General Real Estate Investing
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 2 years ago, 03/29/2022
Understanding LLC for Real estate investing
Hello,
I am a newbie to the real estate investing and I am going to be purchasing a duplex this July. I am very confused on whether opening an LLC and having my rental income go through a LLC is beneficial? I have also seen discussions on opening an LLC per rental property, is this the most beneficial way to do this?
If anyone can give me a basic rundown of if an LLC is beneficial and how to use it to my benefit, I would greatly appreciate that. I seen different opinions and ideas all over the place and its just starting to confuse me.
Thank you for your assistance!
Hey Kaylee,
The main benefit of purchasing your property under an LLC is asset protection. Simply put, with your property under and LLC (instead of your personal name), if a tenant, contractor or some one else were to sue you because of an incident on that property, they would not be able to go after your assets outside of that property such as you personal residence, your vehicles or other personal possessions. Note, that just because you have the property in an LLC, it is not guaranteed 100% that someone suing you (in regards to that property), could not go after your other assets.
Other than the protection benefit, there are not too many other benefits. There is some level of privacy, but most of the time people can search online and find the owner of an LLC.
Where an LLC may hurt you is the financing. Typically you will pay higher rates on a property purchased in an LLC instead of your personal name. The rates are not out of this world higher, but they will be higher.
Regarding one LLC per property, there is no right or wrong here. You can put one property per LLC and it is also common to place a few properties per LLC up to a certain amount, usually around $1 million.
Since you are just purchasing your first rental property, I would not worry too much about the LLC vs no LLC debate. Just focus on finding and buying your first property. If you have not considered it already, you should think about house hacking. It's an amazing way to get your foot in the door.
Good luck on your journey and don't over think it!
I'm a newbie as well, so don't have much to add to the above, but I do have a follow up question. Let's say the first rental is bought without an LLC but then we scale/grow, how challenging is it to later put it into an LLC. Is it a matter of just changing names on forms, or would you essentially have to "sell" it to the LLC or refinance it (with the higher rates mentioned) in the LLC name?
Quote from @Michael Hodde:
I'm a newbie as well, so don't have much to add to the above, but I do have a follow up question. Let's say the first rental is bought without an LLC but then we scale/grow, how challenging is it to later put it into an LLC. Is it a matter of just changing names on forms, or would you essentially have to "sell" it to the LLC or refinance it (with the higher rates mentioned) in the LLC name?
Many investors just quit claim deed the property over to their LLC at some point in the future. At the same time, many investors never do this on their first properties and just leave it in their names. It is not a challenging process at all. Most mortgage companies have a due on sale clause and the transfer of a deed could trigger this clause, requiring you to pay the full balance of the mortgage. This rarely happens, but its worth noting.
You could sell it to your LLC but that would be a wasted of money and time unless you had a very specific reason to do so.
Lastly, on the one two or three that may be in your name, you can throw an umbrella policy on them with a high liability amount to cover you just in case.
This is extremely helpful thank you so much! The liability aspects makes a ton of sense.
I have one last follow on question. If I purchase the property in my name, but also have an LLC. Can I have the rental income go to my LLC so it does not increase my personal tax bracket and pay the mortgage through the money in my LLC? Then the income that goes to my LLC gets taxed as the company not as me personally.
Or is this the same thing as having the home purchased with an LLC.
Quote from @Kaylee Sheppeck:
This is extremely helpful thank you so much! The liability aspects makes a ton of sense.
I have one last follow on question. If I purchase the property in my name, but also have an LLC. Can I have the rental income go to my LLC so it does not increase my personal tax bracket and pay the mortgage through the money in my LLC? Then the income that goes to my LLC gets taxed as the company not as me personally.
Or is this the same thing as having the home purchased with an LLC.
You will need to educate yourself on pass through entity, which is what your LLC will be. Also research active and passive losses. I don't have a great resource to link for you, and it can be very confusing the first time you hear it. But the answers to your questions lie down that road, and it will be worth your time to research it. Good luck!
Appreciate! Definitely will! Having the right terms now will definitely help me out!
Quote from @Kaylee Sheppeck:
This is extremely helpful thank you so much! The liability aspects makes a ton of sense.
I have one last follow on question. If I purchase the property in my name, but also have an LLC. Can I have the rental income go to my LLC so it does not increase my personal tax bracket and pay the mortgage through the money in my LLC? Then the income that goes to my LLC gets taxed as the company not as me personally.
Or is this the same thing as having the home purchased with an LLC.
- Bryan Martin
- [email protected]
- 217-788-0750
@Kaylee Sheppeck, as @Malcomb Stapel said regarding taxes, an LLC will be a pass-through entity which basically means it will not show a profit or loss itself, rather it will be passed through to your personal taxes. This can get a bit more complicated so I would strongly recommend finding an accountant well versed in real estate investing. There are significant differences between accountants; some simply prepare taxes, and others do tax planning. The former usually takes a short term approach to taxes and simply deals with the taxes owed at the time and manages decisions that have already been made. A tax planning accountant takes a more long term approach and will help you make decisions ahead of time that will have beneficial tax consequences come tax time.
As @Bryan Martin mentioned, it's best to have specific accounts for each property to make tracking expenses and transactions a lot cleaner on the books. Of course, working with a good tax planning accountant may allow you operate with one dedicated account as they will help track expenses for you, but in general individual accounts would be a best practice.
Lastly, as @Brandon Rush stated, typically an investor would purchase a property in their name and later quit claim it into an LLC. This is usually an easy process however a few things to anticipate:
1. Talk to your bank doing the financing when you start the process for initial purchase, and let them know your intentions of moving it to an LLC after close. This way steps can be taken to make sure there will not be issues with the loan after the fact.
2. Doing the quit claim may require help from a real estate attorney to make sure it's done correctly and to avoid accidental excise or transfer tax. This is definitely worth the cost of the attorney's help.
3. If the property is in your name only, and you want to quit claim the property into an LLC that has investment partners as other members, this can complicate the matter with regards to the loan and possible fractional "sale", hence items 1 and 2 are even more important.
4. If you are planning on expanding your portfolio with more properties over time, a good practice would be to have each property in their own LLC, and each of those LLCs own solely by a parent LLC that will act as a holding company. You would be the sole member of that parent holding company and then indirectly own your properties through the tiers of LLCs. This adds more layers of protection (again not 100%, but better than holding a property in your own name) and would be worth structuring early on in your investing process.
This is definitely not a one-size-fits-all and there are many nuances for one's specific case and state you operate in, so again working with both a real estate accountant and attorney is important.
If you are just starting out I would focus on having a good personal liability umbrella insurance policy. It's cheaper than an LLC and gives you somewhat more protection. The insurance company will fight to minimize any losses whereas you will have to pay a lawyer on your own if you just have an LLC and no insurance. A good lawyer can always figure out a way to go after your personal assets even with an LLC in place. If you are just starting out you probably don't have a lot of assets so a $2M umbrella police would be fairly cheap. Once you acquire more properties then I would suggest adding them to an LLC and then add a commercial umbrella policy. I have 2 LLCs: one for my commercial property and one for my residential properties. Find a good CPA and a good lawyer to talk through things. You should establish these relationships early to avoid costly mistakes early on.
Quote from @Will Kenner:
@Kaylee Sheppeck, as @Malcomb Stapel said regarding taxes, an LLC will be a pass-through entity which basically means it will not show a profit or loss itself, rather it will be passed through to your personal taxes. This can get a bit more complicated so I would strongly recommend finding an accountant well versed in real estate investing. There are significant differences between accountants; some simply prepare taxes, and others do tax planning. The former usually takes a short term approach to taxes and simply deals with the taxes owed at the time and manages decisions that have already been made. A tax planning accountant takes a more long term approach and will help you make decisions ahead of time that will have beneficial tax consequences come tax time.
As @Bryan Martin mentioned, it's best to have specific accounts for each property to make tracking expenses and transactions a lot cleaner on the books. Of course, working with a good tax planning accountant may allow you operate with one dedicated account as they will help track expenses for you, but in general individual accounts would be a best practice.
Lastly, as @Brandon Rush stated, typically an investor would purchase a property in their name and later quit claim it into an LLC. This is usually an easy process however a few things to anticipate:
1. Talk to your bank doing the financing when you start the process for initial purchase, and let them know your intentions of moving it to an LLC after close. This way steps can be taken to make sure there will not be issues with the loan after the fact.
2. Doing the quit claim may require help from a real estate attorney to make sure it's done correctly and to avoid accidental excise or transfer tax. This is definitely worth the cost of the attorney's help.
3. If the property is in your name only, and you want to quit claim the property into an LLC that has investment partners as other members, this can complicate the matter with regards to the loan and possible fractional "sale", hence items 1 and 2 are even more important.
4. If you are planning on expanding your portfolio with more properties over time, a good practice would be to have each property in their own LLC, and each of those LLCs own solely by a parent LLC that will act as a holding company. You would be the sole member of that parent holding company and then indirectly own your properties through the tiers of LLCs. This adds more layers of protection (again not 100%, but better than holding a property in your own name) and would be worth structuring early on in your investing process.
This is definitely not a one-size-fits-all and there are many nuances for one's specific case and state you operate in, so again working with both a real estate accountant and attorney is important.
- Bryan Martin
- [email protected]
- 217-788-0750
Also look into series LLCs - they're not available in all states, but can be way less complicated if you're thinking of an LLC per property. What you do depends on your specific situation, though, and as others said, an umbrella policy is always a great place to start.
Quote from @John B Clark:
Also look into series LLCs - they're not available in all states, but can be way less complicated if you're thinking of an LLC per property. What you do depends on your specific situation, though, and as others said, an umbrella policy is always a great place to start.
Great advice on both points.
- Bryan Martin
- [email protected]
- 217-788-0750
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
- 16,091
- Votes |
- 10,239
- Posts
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
For almost everyone starting out, without partners, buying small vanilla residential rentals, an LLC won't do squat.
An LLC will make your life more difficult and expensive if borrowing. Insurance isn't cut and dry either.
Wait until you are buying commercial assets and or have partners.
@Kaylee Sheppeck
My ***opinion*** after years of research and many many conversations with professionals.
Your first 4 doors, I wouldn’t worry about putting into LLCs. Your head will already be spinning with the deal details.
Have a $500k-$2m liability insurance policy on each property and if really worried, also put them in umbrella policy as well (I did this, I was worried)
Liability is lower for “mom and pop” landlord so under 4 doors, statistically lower risk.
After 4+ doors, do LLC.
At 4+ doors would be hard to argue you aren’t running rental businesses and should have accounting structured as a business as well as gear up liability protection.
NEXT QUESTION
"Should I put every property in an LLC?"
If you’re going to have less than 10 properties total, and you are worried about risk, then maybe throw every single property in an Llc. Which, then you will have 10 separate businesses and need 10 separate credit cards and books etc. Big pain to do correctly.
Slightly more sustainable and less of a headache;
Put a certain qty into one Llc and then have a holding company.
Example: 5-10 properties under 1 LLC then that LLC will be held in "holding company LLC"
So If you have 40 properties. 10 properties per LLC. 4 LLCs. All 4 LLCs are held under 1 holding company.
There’s a few more nuances you could choose to explore with this, but this will get you started.
Additionally:
1. Don’t be a slumlord
2. Maintain safety aspects of properties
3. Follow city/rental certs, zoning, inspections
4. Do what your lease says you will do
5. Don’t discriminate and offer equal housing, etc
This was after a lot of reading, research and conversations with CPAs & Attorneys to put this simple, decisive, personal opinion together.
*Quick tip*
Prime corporate services does LLC creation with articles of organization, op agreement, and EIN for really cheap if you say you were referred by someone who uses them.
- Joe Hammel
- [email protected]
- 330.844.5209
Personally I always put my properties in a llc. I wouldn't put it in a series llc as they are untested in lawsuits (according to my cpa). It costs an extra 300 dollars to file and if you personally have wealth or more than 1 property it makes sense. It can protect your personal finances as well as your other properties from a lawsuit. 300 dollars is a small investment for a lot of comfort, so well worth it in my opinion.
Hi there - I would recommend always using LLCs for your properties. If you are going to have multiple properties, I would look into the series LLC (or DST if you are a CA resident of invest in CA). The LLC is necessary to ensure you have liability protection in the event of a lawsuit - it ensures that your personal assets are not at risk because of a business issue and vice versa. Using an LLC can also provide tax and operational benefits as it allows you to capture business expenses, opens up additional financing, etc. Happy to chat more if you have questions!
Thanks,
-Megan