Owning real estate investment properties is often lucrative. But, real estate investments, whether vacation rentals, long-term rentals, or “fix and flips”, can be disastrous if the investor fails to utilize an entity and/or fails to utilize an entity in the correct fashion. Indeed, it is critical that investors structure their investment real estate, whether through an LLC, a limited partnership, or other entity, to minimize personal liability. And, no matter the structure, investors with entities must avoid the following mistakes:
1. Failing to Transfer an Existing Property, Via Deed, to the Real Estate Entity. Upon forming an entity, the real estate investor must execute a deed transferring the real estate to their newly formed real estate entity. The deed must be recorded in the county in which the investment property is located. Failure to do so will cause the investor to remain personally liable for property related issues and largely defeats the purpose of creating the real estate entity.
2. Failing to Insure the Property Under the Name of the Real Estate Entity. It is imperative to have written proof that the real estate entity is insured, so that an insurance company is not provided with an easy reason to deny coverage.
3. Failing to Comply with Entity Maintenance Obligations. It is critical that you maintain your real estate entity’s good standing and have written records outlining various actions taken by the real estate entity. Additionally, some entities require the filing of annual documents in order to maintain “good standing.” For example, certain Arizona entities are not required to file annual reports; whereas, some entities must file them. Another maintenance issue that arises is the failure to keep accurate records, like segregating business banking activities and personal ones.
These are not the only mistakes that we see. For instance, most real estate investors do not know that, upon transferring real estate to a real estate entity, the business must update its title insurance policy to reflect this new ownership. Failure to do so can result in a title claim being denied. Another common and avoidable mistake is failing to execute all contracts in the name of the real estate entity. This, too, can defeat the entire purpose of creating a real estate entity.
Patrick R. MacQueen is a founder of MacQueen & Gottlieb, PLC. For questions about keeping your real estate entity in compliance with various laws, feel free to send him an email at firstname.lastname@example.org.