Should I put my investment property in an LLC? If you're asking this question, it's important to understand what LLCs are and how they work. An LLC, or limited liability company, is a business entity that allows an unlimited number of members. Putting investment property into an LLC means making the LLC the property owner to gain asset protection for legal purposes. Profits from the LLC will go to the members.

In the case that a member of the LLC has a creditor looking to fulfill a debt, the investment property owned by the LLC will be protected. Using an LLC to hold your real estate can be beneficial for estate planning, and ownership transfer is smoother this way.

Benefits of an LLC

An LLC gives you the freedom to choose who will be managing the business, whether it be the members themselves or hired individuals. Depending on the state, there may be lower fees for registering and maintaining the entity. LLCs allow real estate investments and foreign ownership. Transferring real estate holdings and ownership to a member's family and loved ones can be done without creating a new deed, and all while avoiding additional taxes and fees.

Disadvantages of an LLC

  • Cost: Depending on your state and how your business is formed, an LLC can be pricey.
  • Financing: Banks typically don't loan to an LLC, and if they do, it'll be under your name.
  • Lack of asset protection: Not all lawsuits are easy to resolve, and your assets may be unprotected if your LLC gets sued.
  • Due-on-sale clauses: This only applies to those who already have a financed property.

Who Should Create an LLC?

There are a few questions to ask yourself before placing any properties into an LLC. Consider factors like how many properties you own, what benefits an LLC would offer you, and whether you need to limit liability for your properties.

A landlord who creates an LLC can benefit from pass-through taxation and limited liability, especially if they own multiple properties.

When Should I Create an LLC?

Buying the property after creating your LLC will help you avoid the following:

  • Telling your mortgage holder the title is going to the LLC, which may allow them to close your current loan and open a new one for you.
  • The need to notify current tenants and update leases.
  • Paying a Title Transfer Tax.

How Do I Transfer Title to the LLC?

According to property law, the property title states ownership and the rights of all named on the document. To transfer the property title to your LLC, you must draft and file a Quit Claim Deed to the County Clerk's office. There's usually a title transfer tax that must be paid.

The lender may get rights to foreclose on the property if the mortgage and property deed have different owner names.

Steps to Create an LLC for Investment Properties

If your property has an existing loan, talk to your lender to see if a title transfer to your LLC is allowed.

  1. Pick a unique business name.
  2. File your LLC's Articles of Organization.
  3. Draft an Operating Agreement stating the obligations and rights of all members in the LLC.
  4. Contact your local newspaper to publish a notice that you intend to create your LLC (if required by your state).
  5. Get any state-required licenses and permits.
  6. Register the LLC in your state with the correct forms.
  7. Transfer property titles to the LLC with a Quit Claim Deed.
  8. Open a business account for your LLC.
  9. Update current and future rental leases with the LLC as the owner and note where payments are to be deposited.

Forming an LLC for Real Estate Investments

Before LLCs were formed, corporations were used to get limited liability for an investor's property. The benefits to placing an investment property under an LLC's name are personal risk protection and tax advantages.

Many investors don't feel that creating a company is truly beneficial when liability insurance can be quite affordable. However, those who only have insurance to lean on for protection from lawsuits and debts may be at risk. Currently, there seems to be an increased trend in real estate investors seeking to create an LLC to have the limited liability protection.

If you need help with LLCs and investment properties, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.