Asset Protection. I think this is the big one that drives investors to pursue an LLC. The big liability with a rental property is if a tenant slips and falls and wants to sue you. You all know people are litigious these days and as soon as someone knows you own properties, you are an immediate target. If you aren’t protected in some way against this, all of your personal assets may be at risk if you are sued.

Tax Advantages. Putting your properties in an LLC can offer options of pass-through taxation and avoidance of double taxation, you can get taxed as a partnership, or if you have the LLC taxed as an S-Corp you may be able to use that to reduce self-employment and other taxes. All of those benefits would have to be tailored to your specific structure and situation, and not all of those options would apply to everyone, but those are some of the things that may be of benefit.

Cost. This issue will vary depending on where you live and how you do it, but an LLC can really dig into your cashflow. For instance, if you live in California, there is absolutely no way I can avoid the $800/year fee required for all LLCs to pay. But this is Utah and not much of an issue. Another beast of a fee is the cost of filing the separate tax return for the LLC if you use an accountant, which I absolutely recommend if you are dealing with rental properties. For me, that would be another $200 per year. The initial fees to create the LLC in the first place is about $450 to use an attorney (highly recommended) or you can do it yourself for less than $100 in filing fees. I don’t recommend using one of those cheap online deals where you do it yourself because one of the biggest financial benefits of rental properties are the tax advantages and if you aren’t set up correctly, you’ll miss out. 

Financing. Many, if not most, lenders won’t lend to LLCs. Even if they do, it will still be backed by your personal name anyway. In general, getting financing for properties under an LLC name can be very difficult if not impossible. So that means if you want to refi or pull equity/money out of the home you need to transfer the home out of the LLC.

Non-Foolproof Asset Protection. There are situations where an LLC may not protect you from lawsuits. Be sure to understand what those are. Also, if a lawsuit were to happen, sometimes having an LLC can actually complicate the process making it difficult for resolutions to be reached quickly. The person suing you will likely have an attorney looking to pierce the corporate veil. So if you do it, do it right.

Triggering Due-on-Sale Clauses. This one only matters if you already own a financed property. Oftentimes investors will buy properties under their personal name and then quit claim it to an LLC. There is no problem in doing that, but there is a slight risk that doing so could trigger the “due-on-sale” clause in your loan agreement meaning you would owe the remainder of the loan immediately. That could be a lot of money to have to come up with out of pocket! I was told it is a small chance it could happen, but a small chance with that much money is worth considering. Personally, I've never seen a due-on-sale clause exercised.