Since rental real estate is treated as a business, legal ownership can take many different forms. Choosing the right type of ownership structure for a rental property is extremely important for reasons such as liability protection, controlling tax liabilities, and staying on top of administrative requirements. Below we take a deep dive into several of the most common rental property ownership structures.
Types of Rental Property Ownership Structures
Sole Ownership, also called Individual ownership or In severalty, is when title of real property is held in the sole name of one person, without any other owners. “Severalty” is a legal term that refers to one owner being “severed” from other owners. When a property is owned in severalty, the one owner possesses the entire bundle of legal rights, giving them the most complete control of the property.
Partnership is a form of property ownership where two or more parties share legal ownership. Although a Partnership is not a legal person, it can hold title to real estate in the name of the partnership. Members of a partnership can be people, entities, and corporations. Partnership agreements are not included in public record, but should still be held with care in case an issue arises. There are several different forms of partnerships; each of which has different strengths and weaknesses. The most common types of partnerships are General Partnerships and Limited Partnerships:
A General Partnership is a form of property ownership where at least two or more parties (i.e. partners) share ownership in operating and managing the property. In a general partnership, the partners share unlimited personal liability for the business debts. There is no registration requirement or formal filing that needs to be completed to form a partnership, rather partnerships are created through receiving a share of the profits generated by the property held within the partnership.
As another type of Partnership, Limited Partnerships must have at least one General Partner and one Limited Partner. When a property is owned in a Limited Partnership, the Limited Partner is legally not allowed to participate in the property’s operation and management. As such, day-to-day property oversight is usually the role of the General Partner. This type of property ownership structure is usually most common and beneficial for a Limited Partner who may invest capital into the partnership, but does not want to assume the business liability.
Joint Ventures (commonly referred to as a “JV”) are business entities that are created for the purpose of shared ownership in real estate investments, where the entity is intended to be dissolved once the project is completed. Joint ventures are similar to Partnerships in that they have at least two or more parties coming together into a single entity. Joint Ventures operate similar to a General Partnership (see above). All parties in a Joint Venture share ownership, profits, losses, managements and fiduciary duties to other members of the entity.
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A Corporation is a common form of rental property ownership found among commercial properties. In a corporation ownership structure, the property is legally owned by the corporation and the corporation is owned by stakeholders. This setup creates a separation between the independent legal entity and the actual owners. Corporations may own real estate as a tenant in common (i.e. owned by several parties) or in severalty (i.e. one person or entity) but not as joint tenants. The beauty of a corporation is that it can perform the same responsibilities and has the same rights given to natural persons; i.e. entering into contracts, borrowing money, making loans, etc.
Limited Liability Company (LLC)
Limited Liability Companies (commonly referred to as an “LLC”) are another common form of rental property ownership found among many types of investment properties. An LLC operates similar to a Corporation where the entity legally owns the property and owners of the LLC enjoy a degree of legal independence from the entity. Owners of an LLC are called members and there is no limit to the number of members an LLC may have. A Member could be an individual, corporation, foreign entity and/or other LLCs. The main attraction to LLC ownership is that members have limited liability proportionate to their investment. This means that the owners cannot be personally liable for any financial losses beyond their investment into the LLC. They are however personally liable for the business’ debts.
Real Estate Investment Trust (REIT)
Real Estate Investment Trusts (commonly referred to as a “REIT”) is a form of property ownership where the entity acts as an investment vehicle that acquires, finances, owns, and often operates income-producing real estate. In this type of investment vehicle, investors invest small amounts of capital in the form of shares to gain ownership. As such, REITs are sold through major stock exchanges and traded as securities, requiring registration with the Securities and Exchange Commission (SEC) as well as meeting a number of requirements to legally qualify as a REIT. Properties that are owned by REITs are typically larger investment properties that can span across many industries such as office buildings, hospitality properties, self storage properties, and more.
Owning real estate in a Trust is primarily done for succession planning purposes. This means that the property owner (i.e. Trustor or Grantor) uses the Trust to clearly outline what shall happen to property upon a death or predetermined time/event. In a Trust, the title of real estate is held in the name of the Trust, but the owner can still operate it. Although ownership is public record, the terms of a Trust are usually private. There are two primary types of Trusts: Revocable Trust and Irrevocable Trust. In a Revocable Trust, the Grantor (i.e. owner) has full control over its assets at all times and can change its terms whenever they please. In an Irrevocable Trust, the Grantor (i.e. owner) is unable to modify or terminate the Trust without the permission of the Beneficiary or within the terms of the Trust. Benefits of Trust ownership include protecting and managing assets for beneficiaries, avoiding probate upon death of Grantor, and reducing tax obligations.
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