How to Create a LLC for Rental Property Investing

Of all the questions that I receive about rental property investing, the question of LLC for real estate investing has to be one of the top ones. Basically the question is: “Should I start an LLC for rental property investing?” 

The basic answer is yes AND I’ll show you how!

BUT it really depends on many factors. The persons goals, investment strategy, current finances, and many others.

What I ALWAYS teach my investing students is that they should create an LLC for real estate investing and specifically create a LLC for rental property investing.

A Limited Liability Company (LLC) is one of the most preferred entities to have your company structured in. There are others like S-Corporation and C-Corporation but an LLC for rental property investing is one of the best entities to hold your real estate rental properties in.

With any business entity, you own the company and the company owns the properties. There are many benefits to this such as liability, financing, on top of many others.

LLC for Rental Property Investing Decreases Liability

Set up your own LLC where I do. Mycorporation.com

How to Create a LLC Easily A Step-by-Step Guide

This is the step-by-step process showing you how to create a LLC on your own. Creating an LLC is quick, inexpensive, and you can do it yourself.

If you want to learn how to use your LLC for rental property investing, check out this article and podcast I did showing you all the steps.

Pros and Cons for a LLC for Real Estate Investing

I definitely suggest having an LLC, which is a Limited Liability Company, for many reasons.

An LLC has many pros but a few cons as well.

However, I don’t think the cons are that bad, which is why I hold my properties in LLCs rather than in my own personal name.

Pros For An LLC For Rental Property

Asset Protection

An LLC provides asset protection for your property and for everything you personally own. This pro outweighs all of the cons!

Let’s say you have one rental property that you put in an LLC and you have your personal home that you put in your name. If somebody slips and falls at your property, it’s under the LLC.

The people who sue can only sue the owner of that property. If it is in your name, they can go after you personally, including your bank account, your personal home, your bank accounts, and anything you own.

If you hold that property in an LLC, the LLC will make sure it stops at the LLC.

Whatever the LLC owns gets sued. If you have 15 rental properties and have them split up into five different companies and someone slips and falls and sues, at most they can go after only what is in that LLC.

You need to protect all of your assets so you are well taken care of. That is a huge benefit!

Making Money with Rental Properties FREE Investing Course

Tax Benefits of a LLC for Real Estate Investing

There are huge tax benefits for putting your property in an LLC. The LLC is basically a pass-through entity.

If you are a regular corporation, you would get taxed at the corporation level. Any money the corporation makes is taxed. Any money left over that is distributed to the owners gets taxed again.

An LLC doesn’t have the two different taxes. It passes through the LLC and doesn’t get taxed. Once the money is distributed to the owners, it is taxed.

The pass-through of the money to the owner only gets taxed one time. This is a huge benefit! There is no double taxation.

Your Estate Planning with a LLC for Rental Property Investing

If you put all of your properties in an LLC, whoever owns the LLC is the one that actually gets the benefit.

If you and your spouse own the LLC for real estate investing, you can sell part of your company to your kids and they become part owners. Or, if you pass away, your kids can be beneficiaries of the shares you own in the company and those shares get transferred over to your kids.

The company still owns the properties and still owns the title, but the company changes hands.

Talk to your attorney and accountant to make sure everything is set up legally and all of the taxes are paid.

Try to avoid taxes as much as legally allowed. With estate planning, you also get out of estate tax. The estate tax is passed along to another person, but if it is in an LLC for real estate investing, they don’t get taxed on it.

Not only are you able to legally avoid taxes, an LLC for real estate investing allows you to pass the property to other people.

Cons For An LLC For Rental Property

Cost of Starting and Maintaining an LLC

If you put a property in your own name, there is no added cost. Putting the property in an LLC for real estate investing is an added cost.

To set up an LLC, you need to pay the franchise tax and fees to your state, but this cost is minimal. If you buy a $100,000 house, the cost to set up an LLC is about $100 or $200 at the most.

Would you pay $200 to save yourself $100,000? Of course you would! You would absolutely give someone $200 to save that much money. Don’t let this cost hold you back.

The cost is not a big deal.

Financing of Properties You Put in LLCs

Most residential loans don’t like having the entity held in a company name, because they want to have a person liable to pay the debt.

If you go out and try to get financing from a bank and tell them it is going to be in your company’s name, they will probably not want to do it.

It is much trickier finding financing to buy properties. It is not as easy as just putting it in your name.

It’s Not 100% Asset Protection

Having your property in an LLC is not foolproof. There are ways for someone to still sue you directly.

If the person suing you proves your LLC is not valid, you lose the protection of the LLC. However, it is a huge protection if you set it up right.

Due on Sale Clause

Let’s say you buy a property in Texas for $150,000 with a mortgage and six months later you decide to put the property in an LLC to protect it. If you do that, all mortgages today require payment of the loan balance as soon as there is a transfer of ownership.

When you put the property into a trust, that is not a transfer of ownership, because the trust is in your name.

When the property goes into another name, whether a company or a person, the due on sale clause can be implemented by the bank has recourse to collect the balance of the loan.

One option if you want to move your property from your name into your company name, and it has a mortgage on it, move it into a trust that the LLC owns. You own the LLC, the LLC is the trustee of the trust, and the property is in the trust. Don’t take my word for it, talk to your attorney!

I choose LLCs, because of all the pros I mentioned above. I make sure my assets are protected and I am protected from anyone that may want to sue me.

My personal opinion is to not choose corporations or S-Corporations, because there is a lot more that you may need to do as far a governance.

I use LLC for real estate investing because it is easy and cheap to do, and you get so much benefit out of it.

Benefits of Having Your LLC for Real Estate in Wyoming

No matter where you live, you may set up your LLC in Wyoming. The only caveat is you need a registered agent that lives in the area.

I lived in California and bought properties in Ohio, Texas, and Arizona with the LLC I set up in Wyoming.

As best as you can, try to make sure you never get sued.

This way you won’t need to worry that all of the protections you set up will hold. Make sure you don’t get sued and if you ever do get sued, make sure you are ready with all of these asset protections.

Talk to your accountant and attorney to make sure your business is set up correctly!