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Real Estate Investing: LLC versus Customized Investment

Updated on October 9, 2017
Steven Correa profile image

Steven is a co-owner at Denbar Properties. He has been investing in real estate since 1990.

Real Estate Investment

One does an investment to make more money from their existing money. Real estate investments are no different....you need to invest before you can make profits. It is important that one makes a calculative decision before investing, after all it's your hard earned money which is at stake.

The major advantage of investing in real estate is that Real Estate Income comes from at least from 3 sources.

Real Estate Income

* Income from Operations (Simply Rents minus Expenses)

* Paying down the Mortgage (Steady Increase in equity)

* Capital Appreciation (Property values typically increase over time)

Many folks consider tax benefits as an additional source. Although this is true, I don't like to count it mainly because most of the tax breaks in real estate are temporary in nature in that they are more of a tax deferment versus a permanent tax reduction.

Traditionally there are two types of real estate investment options. One where you are a share holder in a Limited Liability Company (LLC) or you can have a real estate company find out a suitable investment opportunity for you based on your specific needs i.e. Customized Investment.

LLC Vs Customized

Be a part of an LLC
Customized Investment
Be part of a small group of owners who have similar investment objectives
Retain a real estate company to put together a real estate investment tailor made for you
Ability to own larger properties than you might purchase on your own
Could be a single property or a portfolio of properties
Risks is divided among shareholders
Risk is mostly yours
Traditional Real Estate Investment Options

There can be a third option too... investing with a Real Estate Investment Trust (REIT). REIT is basically a company which provides investors with income-producing real estate investment options. which is what an LLC also does. The major difference being that it is modeled after the mutual funds and is traded on major stock exchanges.

Be a part of an LLC

The real estate investment firm sponsors an Limited Liability Company (LLC).

How it works?

  • An LLC is formed for each new investment.
  • Investors own a share of the LLC in proportion to the amount they invest.
  • Investment properties are then purchased by the LLC.
  • Investors receive a return from the LLC by way of annual or semi-annual distributions.
  • Investors also receive a onetime capital gain when the properties are sold.

Let's take an example

4 shares of $50,000 each = $200,000

Purchasing power = $ 1,00,000

Annual distribution = 8-10%

5-year share appreciation = 40-50%

Note:

The calculations in the above example are based on the following:

  • Purchasing power is based on a 20% down payment with an 80% mortgage loan
  • 5-year share appreciation is based on the mortgage paydown of a loan at 5% and amortized over 20 years.
  • The example does not factor in potential appreciation.

Is this for Me?

When you become a member of one LLCs, the LLCs name is listed in public records as the owner of the property. Most of the members (owners) of the LLC can remain private. So you get to maintain your Privacy!

This option is best suited to individuals who prefer putting lower amounts into any one type of investment. For example, investors who usually put $10k in each individual stock or bond, they may not want to put $100k into each real estate project. Now, being a part of an LLC let,s them invest just $10k in each real estate project.

Customized Investments

How it works?

  • Have meetings with the real estate company representative to have them understand your needs and what you are looking for.
  • Define a list of investment parameters that both agree with such as location, type of property, length of ownership, form and timing of returns, level of risk, tax favourability etc.
  • The real estate company would provide a consulting bid. Bid includes working on your behalf through all stages of search, due diligence, entity creation, acquisition, and funding and in some cases, ongoing management.

Is this for Me?

This option is best suited for investors who have considerable experience with investing in real estate, and have a good idea of what they are looking for, but do not have the time or inclination to do the leg work. It works best for project sizes of $5MM or greater.

Although most investment advisers would give you options in your best interest. It is up to an Individual investor to choose carefully who you decide to deal with, read through all documentation and verify credentials.

Investment Choices

What is your preferred choice of Investment?

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