Do I need an LLC to invest in Real Estate?

Often during my conversations with people that are interested in Buy and Hold Real Estate I hear “I’m ready to start investing, I just have to form LLC” or “I have my downpayment and LLC, can you help me get started.”  This is quite a popular topic, other have posted similar takes on the topic of LLC's for investors. Here is my take.

I’m not sure where the idea that you need an LLC to invest in Real Estate came from, but here is an article to shed a bit of light on LLC’s and Real Estate Investing, If you have already formed an LLC or are thinking about doing so, please read this, it might help to save you time and money.

Do I need an LLC to invest in real estate?

The short answer here is the same as it is for many Real Estate Investing questions…it depends. Most people form an LLC to protect themselves from the liabilities involved with Real Estate Investing but its not always necessary.

Why you might not need a LLC

LLC’s do not automatically protect your assets from a lawsuit, in fact a LLC can easily be pierced leaving you and your asstes vulnerable to legal action. LLC’s function best when the person that is the owner operates their business responsibly and creates a clear line between themselves and the business entity. A LLC owner can protect themselves in a few of the following ways:

• Keep detailed records and an accounting of all things related to the property including but not limited to service record, compliance related documents etc
• Keep your LLC’s funds separate from your own
• Keep a detailed record of expenses related to the property

To further complicate things in the event of a lawsuit a LLC will make it difficult or render you unable to represent yourself in courting many instances since you are now viewed as a business entity you will be required to have an attorney represent you in even the smallest lawsuit, this makes any legal proceeding more expensive it can also increase the duration of your legal proceedings. 

If none of the info above makes you think twice about using a LLC to invest in Real Estate, consider how a LLC can effect your cashflow. Most banks charge higher interest rates when lending to a LLC (many institutions won’t lend to a LLC) in addition you wont be eligible for conventional financing. Thats right, that LLC may cost you more money each month.

When might an LLC make sense?

Don’t get me wrong, there are times when using a LLC to invest in Real Estate might make sense. Here are a couple of examples of times when using a LLC to invest high make sense:

• Working with a hard money lender
• Investing in a commercial rental property (A property with five or more units)  

If I don’t have a LLC how do I limit my personal liability?

There are ways to limit your liability and protect yourself from lawsuits as a rental property owner that do not involve a LLC, here are a few:

• Purchase adequate insurance
• Be careful of your pet policy or place breed restrictions in your lease
• Remove potential hazards from the property (dont allow renters to use them either) ie swimming pools, bounce houses, kids play sets
• Keep your property in good repair
• Remove snow ice and debris promptly

Now that you’ve read through this article you may have a bit of a different perspective on LLC’s and Real Estate Investing. Before you form an LLC or use one to take out a mortgage consult with your attorney about your specific situation and decide how you’ll proceed.