Investment properties are a popular way for people to diversify their personal wealth. You can take the equity you have accrued in your own home and use it to purchase a second property. You might fix up a home in poor condition and sell it for profit, or you might turn a vacant home into a rental unit that generates ongoing revenue.
Buying real estate at a low price to sell for a higher price or produce ongoing revenue can be a great business model, as the demand for housing is constant. Regardless of which business model you intend to pursue, you may want to consider creating a limited liability corporation (LLC) to hold the title for those investment properties.
Real estate comes with significant liability
When you buy a property, you take on responsibilities for that property and certain risks. If someone gets hurt on the property, especially in situations involving older, poorly-maintained properties, you could face a big insurance claim or possibly a civil lawsuit.
If someone falls down the stairs because of a broken handrail, for example, the property owner could be responsible for a lifetime of lost wages because of the brain injury they suffer in the fall. The injured party could try to hold you as the property owner personally accountable for the injuries that they suffered, including all of their medical bills and even their future lost wages.
They could even go after your biggest assets, like your home or your savings account. By creating an LLC to hold property for you, you shield yourself from the personal liability associated with real estate investments. If something goes wrong, the LLC and not you as an individual will be accountable in court.
Are there any issues with using an LLC to hold property?
There are expenses involved in establishing and maintaining an LLC. There are also risks, especially if you don’t take the right steps when starting the company, that the courts could pierce the corporate veil and still hold you personally accountable for a personal injury lawsuit or similar client.
Learning about premises and business liability can help you protect yourself and the business investment you want to make in residential real estate.