What Every Florida Real Estate Investor Should Know
I. Real Estate Investment Company Set Up Basics
Setting up your business requires thorough planning, which includes following Florida State requirements and lots of paperwork. Many investors, who form their business on their own, run the risk of not setting it up correctly.
Filing the business with the Secretary of State is not enough. To protect all parties involved, you need additional documents in place. For example, if you form a corporation, you must have bylaws, resolutions, and minutes; if you create a limited partnership, you need a partnership agreement; if you form an LLC, you should have an Operating Agreement in place. Each of these documents details the rights and responsibilities of each party involved in the business.
It is highly recommended that you have an experienced real estate attorney on your team to advise you through the entire process. With an experienced real estate attorney on your side, you’ll know the business is set up correctly, and that your personal and business assets are protected from liability in the event of a lawsuit. At the end, for your peace of mind, it is well worth the time, expense, and effort to form your business correctly.
II. Best Corporate Structures for the
Real Estate Investor
1. Sole Proprietorship
A sole proprietorship is one of the most simple business structures you can choose to operate a real estate investment business. As an unincorporated business owned and operated by one individual under his or her legal name or fictitious name (a trading name), there's no need to create a new legal entity. It is the easiest way to become a real estate investor, but it has many disadvantages.
Some major drawbacks of doing business as a sole proprietor are (i) higher exposure to liability, (ii) fewer tax benefits than doing business as a legal entity, and (iii) not necessarily the least expensive way to protect your assets.
2. Limited Liability Company (“LLC”)
Investors who "buy and hold" property, with the primary goal of generating rental income and long-term capital appreciation, have the option of placing each property in its own separate LLC. Filing separate LLCs provide a distance between an investor and his or her business, while not relinquishing control. It also offers excellent tax benefits and asset protection. Creating subsequent LLCs also provides another layer of protection by insulating each property from each other, effectively reducing risk.
Note: In 2010, a Florida Supreme Court decision (Olmstead v. Federal Trade Commission), rendered assets held inside of a single-member LLC no longer protected from creditors because the Florida Supreme Court found that charging orders are inapplicable to single-member LLCs.
Consequently, single-member LLCs are now treated like sole proprietorships, allowing judgment creditors seeking repayment of a debt owed the ability to (1) take a debtor’s membership interest in the single-member LLC, (2) seize control of the company, (3) redirect the LLC’s distributions, and, (4) liquidate its assets until the debt is paid.
3. Limited Partnership (“LP”)
A Limited Partnership is comprised of a general partner and limited partners. The general partner is responsible for the management of the LP and is liable for its obligations. Limited partners, however, do not actively engage in the management of the business, but may invest in the business. Both the general partner and limited partners share in the LP’s profits and losses.
Consider forming an S-corporation to reduce self-employment tax if you’re engaged in fixing and flipping property to turn a quick profit within one year. The “buy and sell” real estate is considered inventory and you, the investor, are considered a "dealer."
Under an S-corporation, real estate dealers are allowed to take a "reasonable salary" (which is subject to social security and Medicare) and then take the remaining profit as a distribution (which is not subject to self-employment taxes).
While real estate dealers avoid self-employment and social security taxes on a portion of the profit earned from their short-term investments, they lose out on taking advantage of tax benefits such as the (i) capital gain tax rate, (ii) depreciation deductions, (iii) installment sales method for recognizing gain, and (iv) a tax free like-kind exchange under the United States Internal Revenue Code 26 U.S.C. § 1031 (also known as the 1031 Exchange).
III. Taking Possession of Your Property
1. The Difference Between An Eviction,
Ejectment, and Unlawful Detainer Action.
A landlord in Florida is not allowed to evict a tenant unless the landlord abides by specific rules to end the tenancy first as outlined in Florida law and the lease agreement. An eviction, ejectment or unlawful detainer action applies when certain conditions exists, as described below.
An eviction is the proper remedy for removal of a person occupying your property when that person is subject to a lease, paid rent, made mortgage payments, contributed to the upkeep of the property, or paid utilities in exchange for the use of the property.
Unlike an eviction, an ejectment action is only proper for removal of a person occupying your property when that person is not subject to a lease, did not pay rent, mortgage, utilities, or upkeep costs in exchange for the use of the property, but claims to have some right, interest, or title to the property.
Alike an ejectment, an unlawful detainer action is an appropriate remedy for removal of a person occupying your property when that person is not subject to a lease, did not pay rent, mortgage, utilities, or upkeep costs in exchange for the use of the property, however, the occupant, in this case, has no legal claim or rights to the property.
For more information on ejectment and unlawful detainer actions, visit our website!
2. What are some reasons for terminating
A landlord may terminate a tenancy when the tenant (i) fails to pay rent, (ii) violates the lease or rental agreement, or (iii) commits an illegal act.
3. How does a landlord terminate a tenancy?
For a landlord to terminate a tenancy, he or she must first give the tenant a written notice. The type of notice provided to a tenant is based upon the reason for terminating the tenancy in the first place (see Paragraph 2. (i)-(iii) set forth above).
4. How long does it take to remove the
tenant/occupant from the property?
An eviction uses a process called a "summary procedure" to get the case through the courts as quickly as possible. Notwithstanding this speedier process, the landlord and tenant must abide by all the steps outlined in Chapter 83 of the Florida Statutes.
5. What are the steps in an eviction?
It is important to note that throughout the entire eviction process, a Landlord is prohibited from engaging in self-help or any other methods to force the Tenant to move out of the property (i.e., the Landlord is not allowed to turn off the water, electricity, or gas and is not allowed to change the locks to the doors). Therefore, a Landlord should not try to evict a tenant on his own under any circumstances!
If the Tenant has not paid rent to the Landlord, then the Landlord must provide a Notice for Nonpayment of Rent to the Tenant. It is important to note that the notice period does not include Saturdays, Sundays, and legal holidays. So, the timing of the posting of the notice is crucial!
If the Tenant fails to pay the past due rent amount or refuses to vacate the property after receiving the Notice, then the Landlord may file an Eviction Complaint. As these are legal papers, a sheriff or authorized process server should serve the Tenant with the Summons and Complaint.
It is important that the Landlord consult with an attorney to draft or review a Notice for Nonpayment of Rent to the Tenant to make sure it is written and posted properly.
The Tenant only has five (5) days to respond to the Complaint for Eviction and deposit the rent owed into the Court Registry.
If the Tenant does not file an answer to the Complaint and deposits the rent owed into the Court Registry, or fails to respond within the time allowed, the Court may enter a Default Judgment against the Tenant, and the Tenant could then be evicted.
IV. Consult with an Experienced
Real Estate Attorney
Forming the right business entity for your real estate investment business requires great thought and consideration. Therefore, you should seek the advice of experts who will help you determine what real estate business structure is best for you.
It is also important that you take the proper steps if there's a need to remove a person from your property. The process is not as simple as it seems; therefore, it is wise to contact an experienced attorney who can help you.
Attorney Kimberly Soto’s real estate law experience includes representing investors in the purchase and sale of hotels, apartments, condominiums, single-family homes, shopping centers, subdivision and mobile-home developments, representing buyers and sellers in residential real estate transactions, as well as representing landlord and tenants in lease negotiations, evictions, ejectment actions, and unlawful detainer actions.
Ms. Soto has extensive experience drafting purchase and sale agreements as well as condominium documents, representing homeowners and condominium associations, and reviewing and identifying issues contained in contracts, title, and loan underwriting.
For more information, please feel free to call Kimberly Soto at 321.972.2279 to schedule a consultation.