LLC : There are more cons than pros

[Kevin N.]

I'm just a novice investor but the more I read about LLC the more disadvantage i found than the advantages it provides.

Cons:

cost more to setup, cost more each year to file taxes, can't take out conventional mortgages, interest rate will be higher if you cash out with a commercial loan, more paper work and book keeping. Harder and cost more to get an umbrella insurance. I also heard that certain clever lawyers could still go after your personal assets especially if you have a single member LLC and/or you manage the property yourself.

Pros:

Separate liability with your personal assets(but you can solve this problem with a high umbrella insurance ). 

I guess someone else can fill me in but that's what I know about LLC. Am i missing something?

[Matt Devincenzo]

Originally posted by @Thomas Oliver:

Also with the LLC. If you use small banks they don't show the loans on your personal credit. So that pesky debt to income don't get in the way as much.

I am in my first yr of investing so I am still learning.

Also the tax deductions are way better.

 Neither one of those is true.

When you apply for a loan you have to fill out a form listing your debts. Specifically they're looking for ones that aren't on your credit report. You MUST still disclose them, not doing so is fraud. There are specific criteria about your ownership % and involvement in an LLC before you do not need to list the debt on this disclosure.

An LLC is a pass through tax entity meaning that the deductions are the same for you personally or for the LLC. There are ways to "elect" a specific taxation method for your LLC (such as LLC taxed as an S-corp) but the LLC does not in and of itself provide you tax benefits. Those tax benefits are a result of the corporate tax structure not the LLC.

@kevin N. an LLC is a tool, it is only useful when used for its intended purpose, and when it is the most appropriate tool for the job. If you had a plumbing leak and I handed you a hammer, you'd look at me funny and wonder what help I was being (wrong tool for the job). Or if you were hanging a picture and needed to hammer in a nail, and I handed you a 10 pound sledge you'd wonder if I was being funny (right tool, not the best purpose for that size of tool).

If you are a high net worth individual looking at buying rentals, the returns might be great but the risk to your other assets by buying a rental is an issue. To protect from that, an LLC may be the best tool and the most appropriate one to keep a lawsuit from getting to your other assets.

By and large many people starting out do not need the tool yet, and as you've pointed out the expense and paperwork associated with it renders it a sledgehammer when you need a normal claw hammer. For many of those people (myself included) the better tool right now is the insurance. I gladly pay for a $1MM/$3MM aggregate liability policy on EACH rental at a cost of about $10/mo to protect my assets. 

At some point I hope to need the sledge hammer, and my attorney will help me know when that is, but right now isn't it.