If you’re a landlord or thinking of investing in real estate, you’ve probably heard that forming an LLC (Limited Liability Company) is a smart move. But is it necessary? Not always. Here’s what you need to consider before making the decision.
Benefits of forming an LLC for your rental properties
- Liability protection: Setting up an LLC for your rental business is a great way to protect your personal assets should a tenant or guest be injured on your property.
- Ownership flexibility: Structure, share, or transfer ownership of rental property in ways not available with individual ownership – including adding or removing a partner/investor without re-titling the property and splitting ownership in any ratio among multiple parties.
- Simplify estate planning: Unlock succession planning options such as gifting shares to family members over time or transferring ownership to heirs without needing a new title.
- Attract investors: Raising capital for real estate deals is easier with an LLC as it simplifies the process of issuing shares to outside investors without giving up control.
- Professional appearance: Operating under a business name (ex: Your Name Properties LLC) helps you establish credibility with tenants, vendors, and investors.
- Operate like a business: Open a business account to separate rental activities from personal transactions and formalize business operations.
Disadvantages of forming an LLC for your rental properties
- Upfront and ongoing costs: Filing fees, potential reporting requirements, and annual maintenance costs can add up depending on the state or states where your rentals are located.
- Challenges with financing: Getting a mortgage with an LLC is more complicated than applying as an individual. As a business, you generally need to show a history of income and profit, which you may not have with newly-purchased rentals. Rates tend to be higher, minimum down payments higher, and restrictions tighter when borrowing as an LLC.
- Administrative burden: While some owners prefer the formality of running their rentals like a business, others dislike the additional paperwork and bookkeeping.
What if I don’t use an LLC?
Many landlords operate successfully without an LLC by carrying strong landlord insurance, separating personal and rental finances, keeping properties well-maintained, and using clear lease agreements with documented procedures.
This simpler approach can work well for those with one or two properties.
However, as your portfolio grows or you want more protection, an LLC is usually the smart next step.
Need help making a decision? Schedule a Rental Property Operations advisory session and our experience real estate team can help you decide which structure makes the most sense for your goals.
For questions or to book a session, give us a call or email masterplan@accountabilityservices.com.
