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. This is especially so if you decide to work as an individual with a Sole Proprietorship without starting a legal business entity.

The reason here is that your liability can be extended to your personal assets too.

To get personal liability protection, it’s important for you to incorporate your real estate company or start a real estate Limited Liability Company.

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

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

Pros and Cons of Starting a Real Estate LLC.

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

Pros of Starting a Real Estate LLC

Here are some benefits you stand to gain from starting an LLC.

• Reduced personal liability: Starting a Limited Liability Company helps you limit your personal liability for any unforeseen circumstances related to your property.
  For example, if someone is injured on 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 property will not be exposed to lawsuits or compensation claims.

• Added credibility: 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.

• Ease of selling: You can easily sell your LLC and its associated assets through a seamless transfer of membership interests.

• Multiple LLCs: You can also start 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.

• Ability to register in a different state: When starting a real estate LLC, you can file your real estate business in a different state than your home state. This is especially beneficial if your real estate property is in that state.
  It can be even more helpful if the state has lenient tax laws and business regulations.
  For instance, one of the best states to start an LLC is Delaware. It’s known for its business-friendly regulations your real estate LLC could take advantage of. These include saving on taxes, low registration fees, an expedited registration process, and favorable legislation.
  You may need to incur some extra costs, but forming a real estate LLC in other states can have more advantages than one.

• Protection from personal liability: As mentioned, filing for a real estate LLC protects your personal assets in case of a lawsuit. The company will be treated as an independent entity from you in legal issues. Other forms of business, such as a Sole Proprietorship, however, do not enjoy this advantage.

• Tax benefits: With a real estate LLC business structure, unlike Corporations, your business is not subject to double taxation. This means that besides taxing your individual income, the Internal Revenue Service (IRS) will not subject you to corporate taxes when you start an LLC. You’ll have to pay a self-employment tax though.

• Better loan offers: When starting a real estate LLC, you are more likely to get better loan terms and interest since it’s a legal business entity. That hands it greater credibility than a Sole Proprietorship. Even if you’re the only member of your LLC, your loan terms will differ from those your lender would have offered to an individual.

Cons of Starting a Real Estate LLC

• Paying the balance: 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.”

• Pay transfer taxes: 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 Forming a Real Estate LLC

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

Step 1: Create a Business Plan

Step 2: Complete Real Estate Licensing Requirements

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

Step 4: Form Your Real Estate LLC

Step 5: Open a Business Bank Account

Step 6: Focus on Growing Your Real Estate Business

Let’s look at each step in detail.

Create A Business Plan

Starting a real estate LLC business to generate a seven-figure income is difficult. You need to plan ahead to grow your company the right way. A real estate business plan helps you find a framework for starting and scaling your business operations and planning future finances.

Before coming up with a business plan, 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.

These are some of the major items that will form the basis for your future real estate business. A real estate business plan helps you put this all down on paper, acts as both a reminder and a progress tracker, and gives you a sense of direction.

When coming up with your real estate business plan, first start by writing an overview of what exactly your goals will be. This would help you quantify your business growth as you head towards your goals.

It answers the most critical questions of your business, such as:

• Who are your target clients? E.g. are they millennial homeowners or renters?
• What do the financial projections for your business look like? How much do you need to keep your business operational?
• What is your marketing budget? How much do you need to spend to generate leads?
• What are your sales targets?
• Where will you be located and why?
• What are some of the marketing opportunities to look out for?
• What’s your marketing plan? What channels do you think will be most effective in making your business known?

Once you have your overview, you need to make it adaptable. This way, you can change it as you progress, and either readjust your budget, targets, etc.

When you’re starting to create a real estate business plan, you also need to assess your strengths and weaknesses.

For this, you can conduct a SWOT analysis. This helps you study your competition and know what they’re doing better than you. It also helps you identify the USPs you bring to the market so you can capitalize on them.

Then, you can assess the opportunities in the market that competitors haven’t explored yet. This way, you have an upper hand before even starting your real estate LLC.

As you do so, look at your potential weaknesses, for instance, financial constraints. Anything you think would impede your progress. This helps you come up with solutions early enough.

Your financial position matters when starting your real estate LLC formation process. For this reason, you also need to come up with an investment strategy. As a real estate investor, you need to know what kind of property to invest in depending on your market.

Your financial plan and investment strategy go hand in hand. You will need to keep track of all your cash flows and income, expenses, assets, and liabilities. You will also need to make short-term and long-term projections of the same. This also goes to the financial section of your real estate business plan.

Last but not least, you’ll need an exit plan. No one sets their business up for failure, but if it happens, you’ll need a backup plan. This is important to save your business or minimize your losses in case things don’t work as per your business plan.

For instance, let’s say that your property lasts too long in the market or your rentals remain vacant too long. You’d need to come up with ways to handle such instances as they could lead to losses, and you can include those in your exit strategy.

Complete Real Estate LLC Licensing Requirements

Not everyone can start 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 start 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.

With a real estate LLC, you don’t necessarily have to register your business in your home state. Therefore, you will need to know the regulations for each state before you decide to start a foreign LLC there. You can find these regulations on the Secretary of State’s website for each region.

If you have different real estate properties and a physical presence in other states, you’ll have to register a foreign LLC in each of these states.

To start the process to get a real estate license, you’ll need to follow this process.

• State licensing requirements: As mentioned, regulations vary by state. Therefore, you’d have to familiarize yourself with your state’s licensing requirements. Each state has a real estate governing body and you can find their regulations here.

• Take pre-licensing classes: Each state has an accredited pre-licensing course for real estate licensing qualification. You will have to complete this course according to the state you want to start your business in.The classes and the number of hours the course takes vary too. For instance, in Georgia, you’d have to take a 75-hour pre-licensing course, while in California the course takes 135 hours.

  The individual states also set the passing score required to qualify for the license. The licensing course is one of the major expenses you’ll incur before starting your real estate LLC. It’ll cost you roughly $200 to $700, or more, depending on the state.

  The courses help you understand how to transfer real estate between people and some basic legal real estate knowledge. Some lessons from the course include real estate law, record keeping, and current legal issues.

• Take your real estate exam: You need to pass your pre-licensing exams to be eligible for a real estate license. The passing score varies by state but is mostly between 65 and 70 percent.The exams take anywhere between 2 to 3 hours. After the exams, you’ll get a certificate, proving you took and passed the test. The exam costs are over and above the course fees and it costs approximately $15 to $60.

• File for a real estate license: Here, you’ll submit your license application form along with your test results to the state’s real estate commission. You’ll also need to pay a licensing application fee.Depending on your state, there may be additional requirements and background checks. They may ask for further documentation, such as your fingerprints. You may get denied your real estate license if you have a criminal record.

Work With a Real Estate Broker or Company to Gain Experience

Getting your real estate license isn’t enough. Before starting your real estate LLC, you also need to work with a broker or an already established company. This helps you 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.

As you look for a suitable real estate brokerage, consider one with a company culture that lets you thrive in your expertise. You’ll also want one that compensates you appropriately.

And most importantly, it’d help to join a small real estate broker or company as you’d get to understand various facets of real estate business.

Form Your Real Estate LLC

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

Pick a Business Name

Picking the right name for your business is crucial before starting your real estate LLC. Your business name sets you apart from other real estate firms by establishing your identity in your client base. You need a name that aligns with the purpose of your business and it should attract customers too.

Also, if you’re starting a real estate LLC, your business name needs to be unique. As a Limited Liability Company, you can’t have a company name that already exists. This makes it an important step, as you’ll need to be creative with the name.

File Articles of Organization with the Secretary of State

Articles of Organization is a document containing:

• Your business name
• A concise description of your business
• Your primary address
• Your date of starting the business
• Names and details of company members

In short, this document contains the core information about your business. The contents, however, also vary by state.

As you file your Articles of Organization, you’ll also be required to pay your LLC formation fees. After that, you’ll have to wait until your state approves your Articles of Organization before proceeding to the next step.

Create an LLC Operating Agreement

The LLC Operating Agreement is a document that defines the roles and responsibilities of each real estate LLC member and the company’s decision-making process.

It also states the company’s course of action if a member leaves. This isn’t a requirement for every state, but it’s an important document to have while starting your business.

With a detailed outline of each member’s responsibilities, your company will be prepared in case of a crisis.

Acquiring Other Licenses and Permits

Before starting your real estate investment LLC, you’ll need more than a real estate license to operate in most states.

A tax permit for one will be a necessity. This Employer Identification Number (EIN)/Tax ID is critical for taxation and hiring.

You’ll also need other licenses, for instance, a general business license, a sales tax (if needed), etc.

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

Open a Business Bank Account

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

Focus on Growing Your Real Estate Business

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

You should:

• Build a real estate website: Building a website gives you the liberty to promote different aspects of your business, all on one platform. Here, you can feature all of your properties and services (both for sale and rent).

  With a website, you could easily share your contacts, location, and your business’s mission and vision.

  A user-friendly, well-structured, and fast website also gives your business an online presence that lends it more credibility.

• Optimize your product descriptions: Your product descriptions can make or break your real estate LLC listings. You need to write concise product descriptions that will accurately reflect your product listings and get your audience interested.

  They also have to be clear and compelling enough. An effective tip is to start avoiding cheesy adjectives like “luxurious” and instead paint a picture in your audience’s mind about the experience they’ll get on the property.

  You want a product description that will stir desire in your potential clients.

• Optimize images and videos: Use crisp videos and images to increase your properties’ visual appeal. Take quality pictures from multiple angles to showcase your listings from every angle.

• Have a social media presence: Social media is one of the most effective channels you can use to promote your real estate business. Create at least one social media profile for your real estate business and post your listings there regularly.

  You can use your social media profiles to advertise new listings, source leads, and drive sales. Social media can be your growth tool as it’ll give you access to a wide audience.

  You can make the most of your social media platform by doing live videos of your listed property, posting content about new homeowners and congratulating them, or promoting your listings to reach a wider audience on the platform.

• Share listings on other sites: Widen your scope beyond your real estate website and social media pages. Showcase your investment properties and services on the top real estate listing websites such as Realtor.com, Zillow, and Trulia.

• Use email marketing: Build an email list to reach out to people who showed an interest in any of your listings online. Email marketing helps keep you on top of your potential customers’ minds. Using it, you can reach them regularly to move them down your sales funnel towards the conversion stage. Email lists are also a great way to engage your potential clients.

• Ask for referrals: One of the best ways of starting to grow your business is to ask for referrals from your previous and current clients. Referrals and word of mouth are effective ways to source new leads. To make this more effective, you can also offer incentives to your customers such as gifts and freebies.

• Finally, focus on delivering the best-in-class customer experiences to encourage conversions and bring repeat and referral business opportunities.

Mistakes to Avoid When Starting A Real Estate LLC

Now that you know the benefits that come with starting a real estate LLC and how to go about getting your business off the ground, here are mistakes you would want to avoid.

Purchasing Property Before Starting the Real Estate LLC

One benefit to starting your real estate business as an LLC is that your business becomes a separate legal entity from you.

This means that you get protection from personal liability.

However, purchasing property before starting your LLC exposes you to personal liability. It further denies you the tax benefits that come with an LLC business structure.

Also, getting into a purchase agreement as an individual gives you less credibility compared to having your LLC named in the agreement. Your Limited Liability Company comes with an element of professionalism and trust, especially to potential clients.

Choosing the Wrong LLC Structure

If you pick the wrong LLC structure for your real estate business when starting out, you may miss out on some tax benefits. Normally, with LLCs, members get taxed through the income they receive from their businesses. Additionally, they have to pay self-employment taxes.

Your business, therefore, escapes double taxation that is imposed on Corporations. In that, members pay individual income tax and their company pays corporate taxes.

That said, you can choose to get your LLC taxed as an S-Corporation. This can help you avoid the self-employment tax that you’d have to pay as an LLC member.

Separate Personal and Business Expenses

It’s important to not get your personal and business expenses mixed up, even if you’re a freelancer.

Here’s why.

First, the entire purpose of starting an LLC is so you can separate your personal finances from those of your business; to protect your personal assets from legal suits concerning the business.

Therefore, using your business profits for personal reasons can be interpreted as a misuse of the LLC structure on your part. Your corporate veil could be legally lifted, and this would start to put your personal possessions at risk.

Having separate bank accounts for your business and personal funds would thus go a long way. As a Limited Liability Company, it’s your responsibility to treat your business as an independent entity so make sure you follow it.

Not Performing Due Diligence

The real estate market is lucrative and may hold lots of significant benefits ahead. However, you need to perform due diligence before starting out. This includes everything, from researching the business structure you choose to the practice itself.

You need to study your market thoroughly before deciding which angle to take. Additionally, you need to have a solid exit plan when you start the business, in case things go wrong.

Thorough research on the market, available opportunities, your market strategies, and more shouldn’t be a step you should miss.

This is where your business plan comes in handy. With a real estate business plan, you’ll not only do your background research easily, but you’ll also record everything for future reference.

Not Seeking Professional Help

As a real estate business owner who’s starting out, the information overload on the internet can be overwhelming. You’ll need professional help with the nuanced details about starting a real estate LLC.

This is more so with the legal implications of your LLC formation.

It’s okay to conduct background research on the internet. A blog post like this would give you a quick head start. However, it’s far from enough, even for your taxation issues. You’ll need professional legal services and tax advice.

Leaving the taxation and legal aspects of your business to professionals also allows you to focus on your true expertise: real estate. This way, you’ll have more time to find leads, drive sales, and grow your business.

Underrating the Commitment

Starting a real estate LLC and running it comes with its fair share of commitment, both financially and otherwise. This includes the costs incurred in fees and licensing to those you’ll keep incurring to run the business.

There’s also the time spent taking exams, filing registrations, conducting background research, and gaining experience

The commitment is massive, and before deciding that it’s what you want to pursue, you should be ready.

The legal regulations at the beginning and afterward can be a lot to take in too. So can the annual reporting paperwork and fees needed to remain in good standing. These are all commitments you should factor in before starting a real estate LLC.

FAQs

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 start an LLC for real estate include:

• Texas
• Illinois
• Delaware
• Nevada

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

4. What is the downside of forming an LLC?

The downsides of starting an LLC include:

• Starting an LLC is more expensive than starting 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.

6. Do you have to live in the same state as your LLC?

You can start your real estate LLC in any state you like, even if you do not live there. This is especially convenient if the real estate property is located in another state.

However, you must still register the business in your home state, and that means double paperwork and additional fees.

7. How do I form a real estate LLC?

There are six steps to starting a real estate LLC effectively. Here’s the process:

• Create a business plan
• Complete the real estate licensing requirements
• Work with a real estate broker or company to gain experience
• Form your real estate LLC
• Open a business bank account
• Focus on growing your real estate business

Ready to Form Your Own Real Estate LLC?

Starting 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 property insurance, form a credible business entity, and do so much more easily than you would with a Corporation.

Also, make sure you stay away from the various mistakes that you might make during the LLC starting process. These could lead to difficulty in establishing your business well.

Whether you decide to start 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!