buying under my name or an LLC - which makes more sense?

Question

Hi BP Community,

I'm looking for some insight and advice. I am a newbie and feeling nervous! My husband and I currently own our home that we live in and are looking at potentially purchasing a 5 unit rental. We could either:

1) Rent out our current home and move into one of the rental units to house hack. In this case, I would take out a loan as my primary residence. Of course the perks here would be a lower down payment options and lower rate with a residential mortgage. Downsides would be I think I could get personally sued if there was an issue with a tenant. I think in this case I would need really good insurance?

2) I would purchase under a LLC but then would have to pay commercial rates. Downside is that we would need to come up with a lot more money down and we don't want to sell the house we are in now, we want to keep it.

Does anyone have any advice here? Or has anyone been through this before? I feel like it would be great to go with option 1 but I'm not sure what I would need to get in terms of insurance to cover ourselves.

Thanks for any help you can offer! :)

Jaycee Greene · Answer

Hi @Samantha Storz, welcome to the BP Forum! Any reason you're looking at a 5-unit property rather than a 2-4 unit one? Anything 5+ units is considered "commercial" and the costs of everything related to the property tend to increase. Also, the financing can be a little trickier AND you're not allowed to house hack anything more than 4 units.

Additionally, what is your price range/down payment amount? Are you looking for turn-key properties or something along the lines of a "fixer upper"? Are you looking for properties in Philly or somewhere else?

Stuart Udis · Answer

@Samantha Storz   A tenant or anyone else for that matter can file a lawsuit against you regardless of whether the property is owned in your name or through an LLC. The legal system does not have a gate keeper who decides the appropriate party to a claim before the claim is filed. It's up to the plaintiff to make that determination. Although your name is less likely to be found in the docket if the property is owned by an LLC or another entity.

Also, regardless of whether you own the property in your name or as an LLC, the same coverage exclusions will apply in your GL policy.  A better goal would be to avoid being named in a suit, even if it's your entity. Being named as a defendant is always a drain on time and resources even if it's a covered event by your insurance. Even then expect your insurance premium to increase and a poor loss run history may push you into surplus lines where you will receive lesser coverage at a higher rate, so it's a losing predicament no matter what.

The solution no matter how you take title (particularly as a landlord) is to exceed the implied warranty of habitability, make sure you are up to date on all licensing that's required to legally rent the 5 units, identify and eliminate premises liability risks before anyone is injured, and be fair and responsive with your tenants. Do these things consistently and you will keep yourself out of trouble.   Another consideration would be the experience of living with 4 tenants. It's not for everyone, and much harder to maintain boundaries. Not something everyone cares about, but something to consider.

Lastly, do not form a land trust for the sake of trying to circumvent lending requirement. If the meager difference in rate you may receive is that impactful on the performance of the property you shouldn't buy the property in the first place.

Jaycee Greene · Answer

@Mohammed Rahman Can you share the loan program with @Samantha Storz that will allow for a 5-unit property to be used as a primary residence?

Mohammed Rahman · Answer

Option 1 is your best move—buy the 5-unit, live in one, rent your current home. You’ll get the better loan terms (lower down payment and interest rate) because it’s your primary. Yes, the risk is personal liability, but you can manage that with proper insurance.

You’ll need a solid landlord policy (ask for a DP3) which covers tenant issues, damages, and lost rent. Then, get an umbrella policy for extra liability protection (usually $1M+). That’s the combo most small landlords use instead of LLCs at the beginning.

Option 2 with the LLC protects you legally, but you’ll need a bigger down payment (probably 25-30%) and pay higher rates. It’s safer on paper, but not as cash-friendly when you’re starting out.

Your nervousness is normal, but you’re thinking about it the right way. Insurance is your “shield” in option 1 until you scale up.

Mohamed Sylla · Answer

Hi Samantha — really thoughtful question, and congrats on getting close to your first investment property!

Your instincts are right on both options.

Option 1 is a common and very smart move for newer investors — lower down payment, better interest rate, and the chance to live in and manage your asset directly. If the property is zoned correctly and you're living in one unit, most lenders will still view it as a primary residence loan (up to 4 units), so no commercial loan is needed.

To protect yourself, I recommend getting a strong landlord insurance policy (also called a DP3 policy) and adding an umbrella policy for extra liability protection. You could consider forming an LLC later and "land trust" strategy if you want asset separation without triggering a loan recall (talk to a real estate attorney about this when you're further along)

You’re right on the money on option 2— buying under an LLC will usually require 20–25% down, Commercial loan rates , along with more paperwork and stricter underwriting. I would say this route makes more sense once you’re scaling and/or have experience under your belt.

In short, Option 1 sounds like the better move for where you are today, and plenty of investors start this way. With the right insurance and a bit of legal prep down the line, you can have solid protection too.

If you're looking for local investor-friendly lenders or connections to others doing the same in Philly, along with the surrounding suburbs I’d be happy to chat or introduce you to a few folks in my network!

Wishing you the best on this next step 🙌
– Mohamed

buying under my name or an LLC - which makes more sense?

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