May 2020 - AB Capital

When you’re searching for ways to invest in real estate, likely one of the most important terms related to the investment is the capital stack, which refers to the various types of capital that are invested into a real estate investment project. When looking specifically at a commercial real estate project, the types of investments that make up a capital stack include senior debt, mezzanine debt, preferred equity, and common equity.

While some real estate investors will focus solely on one type of investment, it’s also possible to spread your investment across different sections of the capital stack, which will help you diversify your portfolio. While the common equity and preferred equity layers of a capital stack come with more risk, they can also provide you with higher returns. Despite the lower returns of mezzanine debt and senior debt, making investments in one of these layers allows you to acquire much less risk. If you want to maximize your returns while making sure that the risk doesn’t spiral, having a well-structured capital stack can affect how well your portfolio is diversified, various tax considerations, and the amount of risk that you take on.

For an investment that you make on a real estate project to be worthwhile, it’s important that the return you obtain is higher than the amount you invested. If you’re the main equity holder of a property and are in charge of its development, having an optimal capital stack can be highly important if you want to minimize your losses. If all of your investments go into the riskier common equity layer of a capital stack, your portfolio won’t be very diversified. You also risk losing much more than you make if the project doesn’t pan out. An optimal capital stack is one that has the right mix of debt and equity to it. The following will provide you with seven considerations to consider for an optimal capital stack.

Your Business Risk
Interest Rates
Understanding the Credibility of the Assets
Bankruptcy
Trade-Off
Financial Flexibility
Lender Appetite

1. Your Business Risk

One of the top considerations that you should take into account is the business risk that’s associated with your investments. If the type of property that you’re investing in comes with lower risk and steady cash flows, you’ll likely want the capital stack structure to have a higher amount of debt in it. If your investments mainly include mezzanine debt and senior debt, your returns should be consistent. If the property happens to fail and payments aren’t met, any senior debt holder will have the ability to foreclose and take ownership of the property in question, which helps to minimize risk. Apartment buildings and commercial properties that are credit-tenant leased are considered to be examples of low-risk properties with steady cash flows.

If the property that you’re investing in is an office building that’s located in a highly competitive market, you should expect that the building will have an extensive amount of turnover. With this type of property, it’s highly recommended that the capital stack structure of the building is focused more on equity than debt, the latter of which is borrowed money that must be paid back to the lender.

Businesses with a high amount of equity will have ownership rights for the property itself, which means that the equity portion of the investment won’t need to be paid back. For properties that have a higher chance of failing and not bringing in the right amount of returns, more equity can be preferable compared to a higher amount of debt.

If you analyze the risk of your investment, you’ll be able to more accurately determine what your optimal capital stack should be. When you’re thinking about funding a new project, understanding the capital stack structure of the property in question will allow you to keep your risk profile at the appropriate levels.

2. Interest Rates

It’s also important that you take the interest rates into account for the different levels of a capital stack structure. Debt is going to be less expensive than equity. If the owner of the property doesn’t provide you with consistent payments, you will be able to sell the property in order to recover some of your investment. When you hold equity on a property, you will have a claim on any remaining assets of the property. However, all other obligations to debt holders will need to be satisfied beforehand.

This is where the interest rates of a capital stack come into play. The interest rate or return rate for a senior lender will be around 4-8 percent per year, which is a relatively low rate. While the interest rate that you receive is low, you also have less risk and more security with your investment. As for a mezzanine lender, interest rates are typically around 9-13 percent, which allows for a much higher return. Interest rates for preferred equity investments can be upwards of 18-20 percent, which allows for a significant return on investment.

When considering the common equity layer of a capital stack, you can expect returns to be as high as 25 percent. Even though preferred equity and common equity investments can provide you with high returns, the business risk is also much higher. In the event that the real estate project fails, every other type of investor will be paid back before you. The interest rate and return rate that’s best for you all depends on the level of risk that you want to take on. You could also invest in several layers of the capital stack to ensure that you receive consistent returns with senior debt and potentially high interest rates with common equity.

3. Understanding the Credibility of the Assets

In order to be certain that you’ve made the right investment with a real estate property, it’s essential that you understand the credibility of all of the assets that are placed in the property. While it’s easier to determine the credibility of assets for the capital structure of a business because of the extensive balance sheet they have, you should be able to identify the credibility of real estate assets without too much difficulty. Whether you’re investing in commercial real estate or infrastructure, the credibility of the assets depends on the credibility of the property. If your investment is going into a biofuels energy project, you can be fairly certain that the asset is a riskier one when compared to a standard real estate investment.

No matter your position in the capital stack structure, determining the credibility of the asset is key to understanding if you’re making a wise investment choice. If the quality of the property or asset that you’ve invested in becomes impaired, it’s possible to lose your entire investment, which is true whether you’re a senior debt holder or an equity holder. To determine the credibility of an asset, it’s recommended that you perform regular valuations.

4. Bankruptcy

petition to file for bankruptcy paperwork

It’s possible for you to declare bankruptcy if you are unable to repay creditors. When this occurs, the debt could be discharged or restructured. As an investor in real estate, it’s important that you understand what happens in the event of a bankruptcy. There are two main types of bankruptcy that you should be aware of, which include Chapter 7 and Chapter 11 bankruptcy. With Chapter 7 bankruptcy, the property that you’ve invested in will be liquidated, which means that any mortgage holders or senior lenders will be paid back before any remaining money is provided to equity holders. With this type of bankruptcy, there is typically very little capital left over for holders of common equity.

If you currently own the building because of the amount of equity that you’ve invested into the property, filing a bankruptcy can cause you to lose the property and the money that you’ve invested into it. Chapter 11 bankruptcy focuses on the restructuring of debts, which allows lenders to be paid back over a lengthy period of time. The best way to minimize the possibility of bankruptcy and potentially prevent it from occurring is by heavily cutting your expenses, using debt management services, and attempting to negotiate with your creditors.

5. Trade-Off

The trade-off consideration is one that determines how much debt and equity are placed into a building by the benefits and costs that come with both. When debt increases in a building, the benefits become lower while the costs increase. Even though equity starts out as being more expensive because of a lack of tax savings, higher amounts of equity will lessen in risk over time compared to high amounts of debt.

6. Financial Flexibility

If you own a property that has a mortgage on it, you need to consider the financial flexibility of the capital stack structure. Loan payments will need to be made every month. If you can’t make these payments or pay off the loan in full once it reaches maturity, you will risk the need to file bankruptcy or even lose the asset altogether. If the economic signs in the area for the property that you’ve invested in are currently mixed or even negative, you should consider a lower debt-to-equity ratio. Lower debt means that you’ll have more flexibility during tough moments in the economy.

7. Lender Appetite

Lenders don’t always have a strong and aggressive appetite for making loans with a real estate property. If the surrounding market is currently going through difficult times, lenders will usually be less interested in providing loans for a property. The key to discerning how much debt you’ll use for your real estate investment is to first identify how willing lenders are to provide you with a loan.

When lenders and investors are highly aggressive, you may be able to obtain the money that’s needed for a riskier project. However, this can be a problem at times. When lenders are aggressive and agree to provide you with a loan for the property, they might require much higher returns and even control of the project, which you should consider when investing. It’s recommended that you maintain a healthy balance of equity and debt.

Building an Optimal Capital Stack Structure

You want to focus on building an optimal capital stack structure with your real estate investments if you want to have the right combination of risk and steady returns. While each individual investor has a different capital stack structure that’s right for them, it’s recommended that you avoid becoming too focused on just one layer of the capital stack. If all of your investments are common or preferred equity investments, the risk of losing everything that you’ve invested is greater. If the majority of your investments go into senior debt, your returns will most likely be lower. A healthy mixture of the two gives you a chance to obtain high returns while also lessening the amount of risk that you take on.

You should take all of the previous considerations into account because of the general risks that come with making any kind of investment. Real estate investing is never easy. However, you can mitigate the risks by better understanding what goes into a capital stack structure. For instance, if the asset that you invest in turns out to be worthless, it won’t matter that you’ve made a low-risk senior debt investment. You’ll still lose most or all of the money that you’ve invested. Making smart investments in real estate means understanding everything that goes into the capital stack structure of a property.

*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.

If you’re currently an owner of an investment property, a 1031 exchange might be the ideal real estate transaction for you if you want to purchase another property while selling off your current one. A 1031 exchange is a tax-deferred exchange that allows you to defer capital gains taxes as long as you are purchasing another “like-kind” property. This exchange mechanism is used by some of the most successful real estate investors and can be beneficial in a variety of situations. The following is a general guide to a 1031 exchange in California. It includes details about what the 1031 exchange is, how to perform the exchange, and why the exchange could be beneficial for you. Understanding the intricate details of a 1031 exchange should be accomplished using a “Qualified Intermediary” which is a professional third-party company that accommodates the exchange process and helps you avoid making any critical mistakes that could jeopardize your tax-advantaged sale.

What Is a 1031 Exchange?

A 1031 exchange is an exchange that occurs when you sell one investment property in order to purchase another. When swapping your current investment property for another, you would typically be required to pay a significant amount of capital gain taxes. However, if this transaction qualifies as a 1031 exchange, you can defer these taxes indefinitely. This allows investors the opportunity to move into a different class of real estate and/or shift their focus into a new area without getting hit with a large tax burden.

The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new property within 45 days; and (6) must purchase new property within 180 days.

To understand how beneficial a 1031 exchange can be, you should know what the capital gains tax is. In most real estate transactions where you own investment property for more than one year, you will be required to pay a capital gains tax. This directly levies a tax on the difference between the adjusted purchase price (initial price plus improvement costs, other related costs, and factoring out depreciation) and the sales price of the property. The percentage that’s taxed on your capital gains depends on the tax bracket that you’re in. The 1031 exchange is defined under section 1031 of the IRS code, which is where it gets its name.

4 Types of Real Estate Exchanges

There are four types of real estate exchanges that you can consider when you wish to participate in a 1031 exchange, which includes:

Simultaneous exchange
Delayed exchange
Reverse exchange
Construction or improvement exchange

1. Simultaneous Exchange

One type of 1031 exchange is a simultaneous exchange, which takes place when the property that you’re selling and the property that you’re acquiring close the same day as one another. Keep in mind that this exchange must be simultaneous in order for you to receive the benefits. If the closing of either property is delayed for a short period of time, the exchange could be disqualified, which means that you would need to pay full capital gains taxes.

A simultaneous exchange can occur in three separate ways. The first type of simultaneous exchange is one where you swap deeds with the owner of the other investment property. The second type is a three-party exchange where the transaction between you and the owner of the other investment property is facilitated by a third party called a Qualified Intermediary. Qualified Intermediaries will structure the entire transaction and have training and experience in handling such transactions. Without the help of a Qualified Intermediary, you run the risk of nullifying the 1031 exchange and incurring a large tax burden.

2. Delayed Exchange

A delayed exchange is easily the most common 1031 exchange that you can make. When you conduct a delayed exchange, you will be able to relinquish or sell your investment property before you purchase another investment property. This allows you to use the funds from one sale to acquire another property. This type of exchange can’t occur until you’ve marketed your property, secured a buyer, and have executed the sale and final purchase agreement. A Qualified Intermediary will then need to be engaged to retain the proceeds of the sale until a like-kind property is acquired by the seller.

You will have 45 days to identify a new property and 180 days to close. During this period, the profits from the sale of your previous investment property will be held in a binding trust. Again, while the sale of your new property must be completed in 180 days, you will only have 45 days to find the investment property that you wish to buy. This time-frame gives you some leeway when compared to a simultaneous exchange.

3. Reverse Exchange

A reverse exchange is unique in that you find and purchase an investment property before selling your current investment property. Your current property will then be traded away. By purchasing a new property beforehand, you can wait to sell your current property until the market value of the property increases.

The main issue with this type of exchange is that the transaction typically occurs with 100 percent cash. It’s also important to understand that the majority of banks don’t provide reverse exchange loans. Keep in mind that the purchase of another property with this exchange means that you will have 45 days to determine which one of your current investment properties are going to be relinquished. You will then have another 135 days to complete the sale.

4. Construction or Improvement Exchange

A construction or improvement exchange is a type of exchange that allows you to make improvements to the property before the actual exchange takes place. The property will be placed with a qualified intermediary for 180 days, during which you can use the exchange equity to make the necessary improvements. However, there are three separate requirements that you must meet if you want all gains to be free from taxes.

First, all exchange equity will need to be spent as a down payment or by making improvements to the property within 180 days. The taxpayer will need to receive the same property that was identified on the 45th day, which means that it can’t change significantly. Once the property is given back to the taxpayer, it will need to be at an equal or greater value. These improvements need to be made within 180 days.

Basic 1031 Exchange Definitions

1. What is Like-Kind Property?

The property that you obtain must be a “like-kind property” in order for the transaction to be considered a 1031 exchange. However, this is a broad term, which means that the property you obtain doesn’t need to be exactly the same as the one that you relinquished. Almost any type of real estate can qualify for this exchange. For instance, you could exchange a duplex for an apartment building. Both properties will need to be in the U.S.

2. What qualifies as Investment Property?

The property must be a business or investment property, which means that it can’t be personal property. Your home won’t qualify for a 1031 exchange. However, a single-family rental property that you own could be exchanged for commercial rental property.

3. How do you determine Equal or Greater Value in an exchange?

The equity and market value of the investment property that you purchase will need to be equal to or greater than what you sold your current property for. If your property has a $300,000 mortgage on a $1 million home, the property that you want to purchase must be worth at least $1 million and you must have the same ratio (or higher) debt on the property.

4. What is “Boot”?

The term “boot” refers to non-like-kind property received in an exchange. Typically boot is in the form of cash, mortgage debt or personal property received in an exchange. If you want your exchange to be wholly tax-free, you can’t receive boot on the sale of the property. Any boot that you do receive will be taxed.

5. What does the same Title Holder / Tax Payer mean?

The name and tax return that appears on the property title for the property that you sell will need to be the same as the name and tax return that you provide when purchasing a new property. An exception is allowed if you’re the sole member of a limited-liability company wherein the property is passed from your company to you.

6. The 45-Day Identification Window

No matter which type of 1031 exchange you take part in, you will have 45 days from the close of the sale to find as many as three like-kind properties. If you identify two or three properties, their total value must equal or surpass the value of the property that’s being sold.

7. The 180-Day Purchase Window

Once you sell your current property, you will have 180 days to purchase a replacement investment property and complete the 1031 exchange.

Getting Started With a Section 1031 Transaction

If you feel like a 1031 exchange is right for you, it’s essential that you know what you’re doing and follow all of the rules. The first step is always to contact a Qualified Intermediary to help handle your exchange. Whether you’re conducting a simultaneous exchange or a delayed exchange, the investment property that you choose to buy must be similar to the property that you’re relinquishing. It’s also important that you don’t attempt to use any personal property in this exchange. Keep in mind that you will have 45 days to find a property and 180 days to complete the exchange. Any delay on these time limits could cause you to pay capital gains taxes.

As an investor, these exchanges can be useful in a variety of ways. If you want to diversify your assets with a different property or would like to purchase a property that has better-estimated returns, a 1031 exchange is a great tool. It could also be helpful if you currently manage the investment property that you own but would rather purchase one that’s already managed. While you should now understand how to get started with a section 1031 transaction, this is an incredibly complicated process that comes with many obstacles that need to be navigated. Please contact AB Capital for our list of trusted Qualified Intermediaries.

A real estate debt fund allows borrowers to obtain short-term capital for a variety of different commercial real estate projects, which means that the borrowers are almost always developers or experienced real estate investors. The types of real estate projects that are able to be invested in through a real estate debt fund include construction loans, multi-family buildings and industrial buildings to name a few.

A standard real estate debt fund is comprised of equity-backed capital that can be lent to real estate asset owners as well as potential buyers of real estate. Anyone who invests in this type of fund will generally receive periodic payments from the interest charged against the capital as well as security that’s charged against assets of a property. Each debt fund is usually centered around a specific investment strategy. For instance, some funds will focus on financing certain asset types. Before you get started with this type of investing, it’s important that you’re aware of what real estate debt funds entail.

How to Generate Income Through Real Estate Debt Funds

If you decide to invest your money into a real estate debt fund, you will be able to generate most of your income from interest that’s gathered on borrowed capital, which means that a higher interest rate will allow you to garner more income from the investment. Some of the income that you generate can occur in the event of a default, which will allow the fund to obtain the title to the collateral that was used as the basis for the loan. If your investment allowed a developer to construct a commercial building, this property would be available to the fund if the borrower defaulted on their monthly payments.

These funds typically charge interest rates of at least nine percent, which can differ depending on the current state of the market. These rates are usually fixed with a requirement that monthly payments are made on them. The borrower of this loan must also pay some additional fees, which can include:

Exit fees
Servicing fees
Origination fees
Extension fees
Modification fees

While it depends somewhat on the exact type of real estate debt fund you invest in, there are times when investors are given some or all of the fees that the borrower is required to pay. .

If you want to start investing in real estate debt funds, your first goal should be to find a debt fund, of which there are many to select from. Unless you want to become a manager of a debt fund, someone else will manage all of the investments that are placed in the fund, which gives you the ability to sit back and collect your payments.

This form of investment is useful if you’re looking to have a balanced investment portfolio. Investing in a real estate debt fund is a relatively low-risk investment, which gives you an opportunity to lower the risk of your investment portfolio and provide yourself with consistent income while you wait for your riskier investments to pan out. If you invest solely in risky investments, your losses could be substantial. Investing in a real estate debt fund can be a way to hedge these losses.

How Debt Differs From Equity

Before you go forward with investing in a real estate debt fund, you should first know how debt differs from equity. If you have a greater appetite for risk, investing in equity is likely a good option for you. When you make this kind of investment, you will have either full or partial ownership of the property in question. While individuals who invest in equity will be paid last in the event of the project failing, the potential for high returns is better when compared to someone who invests in debt on a property.

The focus of investing in debt is to minimize risk whenever possible. In most cases, debt investors will minimize risk while increasing the possibility of obtaining a fixed rate of return. Even though the potential for high returns is greater with equity investors, debt investors generally benefit from receiving consistent payments. A debt investor also holds the collateral for the loan, which they can claim in the event that the borrower defaults.

Who Invests in Real Estate Debt Funds?

two people reviewing real estate documents

Debt funds are able to provide commercial real estate borrowers with loans and terms that they can’t receive from traditional lenders. The problem with borrowing from traditional lenders is that they usually have very strict requirements that a borrower must meet if they want to borrow any amount of money. If a borrower is unable to qualify for a loan from a traditional lender, or they seek speed in closing, they can seek investments from debt funds instead.

If a borrower has a somewhat complicated financial situation or lower credit than is usual, they can look towards real estate debt funds for their project. The common loan types that are available through real estate debt funds include bridge loans, construction loans, and rehab loans.

How are Bridge Loans related to Real Estate Debt Investing?

A bridge loan is a type of loan that borrowers can seek if they require short-term financing until they are able to secure more permanent financing. For instance, borrowers who are in the process of selling their current property can purchase another property with a bridge loan.

Once the current property has finally sold, the money that you receive from the sale can be used to repay the bridge loan or to convert it into a standard mortgage. As an investor, your money can be used to invest in a bridge loan through a real estate debt fund. Construction loans and rehab loans are two additional loan types that debt funds may invest in.

Almost any type of investor can choose to invest in a real estate debt fund. Since these funds collect contributions from a large number of investors, your contribution can be any amount that you would like it to be, which can correlate with the amount of risk that you would like to take on with your investment portfolio. If you’re thinking about putting some of your money towards this type of investment, you should know about the pros and cons associated with doing so.

Benefits of Investing In a Real Estate Debt Fund

There are many reasons why you might want to invest in a real estate debt fund, the primary of which is that these investments typically provide stable returns and consistent payments. Whether you’re attempting to balance a high-risk investment or are currently sticking with low-risk ones, a real estate debt fund makes for a good investment opportunity as long as you partner with the right fund management firm. Keep in mind that the payments you receive are usually provided on a monthly or quarterly basis.

Investing in a real estate debt fund also provides you with security within the capital stack. This is a form of senior debt, which means that your investment will have first priority when compared to all other types of investment for the property in question. This is a useful way to diversify your portfolio and helps to minimize risk. Debt funds invest capital into many different projects at a time, which is another avenue for diversification. Since your money is spread around to numerous projects, the failure of one project shouldn’t cause you to lose a substantial sum of money.

Downsides to Consider When Investing in Real Estate Debt Funds

Even though real estate debt funds generally come with lower risk and are able to provide consistent returns, there are some downsides to using your money for this type of investment. Although your risk is mitigated, there is still some risk of investing in a real estate debt fund. For instance, there’s always a possibility that a borrower defaults on one of the properties that you invest in. While the debt fund manager will be able to take control of this property, it may be difficult to recoup the money you’ve invested in if the commercial real estate market in the surrounding area is performing poorly.

When investing in a real estate debt fund, it’s also important that you pair with the right debt fund managers. Make sure that you read up on the history of debt funds before you invest in one. While there are some downsides to investing in a real estate debt fund, the relatively low amount of risk vs possible rewards makes this a good option.

Real Estate Debt Funds: Minimized Risk with High Returns

Investing in a real estate debt fund gives you the ability to maintain a balanced portfolio. These debt funds are backed up by collateral, which means that in most cases you’ll be able to get back some of your investment if the borrower defaults. While equity investments may give you the possibility of a higher return, investing in a debt fund allows you to receive monthly or quarterly payments for a consistent generation of income. If you want to invest in many different types of real estate without needing to actively manage the property that you invest in, a real estate debt fund may be a good option for you and your portfolio.

Before you get started with investing in a real estate debt fund, you should first look at all of your options when it comes to real estate investing. Unlike many investment types, real estate investments can be very exciting because of the variety and potential returns that they provide. Whether you want to maintain a high-risk or low-risk investment portfolio, both of these investment strategies are possible with commercial real estate investing.

Asset preservation is a method of using certain legal strategies to protect all of your assets so that they can be used by yourself, your family, and your spouse.

There are several different asset preservation strategies that an individual or business can use. These methods extend from establishing a limited partnership to obtaining a prenuptial agreement. While anyone can make use of asset preservation, these strategies are typically employed by high net worth individuals as well as a range of different types of businesses.

Protecting and preserving your assets can provide you with long-term stability and peace of mind. However, it’s important that you use the asset preservation strategies that best apply to your specific situation. When you implement these strategies correctly, you should be able to protect yourself against the possibility of serious financial setbacks. The following article goes into detail about the top three asset preservation strategies that you or your business can use to protect the money you have.

#1 Establish Limited Partnerships and Limited Liability Companies

One strategy for asset preservation involves establishing limited partnerships and limited liability companies when possible. A limited partnership is any kind of partnership that’s made with at least two partners. A key difference between general partners and limited partners is that the general partner will have an unlimited amount of liability pertaining to the debt in the business. On the other hand, limited partners will have limited liability in accordance with the amount that they’ve invested in the company.

There are many notable positives of creating a limited partnership, the primary of which is that it will allow you to limit the personal liability for business debts as mentioned previously. You cannot be held responsible for any company debts aside from the money that you’ve invested. This will protect you from incurring too many losses in the event that the business fails. If you’ve been searching for ways to build a company but are wary of the risks that come with investing your money, a limited partnership is a great way to lessen the amount of money that you could lose. Since your investment is protected, you don’t have nearly as much to lose as the general partner. However, this also means that you will have little control over the business operations.

A limited liability company is very similar to that of a limited partnership with the primary difference being that none of the owners of the LLC are responsible for the debts and liabilities associated with the company. If you create an LLC and eventually file for bankruptcy, the members of your company won’t have to use personal funds to pay off company debts, which is a great way to preserve your assets while still creating a business.

How to Start an LLC

If you believe that that the best method for creating a company is to start an LLC, doing so is relatively straightforward as long as you know what steps to take. In the majority of states, starting an LLC begins with filing Articles of Organization with the Secretary of State in whichever state you live in. The basic types of information that will need to be provided when filling out the Articles of Organization include:

The full name of the company that you’re looking to create
A detailed description of your company
Your company’s mailing address, which can be a post office box if necessary
The address and name of the registered agent, which is the individual or company that you’ve assigned to receive any legal papers on your behalf
Basic information about the company’s managers and owners

When you file the Articles of Organization, you will also be tasked with paying a filing fee, which can vary by state. Expect to pay anywhere from $100-$250 in most states. Among the most notable aspects of this process is that you don’t necessarily need to obtain assistance from a lawyer to start an LLC, which should allow you to complete the process in a short period of time. The majority of states will allow you to file these documents by mail or online, which is another way that the process is streamlined. However, a few states have a requirement where businesses need to publish their intent to create an LLC in a local newspaper.

When you’re creating a limited liability company, it’s also highly recommended that you look into an LLC Operating Agreement. This type of agreement provides you with the ability to structure how your business will operate, which extends to everything from how each member will divide the profits to how the company will handle the arrival of new members. With this agreement in hand, your business can operate by the rules that you set as opposed to the rules put forth by the state.

#2 Create Asset Protection Trusts

image of world map with different kinds of currency

Another strategy for asset preservation is creating asset protection trusts. An asset protection trust is a financial protection tool that you can use against judgments, creditors, and lawsuits. The assets that you place in this trust are shielded from creditors, which gives you the ability to avoid litigation and settle the debts on terms that are favorable to you.

When you’re creating an estate plan, asset protection trusts are among the top ways to protect the assets you currently have. This is considered to be a self-settled spendthrift trust, which means that you are the beneficiary and the settlor with a significant amount of control over how your assets are used. Many types of assets can be placed into an asset protection trust, which includes investment accounts, bonds, stocks, personal property, automobiles, and real estate. If you’re looking into establishing an asset protection trust, it’s important to understand that there are two basic types of trusts available to you, which include a domestic irrevocable trust and a foreign offshore trust.

Domestic Irrevocable Trust Vs. a Foreign Offshore

While a foreign offshore trust is considered to be the top option for asset preservation, a domestic irrevocable trust can also be highly beneficial. When selecting the type of trust that you should use with your assets, you’re basically choosing the legal jurisdiction that the assets are protected by. With a domestic irrevocable trust, the account will fall under U.S. legal jurisdiction. On the other hand, an offshore trust is subject to the laws of the country that the trust is placed in.

When you place your money into a domestic irrevocable trust, your assets will continue to be under court order, which means that certain U.S. state laws and federal bankruptcy laws could still apply to this trust. However, this trust is less expensive than its offshore counterpart. There are also many U.S. states that have created asset protection trust laws, which are flexible.

If you want to create an offshore trust, this type of trust is the kind of legal vehicle that isn’t subject to standard U.S. laws, which means that it will be very difficult for anyone to get to your assets. In order for someone to pursue the assets that you hold within an offshore trust, they will be required to use the foreign jurisdiction system with foreign legal counsel, which makes for a very time-consuming legal hurdle.

#3 Prenuptial Agreements

Image of couple sitting on a bench overlooking a lake

A prenuptial agreement is a kind of written contract that a couple can make before they get married. This contract will usually list every piece of property that each individual owns as well as any kind of debts that they’ve accrued over the years. The contract will be used to specify what the property rights are for each individual in the event that the marriage ends in the future. While a prenuptial agreement typically applies to divorce, it can also be used in the event of a death or separation.

Without a prenuptial agreement, all property and assets between the divorcing couple will be subject to the state divorce laws, which are typically centered around equitable distribution. This means that all property and assets would essentially need to be split regardless of who purchased the property to begin with. A prenuptial agreement allows separate pieces of property to remain separate.

Reasons to Create a Prenuptial Agreement

There are many reasons why a couple may want to create a prenuptial agreement, the primary of which is that they want to avoid a lengthy divorce process by specifying at the beginning how the property will be divided in the event of a divorce. When a prenuptial agreement has been signed, you won’t need to go through countless arguments pertaining to how property and assets are going to be divided, which can make the divorce process more straightforward. Some of the additional reasons to create a prenuptial agreement include:

Passing separate property to children from previous marriages
Getting protection from debts that were incurred by one spouse
Clarifying any financial rights that each spouse has

If you want to protect the assets that you expect to make over the course of your marriage, creating and signing a prenuptial agreement is a great way to do so. Keep in mind that courts will look very thoroughly at the agreement, which means that it must be written in a legally sound manner.

If you’ve been thinking about investing in real estate, among the most important considerations of buying an investment property is having a real estate attorney by your side who can help you navigate this process. A real estate attorney is a professional who can use their skills to help you navigate through any legal hurdles that can occur when purc h asing an investment property. If there’s a lien on the property that needs to be taken care of or a dispute regarding the borders of the property, a real estate attorney should be able to make sure that these issues don’t stall your purchase of the property indefinitely.

A real estate attorney can provide their legal services before an investment property is sold, during the sale process, or after the purchase has gone through. The many situations where their expertise may be necessary include everything from providing recommendations of home inspection services to providing counsel if a problem happens to develop during the closing process. Issues can occur during the purchase of an investment property in the same way that they can develop when buying a home for your family.

While the purchase of an investment property may go through without issue, a top reason to consider hiring a real estate attorney is that they can review any purchase agreements, title documents, transfer documents, and mortgage documents. Even a small problem with this paperwork and documentation can put a delay in your purchase, which only serves to increase uncertainty. The real estate attorney that you hire should represent your interests completely throughout the entire transaction. The following is an in-depth look at what residential real estate attorneys do and why you should consider using one to purchase a home as an investment.

What Are Real Estate Attorneys and What Do They Do?

When you’re getting ready to buy an investment property, a real estate attorney can help you with any legal problems and hurdles that might develop during the process. Their assistance is similar to the assistance provided by a standard real estate agent in that they will work on your behalf to make sure the purchase process goes smoothly and that any issues are quickly ironed out. Even after you’ve made the initial purchase, it’s possible that legal issues will occur. If ever they do, a real estate attorney can help determine what legal steps you should take. The attorney you hire should always represent your interests, which means that you can be confident in the counsel they provide.

Real estate attorneys benefit investors because they can effectively handle almost every facet of the process, which gives the investor time to focus on how they’ll be able to get a return on the investment. While you’ll still need to sign any paperwork and gather any of the necessary documentation for buying an investment property, a residential real estate attorney can make sure that the actions you take throughout the purchase process are the right ones. As an investor, a real estate attorney is a great way to lessen the risk of your investment.

Using a Residential Real Estate Attorney Prior, During, and Post Sale

When you hire a residential real estate attorney to assist you during the purchase of an investment property, you’ll find that they can help you before, during, and after the sale. With an attorney by your side through all three phases of purchasing an investment home, the process should be a relatively straightforward one. If you run into a problem before or during the sale of an investment property, a residential real estate attorney should be able to provide you with the representation you need to continue with the sale.

Prior to the Sale of a Home

Likely the most beneficial service that a real estate attorney can provide before the sale of a home is reading the entirety of your real estate contract to make sure that it’s worded perfectly and doesn’t include any language that goes against your interests. If there are any liens that are currently on the home, a real estate attorney should be able to handle the legal issues surrounding the lien, which would allow you to go forward with the purchase.

Before you purchase your investment property of choice, a real estate attorney can also help you by checking the property title for any issues and by providing informed recommendations of home inspection services that you can use. If you want to be certain of the value of your investment property, a home inspection is essential to make sure that there are no underlying problems with the quality or structure of the home. Having a real estate attorney help you during the selection process should allow you to make the right purchase decision.

During the Sale of a Home

Once you’ve made an offer on an investment property, a real estate attorney can guide you through the closing process, which can last anywhere from 15-60 days. For instance, a real estate attorney may be able to attend the closing of the property with you, which will allow them to handle any issues that might arise during this process. While the closing process should go smoothly once you’ve made an offer on the investment home, there’s always a possibility that a legal issue could develop. In this situation, the issue should be resolved much quicker if you already have a real estate attorney at your side.

Another benefit of hiring a real estate attorney for the closing process on your investment home is that they can check any closing documents for errors that have been made. In the event that an issue occurs during the closing period, your real estate attorney can provide you with counsel on whether the closing should continue. They might recommend that you back out of the deal, which could help you avoid making a bad investment. Once the sale goes through, they will also make sure that the deed is recorded correctly.

After the Sale of a Home

There are many things that a residential real estate attorney may be able to assist you with following the sale of the home. One of the more common issues that develops after buying a home is finding out that there’s a problem with the property that the previous owner didn’t inform you about. If the seller had a duty to properly expose these defects, a real estate attorney can handle any kind of litigation that occurs. The types of defects that might result in litigation include ones that relate to the driveways, grounds, and property.

If your investment property is being rented out, a real estate attorney may be able to help you by drafting lease agreements. If a dispute arises pertaining to the borders of your property, you can also retain the assistance of a real estate attorney to help you in this matter. In the event that a foreclosure is necessary, a real estate attorney can assist you in exploring all of your legal options, which can include everything from a mortgage modification to a short sale.

Why You Need a Real Estate Attorney as Part of Your Real Estate Investment Strategy

Real estate investment is already difficult when you’re just trying to find the right homes to invest in that will provide you with a significant return. This process can be made much more complicated if you’re left to handle the entire purchase of the home by yourself. As mentioned previously, there are many areas where a real estate attorney can act as a guide that will help you avoid making a costly mistake.

Among the more beneficial aspects of hiring a real estate attorney is that their services can be provided before, during, and after the purchase of an investment property. If a real estate attorney doesn’t help you by reading the initial sale contract, you could overlook poor terms that would make the purchase a bad investment. During the purchase of a home, an attorney can provide you with counsel on what to do when a problem develops within the closing process.

When you’re purchasing a property as an investment or to expand your investment portfolio, you’ll be better off with a real estate attorney because they can effectively guide you through every step of the process. This guidance should help you navigate any hurdles that arise and keep you from making mistakes that could cause you to later regret your purchase. Without a real estate attorney, the process of buying an investment property can be much more chaotic and may even last longer. However, it’s not enough to just decide to hire a real estate attorney. It’s also important that you find an attorney who will provide you with premium representation and has experience in handling legal matters pertaining to investment property.

Finding The Right Residential Real Estate Attorney

Now that you know how important it is to have a real estate attorney by your side when buying an investment property, it’s time to look at how to find an attorney who you can be confident will provide you with quality representation. It’s highly recommended that you begin searching for a real estate attorney at the same time that you start looking at potential investment homes to buy. If you have any friends, family members, or coworkers who have engaged in real estate investment in the past, ask for a referral.

It’s also easy to perform some online research before narrowing your list of potential attorneys down to 3-5 options. When you type an attorney’s name into a search engine like Google or Bing, you should be able to find reviews and online referrals pertaining to the attorney in question. This is also a great opportunity to identify any red flags that may push you towards choosing one attorney over another.

After you have narrowed your search, it’s time to conduct in-person interviews with the small list of real estate attorneys that you’ve created. During the interview, you might want to inquire about their fee schedule, the amount of experience they have, the number of real estate transactions that they’ve closed, and any possible conflicts of interest. You should also think about asking for a list of references that you can check before making your final decision.

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