When you are preparing to get into real estate investment deals, it is very important to consider what entity you would like to establish in order to proceed. There are typically two ways to do real estate deals. The two most common entities are the Limited Liability Company and the Limited Partnership. These two entities offer the most flexibility and are the ones you encounter most frequently when acquiring or holding real estate.
The Limited Partnership is where you have a general partner or “sponsor”. There are limited partners who are putting in money. Let’s say you have a $500,000 deal. You could have 10 lenders putting in $50,000 each. The general partner generally puts in no money. You or your entity would be the general partner to run the project.
You did the leg work and found the deal; you did the analysis, and got it under contract. Once it closes, you will be the asset manager, hire the property management company, manage the property management company, and increase the value of your asset. The limited partners can be individuals. Their liability is limited to the amount of their individual investment.
So in our case, they would only lose $50,000. The general partner, however, takes on all the liability. That is why you want the entity as the general partner and not you personally. The Limited Partnership is particularly valuable on properties that you want to hold and you can get liability insurance to protect the property as well.
The Limited Liability Company is very flexible. You can have one with a sole member or one with 10 members. You have a manager and members. The members are passive and the manger(s) are active.
You can have the LLC’s own your properties and you can create a new LLC for every property to keep it segregated. You can buy a multi-family property and have the LLC take the title. You can have lenders to your LLC.
You can be a manager and a member of the LLC. The LLC can own the property. You can control the LLC but the LLC owns the property. You only own interest in the LLC.
So when you are making your preparations for real estate deals, be sure and examine your options when it comes to creating an entity. Consult with your attorney. Again, you want to be sure that you go with the best option for the deal that is on the table.
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