Individuals’ vs Entities Definition

IN THIS GUIDE

Individual

Smaller investors

Each property has their own mortgage

Smaller portfolios

Business Entity

More experienced investors

Numerous properties under one mortgage

Larger portfolios

Why should individual real estate investors form a business entity?

Access to private lenders:

Real estate investors applying for a mortgage on a single property aren’t required to form a business entity when going through the bank. However, individual investors can’t seek a loan through a private lender as most private lenders will require a newly formed business entity.

Combined Mortgage:

Private lenders offer portfolio loans which allows investors to have their entire real estate portfolio under a single mortgage rather than each property having its own.

Tax Benefits:

Business entities have access to greater tax benefits. Investors with a business entity can deduct business related expenses such as travel, legally avoid a portion of the self-employed and social security taxes. Business entity tax rates are lower than individual income tax rates. Individuals can reap similar tax benefits through depreciation, long term capital gain taxes, pass-through income deductions, passive income deductions, and the deduction of property related expenses such as insurance, taxes, and interest payments.

Personal Liability

Business entities shield investors from liability. Especially with a Special Purpose Entity (SPE) and Delaware Limited Liability Company. Individual investors should look to form a business entity when performing riskier projects as the business entity will protect the investors personal assets if all carveout conditions are followed. A great way for an investor to protect themselves from liability is through a SPE which is used to legally avoid risk exposure if the corporation enters bankruptcy.

Partnerships

Having an equity partner makes investing in real estate a lot more affordable, accessible, and scalable. Business entities are a great way to formalize a partnership agreement. Forming a business entity for a partnership protects the assets owned by the business entity and protects it from any outside risk in regard to each equity partner.

How can Individuals get similar protection?

Investors with business entities have the benefit of their personal assets being protected. Unfortunately, individual investors don’t often have that same benefit. Individuals can reap similar benefits by securing a non-recourse loan which protects the individuals’ personal assets. Non-recourses loans make it so that the lender is only able to seize the collateral in the loan agreement.

Lenders May Require a SPE Delaware LLC

Lenders prefer the formation of a single purpose entity as it decreases their risk exposure to the borrowers’ assets and liabilities which the lender isn’t providing financing. Single purpose entities limit the lenders risk exposure as real estate investors often have numerous loans and project going on at the same time

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