Once again I have a couple questions for anyone to answer. I’ve been trying to come up with more than one question each topic so I don’t have a million topics. Thanks a lot!
I understand what an exit strategy is, but what ARE some exit strategies? Examples please.
How do you calculate the maximum you will pay for a SFH/commercial property? An example would be awesome.
What is the difference between a LLC and a corporation?
Adam
An exit strategy is simply what you plan to do with a property once you buy it. This would include holding a property long term as a rental unit. Or leasing it with an option to buy to a tenant/buyer.
An LLC is a Limited Liability Company. This is a quick and fairly easy way to protect your personal assets from being attacked in the event someone decides to sue you. A corporation offers the same protection, but is quite a bit more involved to set up. Tax and legal professionals should be consulted regarding the subject of asset protection.
serio,
it depends on what you want your business to be. many people think, and alot do excellent by just making real estate their business. but many others have businesses and use the money from the business to purchase real estate. it’s up to you what you want to do, overall. that’s where the business entity type is extremely important.
also, let’s say you make your business rei, strictly buying, fixing, refing and renting -then repeating the process (easier said than done, but doable), now that’s an exit strategy.
each business entity will offer you certain advantages and disadvantages as far as taxes are concerned. no post on here will give you everything you need to know, you have to talk to a CPA, or read “Deduct it” from Nolo. great book. there are MANY books that go into business deductions etc. now the real estate business offers many different tax advantages, but combined with a business entity buying the real estate, now you’re taking it to a whole other level.
i love getting into and learning about tax deductions, they’re amazing. at the real estate Expo in NY, this past month, there was a guru selling his tax program for 1500 dollars. and it was like sheep to the slaughter. for 1.05 in late fees from my local library, i got out Deduct It - most current edition and learned soooooooo much…and a lot of it turned out to be the same “hidden secrets” that the guru was selling for 1500 bucks! lol i love it.
anyway, as far as calculating a purchase price for SFH or commercial re, you have to realize that both are entirely different for one key difference - they are both appraised in totally different ways, for the most part. one has to do with comparative measures and the other value or income measures (how much money does it produce and can that be increased?)
too much to get into here. again a good book will do the basics.
the bottom line is NOI - Net Operating Income. What ever this is, if it’s a rental - then that’s what you can base your price on.
if it’s a rehab - you must realize that rehabing and the like is (i would consider) a bit more risky and speculative, unless you KNOW THE AREA COLD. but alot of guys use a very BASIC formula.
After Repair Value X .70 - Projected Repairs = Your Offering Price
so 100,000 X .70 - 10,000 = 60,000 your offer price
THIS IS BASIC.
the .70 is a measure for 70% of the VALUE of the AFTER REPAIR VALUE.
so if someone’s selling their house for 85,000 and you KNOW IT’S CURRENTLY undervalue a little, plus more with some light repairs - then you offer 60k (AS AN EXAMPLE).
There’s ALOT that goes into this and your numbers have to be SOLID in order for it to work. also market trends (locally) have to be paid attention to.
hope this helps.
corporate stock is considered an “investment”. as such, it is available to satisfy a judgement creditor. so, when you rear-end the lady in the pinto, she sues you, you lose, she can be awarded your “investments” in the judgement. Now she owns 100% of the stock of the corporation that owns the property. game over.
LLC membership, by contrast, is considered personal property by statute. as such, it is not available to satisfy a judgement creditor. Now when she wins the suit, she can get a charging order against LLC income, but cannot gain control of the entity and the property it owns. this is a big difference.
both the LLC and corporation protect you personally from liabilities arising within the company, but only the LLC protects the company from your personal liabilities.
Also note that LLC’s are very flexible with regard to taxation. You may choose to tax the LLC as a sole proprietor (Sch C), partnership, corporation or S-corp. So you can achieve the superior protection of the LLC, while keeping the advantage of whatever tax strategy fits your needs.
How about a little more LLC info:
In order to benefit from the personal liability protection of an LLC, do ALL of the investment activities have to go through the LLC? Deeds, mortgages, seperate accounts, etc.? Do personal funds have to be kept completely seperate?
With an LLC, are personal homes and personal accounts protected fully against lawsuites?
Also, are you still personally liable for any debts that the LLC has?
Thanks.
unfortunately, nothing is fully protected or guaranteed in this world, except death and taxes! lol
if a lawyer can prove that you were negligent then you can be held liable, personally. secondly, if the lawyer can prove that the LLC was mismanaged and therefore not a seperate entity from yourself, then you can be held personally liable.
You can use seperate entities to conduct several different investments. if you mean does all the activity of one particular investment have to “go through the LLC” - yes. yes, keep funds seperate - A MUST.
if you personally guarantee a loan, yes you will be personally liable.
if your company has credit history, cash etc, then need for personal guarantee will signficantly be reduced.
consult your attorney and CPA.