What Type of Entity Should an Investor Use for Transactional Funding?
The investor involved in borrowing transactional funding can use any entity to purchase and sell the property that he is closing.
While an accountant or CPA should help you make the final decision, generally speaking investors use an LLC (Limited Liability Corp) for properties that they intend to hold and where they will be collecting rents.
Conversely, investors tend to use a corporation (Sub-S election) for wholesaling and rehabbing properties.
Again, make this decision with an accounting professional who understands real estate investing to keep you out of trouble later.
Many investors also use land trusts with the Beneficiary being an LLC that has the accounting done as if it were a Sub-S corporation.
However, this question relates to the transactional funding lender – what type of entity should he be using?
Besides the traditional choices of an LLC or corporation, if the transactional funder is a private lender he will be inclined to use his personal name.
On the issue of using one’s own name, attorneys and accountants will tell clients not to expose themselves to potential liability and that an entity (LLC or corp) will “insulate” them from.
This choice is a very personal matter that needs to be determined with the lender’s professionals to weigh the cost versus benefits of starting and maintaining an entity versus occasionally making a loan to a local investor.
If you start going across state borders, you may get into additional laws and regulations that do not apply in your state.
Get legal advice in the additional state you are intending to loan in or stay in your local area.
The temptation to loan transactional money for a few hours and make money is very tempting, but it does entail various risks so always “be prepared’ before you begin any type of transactional funding.
I am not dodging the answer to the question but rather saying that it is a personal choice.
Having an entity will not keep you from being sued and if you are sued the real cost will be attorneys’ fees.
A good option is to make sure you are doing everything legally to begin with and have your documents drafted by attorneys in your state and these documents are then state-specific.