3 min read

Should I "LLC" my investment?

There are pluses and minuses to being a small investor getting started with LLCs. Here's what I've learnt.
Should I "LLC" my investment?

The first properties I bought were in my name. Over time I shifted to buying each investment property in its own LLC. I find the information out there is complex and murky. This is my '101' guide for myself.

LLCs often come up when talking about real estate. LLCs is the acronym for "Limited Liability Corporations". The question is "who should own the rental property?".

I can own it.

Or a company (LLC) can own it. And I own that company (LLC).

Those are my basic choices. But why should I use an LLC? Or not?

Key LLC takeaways: having an LLC minimizes personal liability but costs me some time and money. There's no personal tax advantage (that I know of).

Big (not all) advantages to using an LLC

I'm not personally liable as an individual. My company, the LLC, is liable. If a tenant gets drunk and falls off the roof, the lawsuit is against the LLC. That means my other assets - my other properties, my money, my own house - are protected.

I can write off some business expenses. I keep it conservative.

I can gift ownership over time to my kids. I can avoid transfer and recording fees of the deeds because I don't need to formally record a new deed.

It's harder for tenants to find who me - the owner - is. There's the property management company and an LLC between me and the tenant. I like my anonymity.

There are other advantages, particularly with many people involved in the LLC. (Look up pass through taxation and sweat equity distribution as an example). Those benefits are for multi-member LLCs.

Big (not all) disadvantages to using an LLC

It costs time and money to set up an LLC. Setting up is probably two to four hours and a few hundred dollars. My LLC needs an operating agreement. Getting a lawyer to draft one is a few hundred extra. If I transfer an existing property from my name to an LLC some states may charge a 'recordation' (or some other) tax. The biggest 'hidden' cost is higher mortgage rates for LLCs. I've typically found 0.25%-1.0% rate premium.

It also costs time and money to operate an LLC. I use an accountant which is a few hundred dollars per LLC per year. Every year I file with the state. Again, a few hundred dollars each time.

I also need to put 20%+ down for an LLC (most ask me for 25% at least). If you're 'house hacking' or getting an FHA-backed mortgage you're probably putting down much less than that.

Neutral for using an LLC

I don't get a tax write off if a 'single member'.

I don't have any meaningful obligations to hold/record 'company' meetings.

Some other things to consider when it comes to LLCs.

It is possible to hold many properties in one LLC. Banks tend not to like it though. I don't do it. It also means a tenant could come after your entire portfolio in that LLC, not just the one property.

You might not be able to get a 15 or 30 year fixed mortgage in an LLC. I have. I've seen most banks insist on commercial terms (like fixed for 5, 7 or 10 years only) for any property in an LLC.

Umbrella insurance provides some added protection across all properties. Typically up to $1 million. Premiums are relatively cheap. Especially as for multiple properties.

This is a tricky subject. As such, I urge you to consult your attorney and accountant before making any decision. My legal disclaimer below.

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