Real estate sales and brokerage is a $164 billion market in the United States, and it is expected to grow by 0.7% in 2021.

However, real estate investments come with a serious liability risk if you decide to work as an individual without forming a business entity or run a Sole Proprietorship. To get personal liability protection, it is important for you to incorporate your real estate company or form a real estate LLC.

While many real estate agents and investors choose to incorporate their real estate businesses, forming an LLC is also a popular yet easier choice.

Wondering why a Limited Liability Company (LLC) is a good choice for your real estate business? Let’s discuss the pros and cons of forming a real estate LLC first.

Pros and Cons of Forming a Real Estate LLC

LLCs have become one of the most popular business entity types for real estate investors. Business owners prefer to form a Limited Liability Company when buying, selling, and renting a property so that the LLC becomes the legal owner of record, not the individual.

Pros of Forming a Real Estate LLC

  • Forming a Limited Liability Company helps you limit your personal liability for any unforeseen circumstances related to your property.

For example, if someone is injured at a property you own, they can pursue a legal claim against the property owner. If the property is an asset of your LLC, your personal assets will not be exposed to lawsuits or compensation claims.

  • Holding real estate investment property in the name of an LLC makes your business appear more credible to the public. It will be easier to find tenants to rent your property.
  • You can easily sell your LLC and its associated assets through a seamless transfer of membership interests.
  • You can also form a Series LLC that will serve as an umbrella company including multiple LLCs for each property you own. This can help you protect each of your properties against any lawsuit or financial dispute associated with other properties.

Cons of Forming a Real Estate LLC

  • If you’ve mortgaged any property as an individual, you (as the property owner) need to pay the balance in full while transferring ownership of the property to the LLC. It is known as the “due on sale clause.”
  • Some states might need you to pay transfer taxes when you transfer the ownership of your property to an LLC.

However, the pros outweigh the cons and, therefore, LLCs are becoming a popular choice for real estate investors and property owners.

The Step-by-Step Process to Form a Real Estate LLC

Here’s the step-by-step process to form a real estate LLC and start conducting business:

Step 1: Create a Business Plan

Building a real estate business to generate a seven-figure income is not easy. You need to plan ahead to start and grow your company the right way.

You should:

  • Identify the nature of your business. Do you want to buy and sell or rent properties? Which types of properties do you want to deal in – residential or commercial?
  • Conduct market research to understand consumer demands and competition.
  • Arrange business financing through business grants, loans, etc.
  • Create a marketing and sales strategy to attract, nurture, and convert potential leads.

Step 2: Complete Real Estate Licensing Requirements

Not everyone can form a real estate LLC. You need to take pre-licensing courses and clear your state licensing examination to acquire a real estate license first. After that, you can file a real estate licensing application to get authorized to form a real estate LLC.

The cost, eligibility, and time required to get your license will vary from state to state, which is why you should consult with local authorities.

Step 3: Work with a Real Estate Broker or Company to Gain Experience

Getting your real estate license isn’t enough. You also need to work with a broker or an already established company to understand how the real estate industry works.

In fact, a majority of states in the U.S. require that you work as an agent for 2-3 years before you can set up your own business.

Many real estate agents choose to work with national franchises and virtual brokerage companies. You can also find work in local brokerages and agencies to gain experience and learn about how things work in your area.

Step 4: Form Your Real Estate LLC

Once you have got your license and work experience, it is time to set up your own company legally. To form a real estate LLC, you need to:

  • File Articles of Organization with the Secretary of State.
  • Create an LLC Operating Agreement, defining the roles and responsibilities of each LLC member.
  • Acquire an Employer Identification Number (EIN)/Tax ID from the IRS for taxation and hiring purposes.

An easier way to form your real estate LLC is to take advantage of our simplified, secure, and cost-effective filing service. You will have to fill out just one, simple LLC formation application and our professionals will take care of all of the legal paperwork for you.

Step 5: Open a Business Bank Account

Along with buying and selling properties in the name of your LLC, you should create a business bank account to do all transactions. This will help you track, manage, and report your business expenses and profits more efficiently.

Step 6: Focus on Growing Your Real Estate Business

The most important step to turn your real estate LLC profitable is to find, engage, and convert potential customers.

You should:

  • Build a real estate website to feature all of your properties and services (both for sale and rent).
  • Showcase your properties and services on the top real estate listing websites such as Realtor.com, Zillow, and Trulia.
  • Create social media profiles for your real estate business and post attractive photos and videos of your properties.
  • Build an email list to reach out to people who showed interest in any of your listings online.
  • Focus on delivering the best-in-class customer experiences to encourage conversions and bring repeat and referral business opportunities.

Frequently Asked Questions

1. What is a real estate LLC?

An LLC for real estate is an established identity that allows a real estate investor to do business as a company and not as an individual. An LLC offers personal liability protection to the owner from attorneys and financial disputes and makes it easier to attract investors.

2. Can I buy real estate properties with an LLC?

Yes, an LLC can purchase real estate properties in both residential and commercial sectors. It can also sell and rent spaces to tenants to make money.

3. What is the best state to form an LLC for real estate?

The best states to form an LLC for real estate include:

  • Texas
  • Illinois
  • Delaware
  • Nevada

These states also allow you to form a Series LLC for added liability protection.

4. What is the downside of forming an LLC?

The downsides of forming an LLC include:

  • Forming an LLC is more expensive than forming a Sole Proprietorship or a Partnership.
  • You need to pay self-employment taxes.
  • LLCs need to maintain their own records for annual state filings. Many states also require that you pay an annual state filing fee.

5. How do the owners of an LLC get paid?

As the owner (member) of an LLC, you can receive company profits, called distributions, throughout the year or at the end of the year.

By default, LLC profits are allocated to members in proportion to their ownership interests. However, an LLC can also choose to use a different structure for distributing profits. You just need to define this in writing in the LLC Operating Agreement.

Ready to Form Your Own Real Estate LLC?

Forming an LLC is one of the best decisions for real estate investing as the LLC structure offers limited liability protection and other advantages. You can open a business bank account, buy liability insurance, form a credible business entity, and do so much more easily than you could with a Corporation.

Whether you decide to form an LLC or incorporate your real estate business, we can help you complete the legal formalities and paperwork correctly.

Have other questions about forming a real estate LLC? Leave them in the comments below. We’ll be happy to help!

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