our risk so that only the house and property might be lost, not everything we own.
Setting up the LLC was easy to do. Our state has a website where you can fill out the "paperwork" and submit the application in about 30 minutes. The fees were fairly reasonable at $200, and we didn't even need a lawyer. A few days later we got a letter from the Secretary of State confirming our LLC was created and a nice certificate to hang on the file (or file into oblivion). Once our LLC was confirmed we gave the name to our broker for the short-sale and the purchase-sales agreement was written so that the LLC will buy the house.
When starting a business it's important to keep business and personal finances separate. The LLC will have to file it's own tax paperwork, which can get pretty complicated depending on what type of tax structure your company has. The easiest thing to do would be to have the LLC disregarded for tax purposes, but you can only do that if the LLC is owned and operated by a single person (or married couple filing jointly). If the LLC was disregarded, it would be taxed like a sole proprietor business on the owners own tax return.
Since our LLC is owned by two individuals, we have chosen to be taxed like a partnership. This means the LLC doesn't pay any taxes directly, but passes all the tax burden onto the members of the LLC. You still have to file many additional forms with the IRS and State on behalf of the LLC, but the Federal tax reckoning will be done at the member's level instead of by the LLC. There are state tax implications that I have not fully explored yet, so more to come on that.
Also, we have applied for a federal Employer Identification Number(EIN). This will let the IRS track our companies activities by the EIN, and let us establish bank accounts and other financial services in the LLC's name. The EIN is used on all tax forms the IRS gets related to our LLC. The process was free and took about 10 minutes online at the IRS's web site (www.irs.gov). You just answer a series of questions about your business and give your contact information for your LLC, and you instantly get a EIN. We'll be on the look out for free business checking accounts in the next week to firmly establish separate finances.
