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In part 1 of our series Invest in Turnkey Properties the Right Way, we talked about Selecting The Right Team, and today we will talk about Step 2 – Setting Up Your Business Structure.
Step 2 – Setting Up Your Business Structure
For many of our clients, purchasing rental property in the US is a whole new concept, and there is certainly confusion revolved around how to setup your business, how the taxes work, and what papers need to be filed. So in today’s blog post we will talk all about how we recommend you setup your business structure to own property here in Michigan. It involves setting up your LLC, EIN and US Bank account, so read on…
Setup Your Limited Liability Company (LLC)
When it comes to holding real estate Michigan Turnkey recommends the business structure shown below for holding rental properties.
Using this structure, the investor sets up a single member Limited Liability Company (LLC), and this LLC owns the investor’s rental properties. This structure has two advantages – Liabilty Protection & Tax Flexibility.
As the name implies, the big legal benefit of an LLC is that it provides liability protection for the owner. Why do you need such protection? Well, these days many investors joke that the definition of a tenant is “A Plaintiff”.
All jokes aside, if you find yourself in a lawsuit due to something like a slip and fall accident on your rental property, the effects can be widely different depending on how you hold the property. If you own the property in an LLC, then you stand to lose all the assets within the LLC including the property. This is not preferable, but it pales in comparison to the scenario where you hold the rental property in your own name. In this case, a lawsuit can not only cause you to lose your rental property, but you can lose everything else you own as well.
Now, limited liability companies aren’t bullet proof, so you should seek the advice of a competent attorney when setting up your entity structure. There are additional things you can do to discourage lawsuits from being filed, and you also have the opportunity to carry liability insurance.
The second benefit of forming an LLC concerns the tax structure. By setting up an LLC you have the freedom to elect the tax structure that the LLC will be taxed as. For example, if the LLC has a single owner, it can setup to be taxed as a sole proprietorship, an S-corporation or a C-corporation. Or, if the LLC is owned by more than one person, you can elect to have the LLC taxed as an S-corporation, a C-corporation or a partnership.
For most of our clients, we advise them to set up a single member LLC to be taxed as a sole proprietorship. In this scenario, you receive the liability protection, but the LLC does not have to file its own tax return, so you will save on annual tax filing fees.
Other Things to Consider with LLC’s
Limited Liability Companies offer great benefits in terms of liability protection and tax flexibility, but there are some other things you should consider before deciding on this entity structure for holding your rental properties. An LLC will have costs associated with it. The costs include an annual filing fee of $25, and if you are not local to Michigan you will also have registered agent fees. The registered agent is required if you are not local because all Michigan LLC’s must have a Michigan mailing address. The registered agent provides a Michigan mailing address for you and will collect and forward any mail sent to your LLC.
Furthermore, there are things you need to maintain in order to keep your LLC in good standing and ensure the courts will treat it as a separate entity if you ever do find yourself in a legal battle. First, you must keep appropriate records for your LLC. This includes meeting minutes, financial records and annual statements. Next, you need to keep your finances separate from any other personal or business dealings. In the eyes of the law you are setting up a separate entity and you need to treat it as such. If you do not, the courts may find it fit to dismiss the existence of your LLC and allow a plaintiff to attack your personal assets. This is exactly what you’re trying to avoid, so keep things separate by running all the finances in a separate bank acount (more on that below).
All things considered, most real estate investors do elect to hold their rental properties in an LLC because of the benefits cited above.
Setup Your Employer Identification Number (EIN)
I know a lot of you are saying what is an Employer Identification Number (EIN) and why do I need one because I don’t plan on hiring any employees. Well, the name is a little misleading, but essentially your EIN is the number that identifies your LLC with the Internal Revenue Service (IRS) which is the US taxing authority. When you file your tax return, you will need this number. Additionally, you will need this number if you wish to open a US bank account.
Setup a US Bank Account
With your LLC and EIN setup, you are almost ready to invest in Michigan real estate. The last item we recommend is to get a US bank account setup. This will allow you to hold money collected from your rental properties in the US and prevent you from amassing large currency exchange fees every time you collect rent, or have to pay for property expenses. You will want to select a bank that offers access online. This is typically not an issue as most banks in the US have very good websites allowing you 24-hour access to your money.
How Do You Do All of This???
Okay, okay, I know there is a lot of information here, and it might be a little overwhelming, so we have a solution for you. At Michigan Turnkey, we’re applying the Turnkey mentality towards all aspects rental property investment, and this includes your business setup. We currently offer a service that will file for your LLC, setup your EIN and open your US Bank account. Additionally, we also offer a resident agent service through your property management company that will provide your resident agent services and submit your annual LLC filing.
Once you have selected your team and your business structure setup, you will be ready to invest in properties. Next time we will continue to talk about how to Invest In Turnkey Properties the Right Way as we talk about Step 3 – Selecting the Right Property.
How do I get started purchasing a turnkey rental property?
This is the most common question we receive from our clients, so we wanted to put some information together in a series of blog posts to help you understand the steps we recommend you take. At Michigan Turnkey, we understand that many of you are purchasing these properties from afar, and we strive to make every aspect of your investment as seamless as possible. We really try to take the concept of Turnkey much farther than just the property. We want to make your investment Turnkey in all aspects, and this includes your business structure setup, the purchase process, property management, property selection, financing and of course the property.
Today we will talk about the most critical step on the whole process – selecting the right team…
Step 1 – Select The Right Team
Okay, so you’ve decided to look at the opportunity to invest in Michigan real estate. You’ve seen how the Michigan Real Estate Market has declined over the last 5 years and you understand the buying opportunity that is currently in front of you. Your problem is that you live in Australia, or Hong Kong, or the UK, and you’re nowhere near Michigan. The opportunity looks very good, but you’re just not sure because of the long distance relationship you will have with your property…so what can you do?
Quite simply you need to work on building your team. When investing in rental real estate from afar, you will need a full team of individuals that will help manage your property, and you need to know that the team on the ground is working for you. So how do you build a good team?
Obviously here at Michigan Turnkey we pride ourselves in the team that we have built, but we understand you cannot take our word for it, nor should you. You’re thinking about investing significant amounts of money, so you should conduct your due diligence on your team just like you would conduct on the property. So, here’s what we recommend you should do…
Come to Michigan
First and foremost, I encourage all investors to visit the areas they will be investing in. If you’re planning to make a $40,000 investment (or more) into a rental property, it behooves you spend a few dollars to come to Michigan and see first hand the areas you will be investing in. A trip here will allow you to see the area, see properties, meet with your property manager, attorneys, accountants, contractors, bankers, etc. You will be able to meet the people you will be dealing with helping you manage your investment. I know this isn’t practical for every investor, but we certainly do encourage our investors to come see us here in Michigan.
Do a Google Search
Have you conducted a Google search about the individual or company you are dealing with? You can be amazed at what you will find by conducting a simple name, company name or email search in Google. I know I certainly was the last time I Googled my own name. To my dismay when I did this I found that there’s another Todd Brittingham in MacPherson Kansas who is a child molester. Obviously you need to make sure you are reading about the right individual or company when you do this kind of search, but it can be a great way to gain some insight into the people or companies you are working with.
Talk to Other Investors
One of the best ways for you to understand who you’re dealing with is to talk with other investors who have worked with them. At Michigan Turnkey we’re happy to connect you with other investors that we have worked with in the past. This is a great way for you to get an honest opinion about the team you will be dealing with and gain insight into their level of customer support.
Use Social Media
Everyone has Facebook right? Okay maybe everyone doesn’t but a good majority of people do. Interacting on Facebook and other social media sites is a great way to gain insight into your team members. We’re on Facebook, Twitter, YouTube, Bigger Pockets, and other social media sites. Come look us up and we would be happy to talk with you.
Ask Lots of Questions
If you’re new to investing from afar, you will certainly have lots of questions, so ask them! The responses you receive will not only give you the information you are looking for, but you will also gain insight into the people you are working with. Some of the things you should be looking at during these discussions in addition to getting your questions answered:
- Was the response delivered promptly? If it takes 3 days for someone to return an email, what will it be like after you purchase?
- Was the response clear? Communication skills are very important when working from afar, if you are confused by the response it is not a good thing.
- Were all of your questions answered? Attention to detail is critical, so all your questions should be answered every time, or at a minimum a plan to answer your questions should be established (i.e. I’ll get back to you when I find the answer).
Some of this stuff is common sense, but if you make a habit to constantly evaluate the individuals you’re working with you can gain a lot of insight into them and prepare yourself to make a decision whether to invest or not with that individual or company.
Okay, these are just a few ideas you can use to help you select the right team. If you have additional ways that you recommend, please by all means post them in the comments we’d be happy to get your feedback.
In our next post we continue our series on Investing in Turnkey Properties the Right Way and we will be talking about Step 2 – Setting Up Your Business Structure.
You’re probably thinking that depreciation doesn’t sound like a good thing…and how the heck am I going to make money from it? Well as it turns out, depreciation is a very good thing. In fact, for many sophisticated investors, it is their favorite form of income from an investment property.
So what is it? Well, in an effort to encourage investment in real estate, the US Federal Government has set up a tax deduction where you can deduct the depreciation of an investment property. In actuality, the property may be increasing in value, but that does not matter. This is referred to as a paper loss, because you didn’t actually lose the money, but the government is allowing you to take the deduction.
Now, there are rules on how the deduction is calculated and how much you can deduct, and I encourage you to consult with your tax accountant on this. For practical purposes however, I will give you some rules of thumb.
- For residential property, you can depreciate the property over 27.5 years.
- For commercial property, you can depreciate the property over 39 years.
- Only the improvements to the land are deductible. The land is not. A good rule of thumb is about 75% of what you paid for the property and improvements is deductible. Again speak with a tax accountant on this.
Now, to calculate the depreciation on a rental property you can use the following formula:
Depreciation = 75% x B /27.5
B = Basis (amount you purchased the property plus any improvements made)
Again I will mention that this calculation is a rule of thumb and you will need to speak with your tax accountant to get the absolute amount you can deduct. This calculation will get you pretty close though. So, for example, if you have a property that you purchase for $40,000 and, your annual depreciation deduction can be approximated by:
Depreciation = 75% x $40,000 /27.5 = $1090.91
So, for this example, you would be able to deduct $1090.91 every year for 27.5 years from your income thereby reducing your tax burden and increasing your return. This is just for one property…imagine if you had multiple properties.
Now the great thing is that you can take this deduction on your taxes even though you did not actually realize this loss. It is a paper loss, and the net effect is that your returns are increased. This is why depreciation is one of your best friends as a rental property owner.
If you’d like to start investing in Michigan Real Estate, feel free to contact us to get started.
As many of you know, we’ve been anxiously awaiting the arrival of our son…
As some of you may know, we’ve put together a series of 7 webinars leading up to our Michigan Cash Flow Property Tour which is being held next week July 7-9, 2011. These webinars contain loads of information you’ll need to succesfully invest in Michigan real estate. If you’ve missed any of the webinars please feel free to view them below…
Webinar 1 – The Top 10 Mistakes to Avoid When Investing in Michigan Real Estate
First Aired April 3, 2011 (Note: Fast forward to 2:00 to get to the start of the webinar)
Webinar 2 – Overview of the Michigan Real Estate Market
First Aired April 17, 2011
Webinar 3 – Property Location and Property Criteria to Maximize Your Return
First Aired May 1, 2011
Webinar 4 – Tax Planning, Legal Planning and Property Insurance
First Aired May 15, 2011
Webinar 5 – Property Management, Section 8 & Land Contracts
First Aired May 29, 2011
Webinar 6 – Pontiac Michigan – Market Preview
First Aired June 12, 2011
Webinar 7 – Detroit, Michigan – Market Preview
First Aired June 26, 2011
Here is our newest property in Pontiac located at 659 Wesbrook. This is a great little property needing very little repairs. We expect to have this one transformed into a full Turnkey property by August 1st.
If you would like more information on this property or any of our properties please visit our Michigan Turnkey Properties Page.
Here’s the full story that talks about the $13.9 million investment in Pontiac, MI…
Check out the video below to see an example of how we’re working with one of our international investors. We shot this a couple weeks back as we were planning the various renovations to a property this investor purchased from us. As you can see from the video we were very thorough in our walkthrough and presented the investor with different options in many cases.
This is exactly how we work with investors who will not be in town to oversee the properties. We know in many cases you cannot come to see the property, so we’re going to bring the property to you through the use of video, pictures and thorough communication.