Do Investors Need to Incorporate?
One of the most frequent questions my clients ask is, “Should I incorporate or use my personal name to invest?” There is no hard and fast answer for this, as everyone has different circumstances.
As an Investor myself, and someone who has helped hundreds of investors purchase their real estate, all I can tell you is that about 90% of my clients, even the wealthy ones with over 10 investment properties, have invested in their personal names.
Drawbacks of Incorporating
Of the 10% who invest through their corporation, there are a few who wished that they had just invested in their personal names. When I ask those clients why they regretted investing through their corporations, this is what they have told me:
Difficult Mortgage Approvals
“Mortgage financing became harder as only a handful of banks will finance an investment property owned by a corporation. It also takes longer to get the approval, and there pages upon pages of criteria for us to fulfill. We were nervous that we would lose the deal because we couldn’t remove subjects.”
Additional Fees
“The start-up costs of a corporation and the annual accounting and filing fees are a few thousand dollars. That eats up all our positive cash-flow on our properties.”
High Taxes
“I was told by my accountant that taxes for rental income is over 49% as the exemption only applies if I have 5 or more full-time employees in my real estate business.”
Ouch!!!
For the above three reasons alone, I can see why so many people shy away from incorporating. Having said that, there are benefits to incorporating too.
Benefits of Incorporating
For investors who do joint ventures and have many partners, investing via a corporation can add a layer of protection in the event of a legal dispute. Owners of a corporation wouldn’t likely be impacted by any remedy or judgement.
Upon hearing this, investors usually follow up with, “What about tenants suing me?”
If your property is managed by a property management company, they should have insurance to cover liability claims. You should also have tenant insurance on your home insurance policy, and make sure that it includes liability coverage. It’s always best to check with your property manager and your home insurance company to know what you are covered for.
It’s also wise to keep your investment property in good shape and do repairs as soon as possible after the tenant reports it to you. That way, you will avoid most tenant claims for injury.
Assess Your Situation to Decide What’s Best for You
In general, if you plan on investing in under 5 income properties, its probably better to invest in your personal name. But if you plan on making real estate investing your business and invest in many properties with various partners, then having a corporation could be beneficial for liability reasons.
I invest in both my personal name and through a corporation. For my joint venture deals, it’s through my corporation. When investing on my own or with my family, I invest in my personal name. That’s the best scenario for me.
If you have any other questions regarding this topic, it would be best to speak to your real estate lawyer. They can determine what is the best scenario for you.