The Detroit real estate market is appealing, not only to people in the United States but to investors all around the world. As the US housing market continues to try to find its footing after the economic issues brought about by the COVID-19 pandemic, investors who want to own rental properties are becoming more and more involved in the US rental market, especially in secondary markets like Detroit. Thanks to the advances in technology that have revolutionized the real estate industry, it’s easier than ever to invest in a property, even if it’s on the other side of the world. If you’re an international investor looking at getting into the Detroit rental property market, it’s important that you choose the right legal structure to protect your investment and yourself.
Why You Need to Choose the Right Legal Structure
Before we dive into the right legal structure for your Detroit real estate investments, it’s important to understand why you need to choose one at all. After all, can’t you just buy one or more properties, work with a Detroit property management company, and let them handle everything for you? You can, but that’s probably not the best idea.
A sole proprietorship is a structure that involves an investor owning a business, in this case, rental properties. While this is certainly the most straightforward way to get into the Detroit rental market, it also comes with some risks.
As a sole proprietor, you’re responsible for personally handling any legal claims made against the property. This can range from unpaid property taxes to personal liability claims filed by a tenant. As an international investor, these claims are even harder to deal with unless you plan on traveling to Detroit to handle them. It also means that your personal assets are at risk. If a claim gets filed against you and you lose the litigation battle that follows, you’re personally responsible as the sole proprietor. With this in mind, there are multiple structures that are better suited for your goals as an investor.
Limited Liability Corporation (LLC)
A limited liability corporation (LLC) is the most popular choice among real estate investors. In Michigan, you’ll pay an initial filing fee to set up your LLC with the state, and then every property that you own is the property of the LLC. In Michigan, the filing fee is $50. You can pay $100 and have your LLC formed on the same day that you file, $500 to have your LLC formed in two hours, and $1,000 to have your LLC officially formed in one hour.
One of the most appealing aspects of an LLC is the number of structures that fall under the umbrella. A single-member LLC involves one person who owns the business, while a multi-member LLC has two or more members. You can also set up a series LLC in which your first LLC eventually owns other LLCs. There are tax breaks available to LLCs that sole proprietorships don’t have access to.
However, the biggest benefit of choosing an LLC is the legal protection that it offers. While you can own the LLC yourself, your personal assets are not at risk in the event of litigation. Instead, the LLC can be sued by a tenant, but they would only be able to bring litigation against the corporation, not you as the owner. The minimal formation costs, tax breaks, and legal protection make the LLC the most popular business structure in the United States.
Partnerships
Partnerships involve two or more people sharing ownership of a property. When choosing a business structure, you’ll need to remember that there are two types of partnerships to choose from, general and limited.
In a general partnership, all the parties share equal responsibility for the business’s debts and liabilities. There are benefits to choosing this structure, as you don’t have to be solely responsible for any financial obstacles that pop up along the way. In a limited partnership, one or of the partners serves as a general manager for the business.
Since the type of business that you’re looking into is a real estate investment business, this would mean that one or more of the partners was responsible for managing the property. While it’s certainly a good thing to have an owner involved in the daily responsibilities of owning a rental property in Detroit, it’s important to note that the partner who is involved in the management has lower liability protection. This puts that partner at greater risk for personal financial loss, which makes it harder to find a partner who’s willing to take that type of risk.
Real Estate Trusts
As is the case with your other options, there are multiple types of real estate trusts to choose from. A trust is a legal entity that manages assets, in this case, properties, on behalf of its beneficiaries. There are different tax implications for foreign nationals using a trust to purchase real estate, so you’ll want to work with a real estate attorney and an accountant who understands these intricacies.
Grantor trusts allow you as the grantor to hold certain rights associated with the properties held in the trust. While the right to make decisions is appealing, any taxes owed on the state or federal level must be claimed on your personal tax return. Conversely, in a non-grantor trust, the trust itself gets to make decisions about managing the property. The positive side of this decreased operational control is that the trust pays the annual taxes associated with the properties held by the trust.
Choosing the Right Partner Helps You Make the Right Choice
The Detroit real estate market is a great option for international investors. However, it’s important to work with someone who not only understands the market but also the intricacies of investing in the Motor City. The team at Upside Investments has helped domestic and international investors navigate the competitive Detroit real estate market for years. Contact us today to find out more about how we can help you add Detroit rental properties to your investment portfolio.
