LLC for Rental Property: Everything You Need to Know
Starting an LLC for rental property is a popular way of managing investment real estate properties.4 min read
LLC for Rental Property
Starting an LLC for rental property is a popular way of managing investment real estate properties. If you're thinking about investing in real estate and then renting one of your properties, you should consider forming an LLC or a limited liability company to hold the titles.
Explore Your Options for Forming an LLC
When an LLC is formed and operated correctly, the personal liability of the owners is limited. You can easily improve your chances of success by complying with applicable laws. However, many types of corporations and partnerships offer similar protections.
You can form several different types of businesses, and an LLC isn't always the best choice. If the owner of any business doesn't comply with the laws and regulations that apply, he or she could be exposed to personal liability. For example, an owner could mix personal and business funds or fail to maintain a registered agent, a third-party representative of the business.
How to Hold Property in an LLC
You should set up your LLC before you purchase the property you want to invest in instead of transferring the real estate to another lender. That way, you won't have to transfer your property or get a lender to consent to the transaction. Also, you'll know if you want to set up a separate LLC for each property or combine them after you buy three or four properties.
Having a separate LLC for each property works well to protect your assets for 10 entities or less. If you have more than 10 properties, place two or more properties in some of your LLCs. The easiest way is to form an LLC for the first few properties, then see how things go from there. That way, if a tenant slips and falls or sustains another injury, only one LLC will be liable, and the others will be protected, along with your personal assets.
Each LLC should have a separate EIN, or Employer Identification Number, and a different bank account number. If you have more than one property in an LLC, use your bookkeeper or property manager to take care of your income and expenses. If you have more than one LLC, you can easily compare profits and expenses as long as you keep your books organized. Income and expenses usually stay in a separate bank account for each LLC.
Holding Property in Specific LLCs
Several different asset classes of LLCs are available.
- Some states allow Series LLCs, which are an effective way to keep the chaos of multiple LLCs organized. After all, 15 or 20 LLCs can be hard to keep track of.
- If you're wholesaling properties, you can run an entire business under a wholesaling LLC.
- You can also put two or three low-income houses in one LLC. However, you should place nicer, more expensive rental homes in their own separate LLCs to reduce your liability.
Consider Financing, Fees, and Annual Registration
If your state has high filing fees and high annual renewal fees, then setting up lots of different LLCs could be very expensive. Also, mortgage rates are usually higher than for personal mortgages because banks consider LLCs commercial loans, even when the property is zoned as residential. You should call your bank to make sure they lend to LLCs.
Most banks require owners to personally guarantee loans, so they can go after their personal possessions if payments are late. Commercial loans have different departments at banks and different qualification requirements than personal loans or mortgages. Forming your LLC is best in the state where your property is located.
LLCs vs. Liability Insurance
For many investors of real estate, forming and maintaining a company isn't worth the possible threat of a lawsuit, particularly when inexpensive liability insurance is available. However, real estate investors who only rely on insurance are taking a big risk. Liability policies often have exceptions, limits, and carve-outs. The chances of a loss that goes over policy limits are remote, but the consequences could be devastating.
How to Transfer Title to an LLC
The title to a property is a collection of rights that outlines its ownership in property law. Titles are also formal documents called property deeds that serve as evidence of ownership. If you bought a property as an individual, then the property deed will have your name on it. However, if you form an LLC, you'll need the company name on it instead.
If you're the title holder, you can transfer ownership to the LLC by creating a Quit Claim Deed and filing it at your local County Clerk's office. That way, you can edit information on deeds that have already been recorded.
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