Do you find yourself asking if you need an LLC for your rental properties? The short answer is Maybe. Needing an LLC is a complicated topic with many ins and outs, and we will cover some of them here.
What is an LLC?
A limited liability company (LLC) is a business structure. You can create an LLC by yourself, with a partner, or with a group. If you own an LLC, you are a “member” of the LLC. If you are the sole owner of an LLC, you own a Signle Member LLC. LLC’s are regulated at the state level, so the process of creating an LLC will differ by state. LLCs can be a great way to manage your risk or a tremendous headache.
Reasons to avoid creating an LLC
1.) You are house hacking (BRRR). When you buy a property through an LLC, you lose the ability to get Fannie May or FHA backed loans. So the same bank that just offered you 3.5% down is now going to ask for 20% down if you’d like to use your LLC.
2.) You are not good at record keeping. To maintain the corporate veil AKA Corporate shield you need to keep everything separate. That means emails to bank accounts to credit cards, and you need to maintain records on everything you spend from your LLC account and every charge on your business credit card.
3.) Cost. There are several costs involved with maintaining the LLC, including the filing fee to set up the LLC, the annual renewal fee, and the registered agent service cost.
4.) Unclear asset protection. Just because you have the letters LLC doesn’t mean that you are fully protected. There are many cases where you are, and many more where you may not be. Each of the possibilities depending on your operating agreement and who set the LLC.
Reasons you may need an LLC for your rental property
1.) They could provide asset protection- Assuming that your entity was set up correctly and you’re maintaining your records if there was a claim against the property- for example, ” Hey, I slipped and fell” there is an entity between you and whoever is making a claim.
2.) Anonymity- In most states and assuming the LLC set up correctly your residents will not be able to find out your name. This is great for asset protection purposes as well as stopping facebook stalkers in their tracks.
3.) Partnership- If you and a group of investors are going to buy a property together, you can more easily and clearly define ownership and roles in the partnership. As with number one, this requires that your LLC be set up and maintained properly.
In closing, this is a complicated topic and the best person to answer these questions are you and your CPA after assessing your long term investment goals and formulating an asset protection strategy. Once you’ve decided to buy your next investment property reach out to a property management company near you!