Should you start an LLC before buying rental property [Expert Review]

Last updated : Aug 11, 2022

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What are the advantages of putting a rental property in an LLC?

The biggest benefit of creating an LLC for your rental property is that it can insulate you from personal liability. Yes, you may have liability insurance, but if someone is seriously injured on your property, they can sue you personally for medical expenses and damages above and beyond the limits of your policy.

Are mortgage rates higher for LLC?

There are also numerous additional expenses you'll have to pay to get a mortgage for an LLC. To start, it will cost you between $1,000 - $3,000 to set up an LLC in most states. On top of that, you'll LLC mortgages typically have higher interest rates than traditional loans.

What are the disadvantages of an LLC?

Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.

Can you live in LLC rental property?

An LLC is a business entity that has its own rights, and buying and owning real estate are indeed among them. So the answer is yes, you can in fact live in a house that is owned by your LLC â€” as long as your operating agreement allows it.

Does an LLC have a credit score?

Does an LLC Have Its Own Credit Score With The Rating Agencies? Yes, a business has its own credit score and credit report. When you start your business and start applying for credit, your personal credit history and score will be taken into account.

Can my LLC buy my house?

You may wonder, "Can an LLC buy a house?" The short answer: Yes. You may want to explore the idea of buying a house with an LLC to enable your business to own property or to have your LLC make your next real estate purchase.

Is it easier to get a loan with an LLC?

LLCs follow the same loan application process as other types of businesses. The major difference is who holds liability for the loan funds in case the borrower defaults. With an LLC, the company owners are not personally responsible for the loan funds unless they sign a personal guarantee.

At what point do I need an LLC?

If you have business partners or employees, an LLC protects you from personal liability for your co-owners' or employees' actions. An LLC gives you a structure for operating your business, including making decisions, dividing profits and losses, and dealing with new or departing owners. An LLC offers taxation options.

Why is LLC may not beneficial?

Profits subject to social security and medicare taxes. In some circumstances, owners of an LLC may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%.

What is the point of having an LLC?

The LLC has two main advantages: It prevents its owners from being held personally responsible for the debts of the company. If the company goes bankrupt or is sued, the personal assets of its owner-investors cannot be pursued. It allows all profits to be passed directly to those owners to be taxed as personal income.

Is it better to buy a property through a company?

Limited company status becomes much more attractive because, unlike property owned by an individual investor, mortgage interest is treated as a business expense for limited companies. This means it's possible to deduct the cost of mortgage interest before paying your corporation tax.

Can my business pay my mortgage?

Home Office. The employer can pay for a portion of an employee's mortgage if he has a home office. However, the IRS allows a deduction only for a home office based on the square footage used exclusively for business.

Can I buy my house through my business?

Absolutely. In fact, there has been a significant move toward buyers purchasing investment properties or buy to let through limited companies. Buying a property through a limited company can have certain benefits. For starters, as a private individual you will pay 45% tax, while a limited company will pay 19%.

Can an LLC borrow money from a bank?

Yes, an LLC can borrow money from a bank to fund their business however, there are a few things to know before putting in your application. Loans are a great way to help small business get through any cash-flow challenges, but loans should make sense and be realistic to avoid any future liability.

Can my LLC affect my personal credit?

Situations Affecting Personal Credit There are a few situations when a bankruptcy filed by a corporation, limited partnership, or LLC might affect your personal credit report. If an LLC has debts in its name, only the credit of the LLC is affected. The exception is if a member of the LLC guarantees the loan.

Can I use my EIN to get a credit card?

In some cases, corporate credit cards don't require an SSN, meaning you can get a business card with an EIN only. Corporate cards have stricter application rules. In most cases only certain types of businesses are eligible, and your business may need to earn a certain profit margin each year.

Where is the best place to start an LLC?

Delaware is the most popular state to file an LLC in because it has a strong reputation for being business-friendly and offers a fast filing process with increased protection for owners.
Wyoming offers low fees and great tax benefits for people looking to start an LLC.

Can you live in a property owned by your company?

Sometime you can live in the property owner by your limited company. This depends on your mortgage. If you have a buy to let mortgage, most lenders expressly forbid you from living in the property. Check with your lender.

Can I buy a house with my EIN number?

Yes. You can use your EIN to obtain a loan, as long as it is for business funding. You cannot use this number to take out a personal loan, as an EIN is only designed for business-oriented transactions.

Can an LLC assume a mortgage?

Yes absolutely. To be eligible for an FHA loan as a small business owner, you must fit one of the following business structures: sole proprietorship, partnerships, limited liability corporation (LLC), corporation, or â€œSâ€ corporation.

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Should you start an LLC before buying rental property

Comment by Robbie Gallatin

hi Clint Kunz here with Anderson business advisors and in this video I'm going to discuss buying property with a limited liability company now if you're a real estate investor you've probably been told that you can acquire property with an LLC and in fact that would be the best way to go because why bite my own name if I turn around and just deed it into an LLC and I get a lot of new real estate investors that will come up to me they'll see me at one of my events and or they'll just email me in the last week how do I go about acquiring or buying property in the name of an LLC well the first question I'm gonna ask you is what type of financing are you using if it's just cash not a problem you can close directly in that limited liability company however when you have financing involved there's gonna be the problem if you're using traditional financing if it's a Freddie Fannie loan then if the property itself is residential it's gonna they're gonna require that you close in your own name you're not going to be closed in the LLC so it's a non-starter so don't even try tempt to put that deal together in that LLC name now if it's not a Freddie or Fannie loan let's assume that's a loan from a community lender so it's what we refer to as a portfolio loan so this community lender bank that you're working with they don't intend tend to sell it they have different guidelines they will probably allow you to close in the limited liability company so in that case you could set up the LLC in order to close now one thing to also consider here when you're thinking about closing in the name of an LLC the question I would have is how does that purchase and sale agreement put together was the purchase and sale agreement written up between yourself and the seller or did you leave yourself some wiggle room because many times a lot of people they don't follow my advice and set up a few LLC's and have what I call them on the shelf shelf LLC is ready to go to put in their offers and so they're scrambling I mean this just comes from experience you should have LLC set up ahead of time that's something I do a lot with my clients as I create you know two or three LLC's and I tell them these are always going to be there for your offers in these limited liability companies so that we can close in the name of them now if you begin or you you have a subscription to procrastinators monthly and you're a little slow on that then what you should do in your purchase sale agreements and write write them up as follows let's say you're gonna buy in your own name or you're putting in in your own name or maybe you have a corporation you would put down Clint Coons and or designate it entity all right use that language not and/or signs which a lot of people have used in the past which is now looked at skeptically by sellers and their agents I use and/or designated entity and then here's what I tell people if I'm ever questioned on that I explained to the seller or their agent the reason I include that extra language in there is that I have not yet talked to my tax professional or my attorney about how I need to take title for estate planning and taxes and that they may advise me to take it in a limited liability company so that's why I'm putting that additional language in there because I may close in an LLC that that explanation works okay I have not had anybody reject that explanation because now you've told them that your local professionals or your professionals that are advising you to do this and so they don't want to practice law without a license so the realtor is well oftentimes back down when you when you give them that rationale so anyhow if you're using anything other than traditional financing like I talked about if it's a community bank then you can close directly in that limited liability company and if you're gonna do that some things you need to keep in mind you better make sure that with the LLC that you're not using a nominee on there there's a lot of people that you know we even talked about it Nevada limited liability companies with a nominee manager well the problem is if you're using a nominee manager it's not you that's gonna create title issues for you trying to close in the name of an LLC and your lender is gonna have a heartache with that so you're gonna want to set up an LLC where either your information is publicly visible or if you want anonymity what I often tell people set up a fresh new Wyoming LLC or Delaware LLC where your name and your information is not provided to the Secretary of State then you'll close in that entity and with title and with your lenders they'll just ask to see a copy of the operating agreement showing you as the manager and member of that company funny thing about that is what has occurred before is I'll have a lender title ask me or ass are my clients to update the state have their information listed and it's kind of comical because we call them back and we tell them inform them that's impossible the state doesn't accept that information so even if I sent it to them they wouldn't put it up there and then they come back to us and they say oh we understand okay great as long as we have your operating agreement it shows your position in that company that you're the owner you're the manager we can proceed forward with this so you want to make sure that either your name's listed on the entity itself as a member manager with the secretary of state where the LLC is set up or you're using an entity such as a Wyoming or Delaware LLC that provides anonymity the other thing you're going to need is a certificate of good standing typically this needs to be acquired within 30 days of closing so be prepared to obtain that you're gonna have to contact the Secretary of State request the certificate of good standing in order to close if you do not have that certificate in good standing it will hold up your closing it's a kind of a ridiculous requirement from my opinion that many of these LLC's are just recently set up within the last six months there's no way they could have been revoked but again rather than fight them and try to argue they don't need the information just give them what they need so you can close on your property and move on now of course if you're you buying for cash or you have private money that's coming in to fund a deal it's never going to be an issue but when working with lenders those are some of the things that you need to take into consideration get that LLC set up ahead of time make your offer in it if not new and or designated entity when you go to closing make sure you have your operating agreement ready for title for the lender and also make sure you have a certificate of good standing my name is Clint Kunz with Anderson business advisors and we just covered how to purchase real estate with a limited liability company

Thanks for your comment Robbie Gallatin, have a nice day.
- Judy Hilgendorf, Staff Member

Comment by nixAddingrigo6

you know perhaps the most common question I receive from BiggerPockets members is should I set up an LLC for my real estate business it's a good question because I'm sure you've heard the horror stories of landlords and other investors getting sued by tenants and losing everything you didn't spend years learning about real estate growing your portfolio and figuring out how to be an effective landlord only to lose it all to some deadbeat looking to gain the legal system right however LLC's are also highly misunderstood in the real estate space because they're just so darn complicated what works for one person might not work for you and what works for you might not work for me well I could give you like the simple answer of talk to an attorney I wanted to have a little bit deeper so you understand this of course I am neither an attorney nor CPA so please take what I'm saying as my own personal opinion and get a qualified person to help you with legal discussions all right well my name is Brandon Turner author of the book on rental property investing and a host of the BiggerPockets podcast and in this video I want to walk you through the world of real estate in LLC's of course if you like real estate content be sure to subscribe to our Channel and click that little thumbs up button below this video letting the world know that this here is a good one all right now this video can be divided into really like three general chunks first I'm gonna explain what an LLC is and why they're so popular second I'll explain the downsides of an LLC and why you might not want one and third I'll walk through some other options you have for protecting your assets okay first let's talk about what an LLC is and what it isn't an LLC is not a get out of jail free card you can be sued with an LLC and you can lose everything an LLC is not designed to prevent you from ever being sued an LLC is designed to help you manage and contain the fallout from that lawsuit so according to the United States Small Business Administration SBA a limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and attacks efficiencies and operational flexibilities up a partnership according to the definition and LLC's benefits are threefold first limited liability if you were to get sued your liability then nor the damage to your wallet may be contained to the assets within the LLC not everything else you own in other words if an LLC is set up right and you get sued and lose the creditors problem won't be able to come and take your personal house to your car or garnish your w-2 job wages of course there are way as a judge might pierce the protection of an LLC and go after those things if every Iowa's not dotted and every T was not crossed all right the second part of the definition tax efficiency the LLC is fairly easy to handle during tax time especially if it's a single member LLC which basically means you own it or you and your spouse LLC's are known as pass-through entities which means the income and expenses flow magically through the LLC and are instead reported and paid by each individual member on their personal income statement there is no like corporate tax like a corporation may pay this can definitely make taxes easier and less expensive then let's say a big you know C Corp that's said while a single-member LLC does not require its own business tax return a multi-member LLC with partners does don't make that mistake now third operational flexibility an LLC is fairly flexible in terms of running it you don't need a thousand documents you don't need a bunch of stock issued it's fairly easy to set up fairly inexpensive depending on where you're at so it's easy to see why an LLC might be advantageous to a real estate investor I mean let's just say a tenant slips on the stairs BAM and broke their hip right the tenet decides to sue that landlord for neglect and the court sides with the tenant for whatever reason let's say your insurance doesn't cover all the legal penalties and you as the owner are required to pay five hundred thousand dollars out of pocket to the tenant ouch well if you own the property without an LLC the tenant could have your wages garnished and force you to sell all your properties and drive you to bankruptcy you probably end up eating cold beans out of a can under a bridge while pigeons sit on your shoulder it's not a fun place to be on the other hand if the owner of that property was Mainstreet Investments LLC then the LLC is the owner getting sued the courts could make you sell that property but they likely won't going to make you sell the other properties owned by other LLC's they won't take your primary residence you will be eating cold beans of course this example is a bit overdramatize and unlikely to happen and I actually don't mind eating cold beans but it does illustrate the fear that drives most investors to want an LLC however even though it sounds like it might be I might be encouraging you to go get an LLC right now hold your horses there are some other important factors to consider so LLC's can be awesome but let's talk about the problems with an LLC and real estate all right so LLC's are great I'm not gonna deny that however it might not be great for you there are some fairly important considerations to make before you jump into the LLC bandwagon that could affect your decision for example and maybe most importantly lending on an LLC is almost impossible for residential properties that's right if you plan on using a loan to acquire an investment property like a single or duplex triplex four-plex it's unlikely you can have an LLC on the property most residential lenders simply will not lend on a property inside of an LLC that makes you have to go to a commercial lender has higher fees higher rates shorter terms something you probably don't want to do now many investors simply transfer the ownership of the property into an LLC after purchasing the property in their own name but that does present some risks as well if the bank finds out and they probably will due to insurance reasons they get updated to that they might call your notdo because of the due on sale clause of course you didn't actually sell the property but you did transfer the title from one entity to your name to another your LLC now in the past this has never really been a problem as banks generally turn a blind eye to this but it seems it could change in the future and it's really only expected to get worse as interest rates go up so if you plan to go that route just I recommend speak with your bank get permission in writing to transfer the property into an LLC this is really the only way you'll be truly protected from that dreaded due on sale clause transferring from you to an LLC all right one other issue with an LLC will ask yourself what are you really protecting and spending all this time and energy doing new investors automatically think they need an LLC to protect themselves but when you're first starting out how much wealth do you really need to protect right then I mean think about it you've got a proper

Thanks nixAddingrigo6 your participation is very much appreciated
- Judy Hilgendorf

About the author

Judy Hilgendorf

I've studied preservation at Howard University in Washington and I am an expert in multilinear algebra. I usually feel mischievous. My previous job was chaplain (prison, military, hospital) I held this position for 12 years, I love talking about knife collecting and hang gliding. Huge fan of Kim Cattrall I practice bocce ball and collect football cards.

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