If you are looking to buy your own dental, medical, optometry, or veterinary practice, you have a number of considerations to make. One of those may be to purchase an investment property that can add rental income to your revenue stream.
For many medical and dental providers, purchasing a mixed-use property that can offer their practice location along with residential and office spaces is a solid investment opportunity. Not only does this give you your own dedicated place to practice, but it also provides some residual income as you rent out the remaining properties. For anyone investing in residential real estate, whether a traditional investor or a healthcare provider looking to manage a mixed-use property and even investors looking for commercial investments, forming an LLC can provide important protection in this process.
A limited liability company, or LLC, is a business structure that organizes a business to reduce personal liability. Owners of the LLC are called members, and they can be individuals, corporations, and even other LLCs. If you have a non-medical business, including a real estate investment business, you can form an LLC to protect your interests.
Buying real estate with an LLC can carry some benefits. These include:
With all of these benefits, it’s clear that structuring your investment properties under an LLC could make sense.
Using an LLC to buy a mixed-use or commercial property is not a perfect solution. It does have some potential downsides.
First, there is a cost involved. This cost varies depending on the state, but it can cost between $40 and $500 to file the articles of organization. You may also have to pay permit fees, business license fees, and attorney or accountant fees as you will need to file a tax return every year.
Second, if you need a mortgage to buy the property, and you go to a conventional lender that focuses primarily on residential properties, you might have trouble securing financing. Banks stand to lose more when lending to an LLC because of the liability limits, and thus some will say “no.” If you do get a mortgage, it may have a higher interest rate because the lender knows you are likely buying the property for investment purposes. This is one of the main reasons we recommend using a lender that works specifically with doctors. If you would like a recommendation, please contact us.
To overcome the lending challenge, you can use an asset-based lender to purchase your investment property through an LLC. Asset-based lenders allow LLCs and other businesses to use their real estate portfolios to secure a loan. Instead of using a particular piece of property to secure the loan’s value, the loan gets repaid based on an agreed percentage of the assets' value. This process involves more liquid collateral than property-based, physical collateral. It provides more structure to change the portfolio as investment needs change but does cost more than a conventional residential mortgage.
While most of the time, medical and dental providers choose to use an LLC to purchase commercial property, not their own homes, but some who go this route will wonder about buying their own properties under the LLC. This practice works best for those who have investment experience or who are using their properties as an investment, not for those purchasing their own home. The advantages of a conventional mortgage and the lack of risk associated with your own home purchase mean a residential mortgage works best in these situations.
Another thought some investors have is that purchasing the property with a personal loan first, then transferring it to the LLC later, would eliminate some problems with getting a loan. However, this isn’t as easy as you might think.
If you own a property with no mortgage on it, then you can transfer the property to an LLC without a problem. However, if the property has a mortgage, you would trigger what is called the due-on-sale clause. This clause requires the property owner to pay the mortgage in full at the time of a sale. The transfer OT the LLC would be legally considered a sale, and thus you would have to repay the mortgage, taking out a new one under the LLC. In effect, you do not gain any benefit by attempting to transfer your assets in this way.
As a healthcare practice, you may wonder if you can purchase an investment property and run your practice all under the same LLC. The answer to this question is based on individual state laws. In California, for instance, most professionals including doctors are not allowed to own their practices as LLCs. Instead, they must operate as a professional corporation. However, the real estate can be purchased in an LLC as described above. This is just one state’s way of doing things, so always check with your state’s laws to see whether or not you can combine your property investments with your practice.
If you are looking for help understanding your real estate investment options and how you can use an LLC to own and manage a mixed-use development, reach out to Dental & Medical Counsel to schedule a complimentary consultation with attorney Ali Oromchian.
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