Do you recommend starting an LLC?

[Kyleigh Morgan]

I have a plan to start a real estate rental company? I haven't even purchased my first property. Do you recommend I start an LLC before I start? What is the benefit of forming an LLC? If it is not necessary or beneficial at this stage, when will it be? Thank you!!

[Rob B.]

Hi @Kyleigh Morgan - If you own your property as an individual and someone files a lawsuit against you, then your personal assets may be at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.

In addition to separating the rental property from your personal assets, you may also want to separate your rental properties from each other. If you own multiple properties, you can “insulate” each property from liability claims by setting up separate LLCs for each property. If you have all of your properties under separate LLCs, then if someone files a lawsuit pertaining to one of your properties, then the rest of your properties will not be affected by the lawsuit. This effectively separates and protects each of your properties. Additionally, Pass-through taxation is a benefit. 

With an LLC, you get the benefit of the company's income "passing through" to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes.

It may be better to create an LLC before you buy a rental property so you can avoid having to notify your mortgage holder that you are transferring your title to the LLC, in which case they may choose to close the loan and issue you a new loan. Additionally, you'd probably need to notify your tenant that the property is now owned by the LLC and update your rental lease whereas doing it beforehand can save you some of that headache. Lastly, converting the property to an LLC after the property purchase may trigger new taxes, specifically a Title Transfer Tax. 

Just a few things to consider/think through. I hope this information helps! Let me know if you need anything else.