Best Legal Entity For Investment Property

[Jeremy Salvador]

Hi all,

I'm purchasing an investment property (residential rental duplex) and I'm wondering what the best legal entity to hold it in would be.

Purchase price: $479,000
Monthly cash flow: $1,500

Income will be kept within the entity to use for acquisitions down the line. Additionally, I plan to sell the property in 5-10 years for a profit and 1031 exchange it into another property. I'd like the legal entity to provide liability protection and mitigate taxes.

What entity should I use? S-Corp, C-Corp, LLC? Or should I just get an umbrella coverage insurance policy and report the property on my 1040 Schedule E?

Thanks in advance!

Jeremy
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[Roger Rouse]

Jeremy,

There are only two choices that make sense:

1) Limited Liability Company (LLC)
2) Personal Ownership

From an asset protection perspective, the attorneys will tell you to use an LLC, because it may protect your personal assets in case something awful happens that results in a large liability lawsuit.

However, an LLC will thrust you into the wonderful world (sarcasm) of commercial lending. LLC's do not qualify for conforming loans. You may not be able to get fixed rate financing, and if you do it will probably involve higher rates and points.

Your choice will come down to a statistically small chance of a large loss vs. a lower return due to higher financing costs plus interest rate risk.

Unless you have an enormous asset base to protect, you might consider titling it in your name and purchasing an umbrella liability policy that includes coverage for the rental property.