When it comes to growing your real estate portfolio in the Dallas area, it's easy to get sidetracked by everything that investors have to do as landlords to keep their investments profitable! Any investor with even a single property knows how much work it can be to keep your houses in Dallas, TX, for rent operating at maximum efficiency to boost the satisfaction of your renters.
When you have multiple investment properties, you know this workload only increases. Whether it's screening prospective renters or vetting contractors, you do everything you can to ensure your properties are protected and profitable. However, there's one element of having a portfolio in Dallas that investors can easily forget: protecting your assets from legal liability.
At RentHub Property Management, we talk a lot about how screening your prospective tenants thoroughly and fairly shelters you and your assets from running afoul of powerful legislation like the FHA, ADA, and FCRA. However, screening your applicants and investigating the vendors you choose to work with isn't the only crucial way you need to be protecting your portfolio! When you lack the protective shelter of a real estate entity, you expose yourself—and your investments—to unnecessary risk.
In today's article, we'll explore the importance of a real estate entity for investors looking to grow their portfolios—and how this can provide security for your houses in Dallas, TX, for rent.
A quick note: This article is not intended as a replacement for an excellent attorney or property manager! When you need legal counsel for your portfolio, work with exceptional professionals in the Dallas area!
The "Why" Before the "What"
Before you choose which type of legal entity is right for your portfolio, it helps to know why forming a real estate entity can help protect you and your properties in the first place. When you put your holdings under your own name, you put yourself and your properties in the crosshairs for any litigation that might be brought to bear against your assets.
If you hold the title to your properties and something goes wrong, that could spell big trouble for you if your renter is injured. In this scenario, if they hold you responsible in court and a judge sides with the tenant, whatever your insurance won't cover comes down on your holdings like a ton of bricks. Suddenly, your personal home, your vehicles, and even the equity in your property are fair game when it comes to what you stand to lose.
No matter what, choosing to set up a real estate entity is better than having no option at all should things go south! That said, when you're trying to pick an entity to protect your houses in Dallas, TX, for rent, which one should you choose? The answer depends on you and your portfolio, but here's a sampler of the most common.
Limited Liability Company (LLC)
- When it comes to long-term real estate holdings, the Limited Liability Company is probably the most commonly used option for Dallas investors.
- This entity structure protects your assets against debt or lawsuits accrued while in operation, and it also shields you from personal accountability.
- The ability to shelter your assets and your person in the event of a lawsuit, coupled with the attractive benefits of pass-through taxation, makes this a top pick for investors.
- No corporate tax return to wrangle means only property owners report profit and loss on their tax return. This serves to protect investors from the risk of "double taxation."
- A sole proprietorship is one of the easier real estate entities to set up, and that can make it an attractive option for investors seeking speed.
- All a property owner needs to do to take advantage of this entity structure is to register your name and obtain the correct licensing needed to set up the proprietorship.
- One drawback that's important for investors to note if they go this route is that a sole proprietorship does not protect you from any business-related debts incurred as a result of operation.
- If the company is sued for any reason, the business is liable—and your other assets can get thrown into the mix. The sole proprietorship does not offer the same protection that other entities provide.
- If you plan to buy and sell properties quickly (a fix-flip approach is a great example of this), then the S Corporation might be the best structure for you!
- The S Corporation structure treats your assets like inventory that you provide as products for your customers, like a car dealership (but for real estate).
- The key advantage of this entity structure when it comes to quick turnaround sales is that it offers some shelter from unwanted and penalizing taxes throughout the year because property owners classify as self-employed.
- If you plan to grow your real estate portfolio with a buy-and-hold approach, this entity structure isn't likely to fit with your financial goals.
Work With an Expert Attorney Before Moving Forward
At RentHub Property Management, we are vocal advocates about always working with the right professional for whatever job you're facing. Whether it's managing your portfolio of houses in Dallas, TX, for rent or fixing a busted pipe, having the right people on your team means the difference between a profitable property or an expensive mistake.
Choosing your real estate entity is no exception! When it's time to choose the entity structure that's right for your Dallas investments, we always recommend turning to an exceptional attorney for legal advice on which real estate entity will protect and shelter your assets the most. There are entity options we didn't even cover in this article, so consulting your legal counsel and tax professional is always a smart move before you make any decision.
Once Your Assets Are Secure, What About Your Future?
After you've taken care of one of the more important elements involved in running a successful—and official—property business, you still have to field the day-to-day tasks of being an investor-landlord. However, your income will only continue to grow if you keep acquiring holdings. How can you successfully manage your expanding investment while seeking new properties for your real estate entity to lay claim to? With the right property management, of course!
While you leave your portfolio—or should we say your entity's portfolio—in the hands of the expert property management team at RentHub, you can get back to expanding your holdings and growing your long-term wealth. A great place to start is by downloading your FREE copy of our guide to real estate investing! Beyond the need for a real estate entity structure to shelter your portfolio, our guide will teach you some of the other ins and outs of running a property business.