MartelTurnkey

In addition to BBQs and the last hurrah for boat people, Labor Day is a time to reflect on our personal labor and how we value it.

Labor Day was established in the 19th Century to commemorate labor movements and honor the American working class. While we agree that labor is honorable and important — the foundation of the American economy — at MartelTurnkey we prefer to focus on an equally American value … freedom.

We want to redefine labor as a phase in an American life, not its sole purpose … and to reframe financial freedom as a goal that anyone, regardless of social class or industry, can strive for and ultimately achieve.

Here are three principles I encourage everyone to adopt to transition from a life of labor to a life of financial freedom.

1. Understand That You Are Trading Time for Money

Whether you are digging ditches, or billing hours as a partner in a law firm, understand this — you are trading your time for money. Some of us charge a higher price for our time … but that’s still time you could be spending with family, or exploring, or cultivating hobbies, or building a business out of your passion, or making a difference in the lives of the disadvantaged.

Here’s the thing … trading time for money is always a bad trade. Why? Because you can always make more money. Money is also volatile. The value of a dollar goes up and down with inflation and deflation.

But time is of fixed value. We all have the same 24 hours in every day to live our best possible life.

And time is limited. One day, time will run out for all of us. We can always make more money, but we can never give ourselves more time.

2. Set Your Sights on Financial Freedom

With this in mind, let’s start treating our “time-for-money” paradigm as a phase in our life, not the whole banana. It’s a means to an end, and that end is financial freedom.

What is financial freedom? We dig into it in this blog, but in a nutshell it means that your time is your own again. You don’t have to punch a clock or deliver for clients to make your daily bread. Your expenses are taken care of, no matter how you spend your 24 hours.

How does one achieve this? For our money, the best way is cash-flowing rental real estate. With enough cash flow from rent, you can replace your job with “passive income.” When one of our clients has enough rental cash flow to replace his or her job income and/or cover every personal expense, we describe that person as “financially free.” They’re out of the labor rat race!

3. Don’t “Save For Retirement” — Invest For Freedom

Now that we’ve set our sights on financial freedom, let’s put it into practice. For most employees and self-employed persons, this means no more “saving for retirement.” Instead, start investing for financial freedom.

Am I suggesting that you stop contributing to an IRA or 401(k) and save that money to make down payments on rental properties?

In a sense, yes.

Government-sanctioned retirement accounts are largely meant to keep people in the workforce, paying taxes and contributing to the economy by trading time for money for as long as possible. Yes, IRAs and 401(k)s let you “grow your money tax-free” … but so can real estate investing, as we describe in this article about the tax advantages of real estate.

The problem with IRAs and 401(k)s is that once the money is in there, it has to stay in there. You can’t take it out (at least, not without penalties) until you are the age at which the government wants you to retire and drop out of the labor force.

But with rental real estate, you can use the cash flow to start replacing your job income right now … while still growing your net worth as the property appreciates and you pay down your mortgage. You can even defer taxes on those gains indefinitely using 1031 exchanges.

Forget waiting until you’re 65 and trying to hike the Appalacian Trail on a second-hand hip. As fast as you can accumulate property, that’s how fast you can become financially free … and kiss your laboring days goodbye!

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If you want a deeper dive into how to transition from labor to financial freedom as quickly as possible, my book Stop Trading Time for Money tackles the subject head-on.

If you’re ready to start accumulating cash-flowing rental property — pieces in the puzzle of your personal financial freedom — MartelTurnkey makes it easy. We have a catalog of pre-screened turnkey rentals in US boom-towns ready to go for our preferred list of buyers. Click here to get on that list … or just start shopping for your next rental property now!

“I own it! It’s mine! Look at my name on the deed!”

Turnkey rental property ownership can be transformative. But another step is recommended beyond the actual purchase. Savvy investors protect themselves with incorporation, which creates a protective veil between the owner and the public.

The corporation is probably the most well-known incorporated entity The limited partnership (LP) and the trust are also popular with new business owners. While any of these entities can technically be used to hold turnkey real estate, the entity that gets the most use in terms of real estate investments is the limited liability company (LLC). Most MartelTurnkey buyers who hold their turnkey rentals in the name of a corporation choose the LLC route. To understand why, here are several pros and a short list of cons of holding your investment in the name of an LLC.

Pros of Holding Turnkey Rental Property in an LLC

Limited Liability

It’s right there in the name, but we can’t stress this enough. Rental property owners have to limit their liability. We live in a litigious culture. If your tenant slips and falls on the porch of their rental property, they have the right to sue the landlord. If the rental property is in your own name, your plaintiff tenant can go after your personal assets, which no one wants.

But if the turnkey rental is in the name of an LLC, they can’t go after your stuff. After all, you don’t own the rental house … the LLC does. Yes, you own the LLC, but that’s not the same thing for legal purposes. The plaintiff can only target assets owned by the LLC;usually just the house itself, along with the debt.

There are several considerations to maintain the “corporate veil” and protect yourself (talk to your lawyer), but that’s the basic idea.

Tax Advantages

LLCs have several tax advantages compared to either a corporation or to owning the turnkey in your name.

If you own the house in your name, you’ll be taxed as a “sole proprietor,” which means you’re on the hook for self-employment taxes. An LLC can shield you from this.

At the other end of the spectrum, corporations are notorious for “double-taxation,” wherethe corporation gets taxed on its revenue, and then the stockholders get taxed on the dividends.

An LLC, on the other hand, can be set up as a “pass-through” entity, where the income passes directly to the owners without the extra taxation. Not only that, but this sets you up to get the “pass-through entity” deduction. Again, your CPA or tax attorney can fill you in on the details.

Want to learn more? Check out this article we wrote on the tax advantages of real estate investing.

Easy to Use

Corporations must adhere to certain set structures and hierarchies. They must comply with complex reporting laws, including holding regular meetings with written minutes that must be kept on record. Ownership can only be transferred by “stock.” In short, there are a lot of strict rules associated with corporations.

LLCs, by contrast, are a relatively new form of entity, with comparably fewer regulations, precedents and formalities to restrict them. The reporting burden is much easier, and ownership can be transferred easily with just a few notarized signatures.

Privacy

Privacy laws vary by state, but in general, an investor can use LLCs to obfuscate the public record and make it hard for an outsider to find out how much real estate is owned. If you own a turnkey property, your tenant doesn’t know who you are. Between you and them is the property management company, and your LLC.

For investors who want a low profile, i.e. who don’t want creditors, predators, looky-loos, and the government to know their actual net worth, this is very valuable.

Cons of Holding Rental Property in an LLC

Mortgage Due-On-Sale Clause

Banks don’t lend to entities — they lend to people. They want to have a person to go after in the event of a loan default. If you buy with a mortgage, you will have to personally guarantee the loan — and the lender will want the name on the deed to match the name on the note.

The way that many investors handle this is to close with their own name on the title to satisfy the lender but then, at the closing table, they transfer title to the LLC. Now they have a loan in their name, but title to the real estate is in the name of the LLC; a win-win scenario.

Please speak to your CPA or tax attorney regarding this.

Beware of Transfer Taxes

Transferring ownership of real estate is often a taxable event. Many states waive transfer taxes if there is no practical change in ownership interest. For example, if you and a partner own a rental property 50/50, there may be no transfer taxes if you transfer title to an LLC that you and the partner also own 50/50. However, some states assess the transfer taxes regardless. Check the laws in your target state so you don’t get caught off-guard.