Investing in real estate can be a daunting prospect for newcomers. Not only is there concern over the feasibility and success of your brand-new venture, but there are technical aspects that you may not totally understand yet. From taxes and forming entities to getting a real estate license, it is all intimidating.
However, let us demystify a few things for you. Are you ready for a big relief?
You do not need a real estate license or an LLC to be successful in real estate investment.
Let’s talk about why you could pursue these things as a real estate investor, but why you certainly don’t have to. In some cases, it might be better that you don’t!
Do Investors Need a Real Estate License?
In our context, which is that of buy-and-hold, passive turnkey investors: absolutely not. Because you are not the one out there seeking out property deals yourself, there is little need to become a licensed real estate agent.
You don’t need access to the MLS or to the deals that can come an agent’s way. The only real benefit a passive investor receives is that of networking connections and a deeper real estate education. Unless you want to pursue a full-time career in real estate, don’t bother with getting licensed.
Not only does it take time, but there are significant ongoing costs of getting licensed in real estate. In the first year, you can expect to tally up to $3,000 in expenses. There’s the cost of the education itself, taking the exam, insurance costs, NAR membership, and more. Most states require new agents to hitch their wagon to a broker for at least a few years — and they will charge you for the privilege.
Maintaining your license can cost around $1,200 per year when it’s all said and done, though this varies by state and association.
While that might not seem like a lot of money, the added ongoing cost doesn’t make sense unless you actively pursue a career as a real estate agent. While the combination of agent and investor can be a force to reckon with, we don’t recommend this path for investors who intend to stay passive. There are ways to network and continue your education in real estate investment that do not demand so many of your resources.
Should I Form an LLC?
One of the motivating factors for real estate investors to form an LLC is to separate their personal finances from business finances — while also protecting personal assets. The idea is that you not only have a separate bank account for investing (which streamlines the tax filing process), but you are protected from personal liability (hence “limited liability corporation”).
Your LLC becomes an entity that is a barrier between someone suing you and you yourself as an individual. Even if you do not form an LLC, liability insurance is always a good idea!
Some may also see an LLC as a way to expand their tax advantages. And it’s true, under an LLC (which files taxes separately) you have access to more write-offs and incentives.
It seems like forming an LLC is a win-win for the real estate investor, but it’s not that simple.
Like a real estate license, there are ongoing costs and complications associated with an LLC. For many investors — particularly those with only a handful of properties — the advantages do not outweigh the costs. While the idea of being sued might seem terrifying, real estate investors will find (as we know from experience) that settling without it getting that far is often more cost-effective.
Not only that, but with a company like REI Nation on your side, your risk exposure in this area is limited. That’s because we dedicated ourselves to quality service and excellence from every angle. Our dedication to communication with investors and residents means that there is little room for the kind of problems that lead to lawsuits.
As a real estate investor, you probably don’t need to form an LLC. When financing a property purchase, interest rates can fall more in your favor as an individual instead of an entity. It’s also more than possible to keep business and personal finances separate without forming an LLC.
Really, you only need to worry about an LLC if you are partnering professionally or dealing with a high volume of properties and capital.
Naturally, you will want to discuss your investment goals and strategy with your CPA or lawyer to determine whether or not forming an LLC is a prudent and necessary move to make. At the end of the day, most passive, buy-and-hold investors do not need to do through the effort and expense of forming an LLC.
Take advantage of our over 15 years of experience. Leverage REI Nation’s knowledge, systems, and resources to build your passive investment portfolio!