In this article, I will share ten pros and cons of LLC for rental property that you must know before forming one. You have heard that many investors use LLCs to protect their investments from any legal disputes.
For example, if someone, most probably your tenants, sues you in Court, the LLC your property is in will get stuck in the case. But if you put all your property in a different LLC, then not all but just one property will get sued.
That thing will save you from huge losses. That is one of the benefits of LLC for rental property, but there are some disadvantages also that you should know before doing anything.
We will discuss that but first, let’s understand how the LLC works and what is the maximum thing you can get by forming an LLC for all your rental properties.
What is LLC in a Rental Property
So an LLC is a business structure that real estate investors and other companies form to hold rental properties. Each shareholder of that LLC (Limited Liability Company) is a member if you are investing with partners.
The formation of the company and the rules and regulations may vary in every country. And some countries may not have the same name as LLC, but the benefits are the same. You check in your country if they have something like LLC in a different name.
Read, also: What is a master lease in a rental property
The biggest advantage of forming an LLC is that it is a pass-through entity that does not pay taxes directly as a corporation. That way, investors save huge amounts of taxes on their investments.
But some states may require an LLC to pay an annual renewal fee or a fee to stay active in the business. That’s your work to check if it is necessary for your state and country.
So in simple words, LLC is required if you are investing in real estate, especially on rental properties, to save taxes, and protect your assets from legal disputes. You can ask your attorney for more information on this, and the rules and regulation your government has.
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The Pros and Cons of LLC for Rental Property
Now I will give you those ten important pros and cons of LLC for rental property that most people consider. After understanding these, you can form an LLC for your rental properties.
If you don’t have many rental properties, then LLC is not needed. It can be dealt with normally. Basically, it is a legal protection for all rental properties you have that can save you many sleepless nights. So here how the game.
Benefits of LLC for Rental Property
Before we start, I want to tell you that what is the biggest advantage to one investor may be a drawback for another. You must consult a qualified real estate attorney before creating an LLC for rental property. Be safe, and don’t play with the law.
1. Forming an LLC is Easy
An LLC for rental property is easy and inexpensive to form, depending on the Country and State you live in. On average, LLC formation costs about $300. But in some states, it may go up to $3,000. But that’s very rare. You can expect to pay about $1,000 to form an LLC company.
One more thing some states have a minimum annual LLC tax fee to keep your company active and annual reporting fees. That is an extra expense that you need to carry with an LLC.
2. LLC Protects Your Personal Assets
Holding all rental properties under different LLCs may help protect the personal assets of an investor in the event of a lawsuit. Plus, If a tenant sued you for any reason, that one single LLC will face trouble, not all of them.
But if you create one single LLC and put all your rental properties in it, all your properties will get affected. But still, it will protect your personal asset from your business assets as that tenant is suing the property he is living in.
If you can spend extra and get a different LLC for your different properties, especially if it’s multifamily, that will become more secure than a single LLC. Like you are taking two-step authentication for your security. You have the password (single LLC), but you want more security (more LLC). Professional attorneys recommend that.
3. Can Save More Property Taxes
An LLC has many tax advantages. Using them, you can save your property taxes. The profit or loss that your property produces will flow through to each member of the LLC, usually based on the percentage of ownership. Members then report income or loss on their tax returns and pay taxes.
There are many other ways that you can use to save taxes. Talk to your CPA, and he will help you to reduce it further.
4. LLC Has More Property Management Flexibility
The agreement of an LLC is also for management flexibility. If one team member has property management skills, he will be appointed to handle the property on daily details. However, it needs approval from all members. But you got my point. You can make your property better with an LLC.
5. Most Professional Choose an LLC
Owning rental property under an LLC also gives investors a professional appearance and increased credibility with tenants, lenders, and vendors. That ultimately increases their reputation, which increases their occupancy rate in the building.
These five are the biggest benefits of LLC for rental property. Now let’s know the disadvantages of LLC for rental property. It’s pretty scary.
Disadvantages of LLC for Rental Property
These disadvantages of an LLC might shock you, as till now, we have discussed the best side of forming a company under an LLC. Now it’s time to see the dark side of it that needs special care by a professional if you want your assets safe.
1. LLCs are Not Completely Lawsuit Proof
As I have told you earlier, if you form an LLC, and put all your property in it, that might cause you a big trouble in the future as not all of your properties have good tenants.
Plus, if some of your team menders got stuck in a lawsuit with the LLC, then the whole company will face trouble with it. Most people dont use different LLCs as it costs a lot of money.
For example, if a single LLC takes $1,000, ten properties will cost $10,000, which is very expensive. That is why investors from a single LLC save some money.
The best protection is that, when you choose tenants, do a trough background check on them. If you have found something wrong, avoid them. With that rule, you can use one LLC. But for bigger portfolios, it’s recommended to use multiple LLCs for multiple properties.
2. Different Rules for LLCs in Different States
LLCs are created and maintained by the State government. If you own properties in different states, they require you to get an LLC in that state. Plus, some rules and regulations may vary in every state, as well as payment for establishing and maintaining the LLC.
3. Additional Tax Filings are Required
The normal taxes are there that everyone has to pay. But LLCs have an annual tax return filing program and an annual charge to make it active that every owner needs to file. Like a big company, you will file IT returns every year for your properties. You can reduce your taxes, but additional tax filing is required.
4. Has Got Transfer Tax Liability
Some counties and states charge a transfer tax when real estate ownership changes like a deed tax. Transfer taxes are usually equal to a percentage of the property sale price. Don’t worry it is not needed as the transfer is rare in this business.
5. Financing an LLC Property Is Difficult
Financing an LLC property is difficult because most lenders will ask each member personally guarantee the property loan. If the LLC defaults, the lender holds each member jointly accountable for any outstanding mortgage debt. And that might get you into some problems.
If you create a good plan on how to approach and form an LLC with the help of a quality attorney, I think these disadvantages are nothing to be afraid of. These cons are nothing, and anyone can manage if they just take all of these a little seriously. It has many pros and cons of LLCs for rental property, but most of them are PROS, not CONS
I am Not An Expert
I am not an expert on LLC forming for rental properties. I am just sharing the information to help you understand the concept better. Please consult with a reputed real estate attorney for more information about forming an LLC and protecting your rental properties.
So there are the ten pros and cons of LLC for rental property if you wish to form it instead of S-Corp or C-Corp. LLC will protect your property at the most than any business entity that most professional attorneys say.
Now you have to understand the benefits of LLC for rental property and the disadvantages of LLC for rental property. I am no one to tell you what to choose. It’s your choice. Choose wisely. Thanks for reading.