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Passive Real Estate Investing as a Limited Member
November 15 | 2012

Passive Real Estate Investing

There are a number of ways for passive investors to enjoy the benefits of real estate investing without the troubles of tenants, toilets and trash.  Passive real estate investing is an option that has been made possible in recent years through real estate crowdfunding platforms like RealtyMogul.com.

What is passive income and passive investing?

Investing as a Limited Member

There are real estate investment companies in the US and around the world who run real estate businesses and handle everything from property acquisition, property maintenance and accounting to the eventual re-sale of a property. These operators typically raise money for these investments and structure them as Limited Liability Corporations (LLCs). It is not uncommon to set up one LLC for each property. The LLC is composed of a managing member (who is sometimes thought of as the “active” member) and “passive” investors who are limited members. One of the greatest benefits of being a passive investor (limited member) is that you have no additional liability beyond the amount of your investment. LLCs can also choose to be taxed as partnerships and “pass through" profits and/or losses to the investors. Unlike corporations, the profits are only taxed once.

Who makes decisions in a LLC?

Decisions in an LLC are governed by a document called an “operating agreement”. While every operating agreement is slightly different, the managing member typically makes all of the day-to-day decisions and the limited members act as passive investors on the transaction. The managing member can determine how much cash to distribute to the limited members versus how much to hold in reserve and assess possible sales for the property. There are certain activities that might mandate a vote by the limited members and the limited members can typically take action if the managing member defaults on the terms of the agreement or is grossly negligent.

Who owns what?

Ownership interests in the LLC are split between the managing member and the limited members according to a negotiated formula outlined in the agreements. All members own shares in the LLC and the LLC itself owns the property. Shares in an LLC are typically sold in units. Units can have a minimum value, such as $5,000 per unit. Sometimes you can buy a fraction of a unit and other times you are required to buy the full unit.

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