Buying rental property with a limited liability company (LLC) is a smart strategy for investors looking to minimize personal liability and protect their assets. To start, you'll need to form an LLC, which can be done by filing paperwork with the appropriate state agency and paying a registration fee.
Once your LLC is established, you can use it to purchase rental properties in the name of the company, rather than in your personal name. This provides a layer of protection, as the LLC becomes the legal owner of the property, shielding your personal assets in case of any legal issues or debts related to the property.
This article discusses the requirements and steps to buy rental properties with an LLC.
Can You Buy a Rental Property With an LLC?
Yes, you can buy a rental property with an LLC. Investors choose to buy a rental property with an LLC to reduce personal liability and invite new members. Sometimes, lenders are more hesitant to provide financing to an LLC. However, you can secure financing and buy a property with an LLC through private financing, cash or by working with mortgage lenders.
Requirements to Buy a House Under an LLC
While there are no specific requirements for purchasing a house or rental property with an LLC, you should be aware of possible additional criteria from lenders. You might get higher interest rates on an investment property or have difficulty qualifying for a mortgage.
To increase your chances of securing a mortgage for a rental property purchased by an LLC, consider a larger down payment and build the credit score of the LLC.
Steps to Buy Rental Properties with an LLC
Here are the steps to buying rental properties with an LLC.
Choosing the Right LLC Structure for Buying a Rental Property
You can choose from different LLC types, such as single-member LLCs, multi-member LLCs, Series LLCs (only available in certain states) or anonymous LLCs (also available only in certain states). Once you've decided on an LLC type, you can form an LLC, depending on state requirements, within a day to a month.
Establishing an LLC
The steps to establish an LLC are:
- Select a unique name for your LLC
- Register your LLC with the state
- Obtain an Employer Identification Number (EIN) with the IRS
- Draft an Operating Agreement
- Open a business bank account
- Get any state or local licenses or permits
- Get relevant business insurance
Once the LLC is established, you're ready to purchase a property. You can also use an existing LLC to buy a property as long as rental properties fit with the stated purpose.
Financing Your Rental Property with an LLC
If you plan to apply for a conventional mortgage, the first step to securing financing may be building business credit for the LLC. You'll need to establish a separate business bank account, obtain a business credit card and consistently make on-time payments to vendors and suppliers.
Once the LLC is established, various financing options are available to purchase a rental property. These include:
- Conventional mortgages
- Commercial loans
- Portfolio loans
- Partnerships with other investors
- Private loans
- Mortgage brokers
You can consider networking with other investors or taking private loans to secure financing that's not conventional. In addition, mortgage brokers can help you connect with the best options available.
Identifying Potential Rental Properties
Once you've established which financing options to pursue, it's time to set investment criteria for rental properties. This process includes conducting thorough market research and evaluating property opportunities based on profitability, long-term cash flow and return on investment (ROI). You can work with local real estate agents to identify target markets and research comparable properties.
Making an Offer and Closing the Purchase
Once you've located the property, it's time to make an offer and negotiate the purchase price with the seller. After the seller accepts the offer, you'll need to secure financing and obtain loan approval. This is also the time to perform thorough due diligence with an inspector and appraiser. Once everything is satisfactory, you can finalize the purchase agreement and close the deal.
Operating and Managing the Rental Property with Your LLC
After the property purchase, you'll need to act as property manager or hire property management services. Responsibilities in managing a rental property include:
- Marketing for and securing tenants
- Tenant screenings
- Maintaining proper record-keeping and accounting for the LLC
- Managing tenant relationships
- Collecting rental income
- Performing property maintenance and necessary repairs
While you can do this yourself, if the time commitment is too great, a property management company typically takes a set percentage of monthly income. Using professional management allows you to earn on the rental property without active day-to-day property management.
Insurance and Risk Management for Rental Properties Owned by an LLC
Even though a limited liability company protects your personal liability, you'll also want insurance to protect the LLC. Consider obtaining landlord insurance to protect the LLC from liability claims. You'll also need property insurance to protect the investment value.
Another good option for landlords is umbrella liability insurance. An umbrella policy covers various liabilities that could arise as a landlord, not only those related to the rental property.
Tax Considerations for Rental Properties Owned by an LLC
When a rental property business is an LLC, the income is generally taxed to the LLC's members as pass-through income. That means you must report all LLC income on your individual income tax return or elect for the LLC to be taxed as an S-corporation or C-corporation.
The LLC can report rental income and qualified business expenses to reduce total taxable income. Consider using tax deductions or tax advantages available to LLCs. You can consult a tax professional like a CPA for guidance and to ensure correct reporting and compliance.
Advantages of Buying Rental Properties Under an LLC
You can take advantage of several benefits when you buy a rental property under an LLC, including:
- Protection of personal assets
- Pass-through taxation
- Easier to separate business funds from personal funds
- Makes it easy to partner with other investors
- Protect the property owner's privacy
Disadvantages of Buying Rental Properties Under an LLC
The disadvantages of using an LLC to buy a rental property include:
- Additional fees to start and maintain the LLC
- More challenges to secure a conventional mortgage
- Can be difficult to transfer an existing rental property into an LLC if you have a mortgage on the property
Becoming a Real Estate LLC Owner
Whether buying your first rental property or planning to build a real estate investing business, using an LLC to purchase properties and grow the business can make sense. You gain liability protection, privacy and simplified business entity management. As an investor, having a business entity also adds credibility to your business and makes it easy to add other investors.
Frequently Asked Questions
What entity is best for rental property?
Is it better to buy property as an LLC or S Corp?
Many investors prefer to use an LLC to purchase a rental property. However, there may be cases, such as establishing a rental property business, where an S-Corp offers more favorable solutions.
What rental properties make the most money?
Generally, multi-unit or high-tenant properties are the most profitable real estate investments. With multi-unit properties, you have diverse income streams that can hedge against loss of income in case of vacancies.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.