By Ken Yee
“Shall I Create An LLC to Buy Investment Properties?” Given the choice, I would highly recommend that one acquires investment properties through a Limited Liability Company (LLC). There are good reasons, and setbacks when buying investment properties through an LLC.
The main benefit of creating an LLC to acquire investment properties is mitigating legal liability. An LLC, as the name indicates, acts as an entity to limit the liabilities of its owners in the event of legal actions. Being a landlord or a property investor may expose the owners to different kinds of tenant-related risks that can lead to costly legal liabilities. Examples of these risky liabilities include landlord-tenant disputes, damage or loss of personal belongings, tenant related injuries or even deaths. Whether or not those legal actions have any merits, the LLC, if being utilized correctly, will provide the necessary corporate veil to the owners and limit everything to just the LLC, hence, avoiding the owner’s personal property and wealth as part of the liability claim. This is the key benefit to owners with investment properties registered under the LLC’s name, especially owners with multiple investment properties.
Having investment properties, especially rental properties under an LLC, can also provide some privacy benefits to the owners or landlords. For example, the rental lease agreement can be signed between the LLC and the tenant(s). Any rents can be mailed or deposited into the LLC’s account, and not to the account belonging to the owner’s personal name. Why does this matter? Well, think about an overly friendly tenant who decided to add their Landlord in Facebook or Linkedin. Think about the tenants who forwarded their Landlord’s name to their friends that are soliciting businesses. Think about the tenants who decided to show up at the Landlord’s workplace or house to ‘discuss’ about problems. Any paying tenants can be a good and friendly tenant but when rents fall behind, people may do unpredictable things out of desperation. Although the LLC may not be 100% privacy proof, it does create a buffer layer between the owner and the tenant(s).
Another benefit of an LLC is that it separates your investments from your personal affairs. Owning an investment property is somewhat like owning a business. Most expenses related to the investment property in which the owner incurred are tax deductible. The LLC, which should be treated like an independent entity, should have its own expenses and at the end of the year, should have its profit and loss statement. By separating your business financially through an LLC, it creates a clear line of separation from the perspective of the Internal Revenue Service (IRS).
The biggest setback with using an LLC for investment properties is with the financing. Most banks will not finance or refinance a property under an LLC. Banks will typically require that a property be held under a personal name. This is a major hurdle for investors who needs bank financing to acquire investment properties. Even if financing is available to the LLCs the rates are usually higher than if the properties were to be in a personal name.
Another setback is with the costs involved in setting up and maintaining an LLC. In addition to the LLC’s initial registration fee, there will be an annual registration fee and the initial fee in hiring a professional to help draft an operating agreement for the LLC. There is also the potential of accounting fees to help prepare the annual taxes for the LLC. These fees are some of the things to be considered before one sets up an LLC.
LLCs are becoming more popular for real estate investors mainly because the pros appear to outweigh the cons. If you do choose to move forward with setting up an LLC for your property investment activities, just be sure you set it up with the help of a professional. Also, make sure you have an operating agreement in place for executing those buy and sell transactions.
My name is Ken and my wife is Bee. I’m a Civil Engineer turned real estate investor and my wife is an IT Professional turned Realtor. Feel free to drop us your real estate questions at firstname.lastname@example.org.
DISCLAIMER: This article is written based on our personal and professional opinions. We are not certified financial advisors and are not qualified to provide financial or legal advice.