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Should You Put Your Rental Properties in an LLC?
Should You Put Your Rental Properties in an LLC?

Reducing your liability as a real estate investor is always a good idea. But is the answer and LLC? Answer: Maybe.

Adam Willis avatar
Written by Adam Willis
Updated over a week ago

Whether you should put your properties into an LLC or not depends on your situation and what your goal by doing so is. How many properties do you own, what states are they in, are you just wanting the legal protection from the LLC, would it benefit your financing options, or are you doing it just because someone else told you do it?

Let’s get educated first about asset protection before you make the final decision.

Benefits of an LLC

Why pursue an LLC at all? An LLC can offer both asset protection and tax advantages.

  • 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.

Disadvantages of an LLC

Yes, there are disadvantages, too. I didn’t even know that when I first started. I’d like to also call these disadvantages - “realities”.

  • 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. 

To LLC or Not to LLC?

Again, it depends on your situation and what you want to accomplish by forming one. The two nonnegotiables are:

  1. Consult a licensed professional who specializes in real estate investing to guide you on what you should do. E.g., a real estate attorney. Email me and I will provide you with some recommendations.

  2. Even if you don’t form an LLC, be sure you have asset protection of some kind.

An alternative to forming an LLC in terms of asset protection is getting an umbrella insurance policy. These policies are fairly inexpensive (mine is only $22/month for all my properties) and gives you the same protection against lawsuits as LLCs will. This is a much cheaper option for the same protection benefit and having that policy will oftentimes make the litigation process easier in case of a suit than having the LLC to go through.

Adam's Properties (Personally this is what I do)

About half of my real estate portfolio is in an LLC. That doesn’t mean I’ll never have the remaining properties in one, but for the time being I am not going that route. By the time I ever looked into putting them in one, I already had mortgages on them and risking the due-on-sale trigger. I also hired a professional property management company and Realtor, that's me, so I know many of the pitfalls landlords face.

Then, adding up the expenses associated with me forming the LLC negated a good chunk of my cash flow that I’m not willing to part with. I instead put them all under the umbrella insurance policy and they are now as secure as if they were in an LLC. I will eventually move all my properties into an entity I’m sure, but that is later down the road when I own quite a few more and have a lot more cash flow margin to work with.

How To Create An LLC For Your Properties

Hire An Attorney. We are happy to recommend several to help you.

Do It Yourself with some online help: Option 1 or Option 2 (least recommended)

My disclaimer is that I am not a legal expert of any sort, nor am I a financial or tax expert. I can only tell you, as an owner of rental properties, my experience in researching LLCs as a potential entity structuring method and the results of that research. You should not make any decisions regarding the structuring of your properties without consulting an expert in the field.

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