Hard money lenders like us come across many types of real estate investors. Some of them are doing it full time. They are heavy hitters that juggle multiple properties at the same time and need additional leverage. Others like the security of day-time jobs and flip houses on the side to supplement their income. Both can be very successful. However, regardless of the activity level, one thing is clear: those serious about running an efficient operation, building wealth and protecting themselves from risk are doing business as an LLC (Limited Liability Company).
We recently had a client who didn’t file his taxes on time. Stuff happen when you are running a hundred miles an hour. The only problem was that his IRS tax lien showed up five days before the sale of the property he just rehabbed. Talk about a closing being dead in the water.
There is a happy ending though. That particular client had the foresight to buy his property in an LLC. Personal tax liens don’t attach to LLCs, so we managed to close the sale on time. Such a happy ending would not have happened were the property title in his own name. What could have happened instead is every real estate investor’s nightmare.
IRS requires its tax liens to be paid before any significant transaction such as a sale or refinances takes place. Our client would have to pay his lien literally within days for the buyers not to walk away. Of course, he could have also chosen to negotiate with IRS and settle with them for less. Doing that would have required him taking his property off the market. He would have to continue to pay his loan interest, taxes, insurance and utilities. His property would sit vacant during the time incurring the risk of vandalism and theft.
Need more convincing?
Here is a list of reasons why hard money lenders love LLCs and why you should too:
Limit your personal liability.
If someone brings a lawsuit against you (got injured on premises, payment dispute, etc.) they cannot go after your personal assets, only those belonging to the LLC.
Protect your property from liens and judgments placed on you or your partners.
As an example of our client shows, creditors to any member of LLC cannot get the LLC assets.
Flexibility of ownership.
You have complete control by having a single-member LLC. You can also add your business partners or members of the family and change their ownership and income allocation percentages easily.
The ownership of any asset purchased or transferred to LLC is difficult to track – a major plus if you want to maintain a low profile.
Easier approval with hard money lenders.
Hard money lenders prefer borrowers who buy in an LLC’s name. Your property and its clear title is a key element of the transaction. Another consideration is that hard money lenders do not issue consumer loans. A property purchased in an LLCs name is another confirmation that it’s a business transaction.
Don’t have an LLCs? Good news is that they are easy and cheap to form. In Maryland, registering costs run only $100. You will need to comply with a couple of other requirements, but none of them are too complicated. Here are the links to help you form your own business in Maryland, Washington, DC and Virginia.
To form your business in Maryland, click here.
To form your business in Virginia, click here.
To form your business in Washington, DC, click here.