It is no secret that investing in real estate is often a shrewd financial move, especially given the current Boston rental market. Whether you already own investment properties or you are thinking about purchasing your first, there are important considerations to make to ensure that you are maximizing your returns and making your money work for you in the most effective and efficient manner. While investing is easy, investing wisely is imperative.
One simple way to invest wisely is to consider transferring ownership of any investment property from the actual individual who purchased the property to a Limited Liability Company (LLC) created for the express purpose of holding real estate. This maneuver, in many circumstances, is a simple way to protect yourself, your assets, and your investments.
There are three basic steps required to create a LLC for the purpose of holding investment properties. The first is to create and register the LLC with the state. In Massachusetts, this requires the filing of Certificate of Organization with the Massachusetts Secretary of State. Additionally, although not technically required, it is a best practice to simultaneously create an Operating Agreement for the new LLC dictating how the LLC will operate, who owns the LLC, and other important powers and restrictions. The second step is to apply to the IRS for an Employer Identification Number (EIN), which is necessary for tax and banking purposes. Finally, the third step is to formally transfer the deed from the individual who purchased the investment property to the LLC. Massachusetts, unlike most other states, tracks its real estate titles in two separate systems: recorded land and registered land. This duel title system can complicate the proper completion of step three. Therefore, it is important to understand how your particular property was originally recorded/registered in order to ensure that it is successfully deeded into the LLC. Once these three steps are completed, the LLC owns the property.
This transfer of ownership has the potential to insulate the individual owner from personal liability stemming from legal claims relating to the property as well as to allow the individual owner to keep the investment property separate from other personal assets. However, every individual owner, investment property, and real estate deal is different and circumstance often dictates what constitutes a wise investment move on a case-by-case basis. Moreover, incorrectly establishing a LLC, failing to follow the formalities of owning and operating a LLC, or failing to properly transfer the property into the newly-formed LLC may have unintended and unfortunate consequences.
Transferring ownership from an individual to a LLC is just one option, among many, to ensure that you are making the most of your real estate investments. Building and structuring an investment property portfolio can seem daunting but with proper guidance it can be a rewarding and profitable venture. Thus, the wisest move any investor can make is to seek the counsel of a Massachusetts lawyer who specializes in real estate transactions to ensure that all options are properly considered and all investments and maneuvers are above-board and executed correctly.