You seriously want to be like Mrs. Jones when you grow up. Now you are probably wondering, “Karla, who’s Mrs. Jones?” Well, let me tell you, Mrs. Jones is someone who buys all her real estate inside of her LLCs. So the question really becomes (and I get this question all the time), should I buy real estate inside of an LLC? Well, as a licensed tax professional, I am going to tell you why some people have chosen to buy real estate inside their LLC—like Mrs. Jones who owns over five rentals, all of which are financed under the names of LLCs. This arrangement is why I refer to her as Mrs. Monopoly.

Personal Credit

The first thing I want to talk to you about is the risk of buying real estate in your own name. I know many who are starting out don’t have many options and that often leaves only your credit. So, you buy real estate in your own name, no big deal right? But when you do that, what is affected is your credit, and every time you purchase real estate, you have a debt toward your credit.

While this may not be a concern for many, when you purchase real estate in your name, people can search your name and they can find the properties you own. Your information available for the public to see is one thing, but having real estate in your name leaves you liable in the event of a lawsuit. Lawsuits can bring legal fees as well as time lost.

You also may be exposing your family thanks to today’s technology and people’s ability to search, for not just you, but also those related to you. So those are the considerations you should take when you are deciding whether or not to purchase property in your own name or in the name of your LLC. The LLC will at least give you some type of anonymity and protection away from people who just might be looking for you.

An Established Company

Ask yourself, “Am I ready to buy real estate in the name of my LLC?” If you are new to having an LLC, it’s important to note that typically banks don’t like working with newbie companies. When you are thinking about buying real estate in an LLC, remember that the banks will look at how long you have had your company. Don’t be surprised if a bank chooses not to lend you money as a brand-new real estate investor with a company that hasn’t been around for more than two years. Banks want you to be a seasoned investor with a track record of being able to hold on to the property and make payments timely.

You may want to get out of being just a regular property owner and become a real estate investor. Having an LLC will allow you to start building your credit and invest by purchasing inside of your LLC through the bank. And furthermore, if you do not have an LLC or have a brand-new LLC, you don’t have a Paydex score. A Paydex score to a business is a FICO score to an individual.

It is really important because building credit under your business allows you to purchase more properties, enables you to make purchases outside of your personal credit, and overall, have more fun with your money. This is what the banks look at when going through the lending process, and if you don’t have that, then you will not be able to finance property through an LLC, and so you may have to personally guarantee it, which is also something for you to consider. So remember an LLC builds credit through a Paydex score, and if you don’t have one, you may be able to go online to Dun & Bradstreet to apply for a Paydex score or view your data/score reports using their website.

Title Savvy

You also want to have a relationship with a title officer. Why is that? A title officer is someone you utilize to transfer the title of a property from your personal name to the name of the LLC. Even if you start out owning property in your name, at some point, you need to start using the name of your LLC. If you transfer the title from your name to the name of your LLC, now your LLC owns an asset. This is a process referred to as a quick claim deed. This is a document that allows for the title of the property to quickly transfer from one name to another. Typically, that transfer is going to be for zero consideration, meaning no additional cost to make the transfer.

With a quick claim deed, you can transfer the title of the property prior to the closing of the escrow quickly by using one document. Once you have done this, you also want to avoid taking rental losses because you are trying to build business credit inside of your LLC and banks like businesses to have positive income. You have to be careful about taking too many write-offs inside of your LLC. You also should try to have positive income. Building your credit in these ways will help you then refinance that property in the name of that LLC, if you need. Not only that, but when it comes time for you to purchase that second property under that LLC, you don’t want to show losses, you’ll want to have positive income so that the bank will just say yes.

Remember, when we are talking about business credit, look at the Paydex score and ways to improve it, so you’ll be ready to take the real estate world by storm.

If you really want to be like Mr. or Mrs. Monopoly, research the concepts shared above and speak with a licensed financial advisor when needed.

See the article here.

By Karla Dennis – Forbes Councils Member

Published September 6, 2022