Common Questions From First Time Real Estate Investors
Our Firm is frequently called upon to advise individuals who are interested in pursuing their first real estate investment property. Whether the investor plans to flip, buy-and-hold, or BRRRR (Buy, Rehab, Rent, Refinance, and Repeat), many of the questions we receive are the same. This article will address the most common questions in a broad manner.
Question #1: Should I buy the property in my own name or through a limited liability company (LLC)?
If you own or operate investment property while owning the property in your own name, your personal assets are at risk. A lawsuit can turn your investment into a liability, with extensive attorney’s fees, selling the property, or bankruptcy as your only options. This personal risk is why no attorney can recommend against using an LLC to own and manage investment property.
As long as the laws regarding the operation of a LLC are followed, owning investment property through an LLC can significantly mitigate the risks and protect the investor’s personal assets.
However, there is one little-known facet to owning investment property in an LLC: Ohio courts require for evictions from property owned by an LLC to be handled by an attorney.
Question #1A: What if I keep the investment property in my own name but purchase an umbrella policy?
There is a common misconception that a personal umbrella policy will provide insurance coverage for all lawsuits that arise from the operation of rental property. If you own investment property in your own name and you are sued by a tenant, your umbrella policy insurer may consider renting a unit in a dwelling as a business activity. Personal insurance policies generally do not provide insurance coverage for lawsuits arising from business activities. Owning and operating your investment property in an LLC, and obtaining the appropriate insurance for those activities, will significantly reduce your risk exposure.
Question #2: How do I transfer property that is deeded in my own name into an LLC?
You hire an experienced real estate attorney. Seriously, do not try to draft and record a deed on your own.
Question #3: What if I make you (an attorney) a member of my LLC so that you can do the legal work in exchange for some of the profit?
You would not believe how many clients ask this question, and how many lawyers get in trouble for not being familiar with the basics of the Ohio Rules of Professional Conduct. No, an Ohio attorney cannot enter into a business relationship with a client and provide legal services to that client.
Question #4: I want to get into wholesaling, how do I start?
“Wholesaling” is generally the practice of entering into a contract to purchase property from a seller with the purpose of finding another buyer to purchase the property from you for more money than you purchase the property from the seller. The wholesaler essentially acts like a broker whose income is the spread between the two sale prices.
If you are entering into contracts to buy property (1) without the necessary funds or financing to close on the purchase, and (2) without the intention to close unless you find another party to buy the property, you are probably going to have legal problems.
Some companies now sell wholesaling paperwork with instructions to have an attorney licensed in your jurisdiction to “approve” the paperwork. First, you should proceed with caution (or better yet, run in the other direction!) if someone offers to teach you how to “get rich quick” in exchange for a non-refundable fee. Second, there are significant legal risks inherent to wholesaling that should prevent an attorney from approving your scheme.
Question #5: The closing agent offered me title insurance, should I buy it?
My usual response to this question is: “Can you afford to walk away from the property?”
When you buy real property in Ohio, you are buying the right to own and use the land described in the deed. But there is no guarantee that you are the only person with a legitimate claim to own and use that land. You are going to have an expensive problem if a lien, unreleased mortgage, heirs or spouses of prior owners make a claim to the property.
These issues usually will prevent a bank from giving you a mortgage or prevent your property’s prospective buyer from being able to purchase the property. Title insurance (available through a title company at the time of closing) is an insurance policy with a one-time premium that insures you against these risks for as long as you own the property.
The author of this article, Kyle E. Hackett, is an Ohio attorney who represents real estate development professionals and investors.
This article is provided for educational purposes only. Please do not rely on this article as legal advice. Contact an attorney licensed in your jurisdiction if you have any questions or legal needs.