1. Keeping You and Your Property Separate
The most popular reason to invest in an LLC rental property is to keep your personal assets safe. Otherwise, if a tenant sues you because of an issue related to your home, there’s no stopping the courts from deciding you need to settle things by liquidating some of your personal assets.
For example, say one of your tenants has a friend over. That friend has too much to drink, trips walking on to the carpet, and hits their head. Believe it or not, they could sue you, alleging that the carpet wasn’t pinned down properly (there might not be any proof they were intoxicated, either). This sort of event is mercifully rare, but it does happen. Now, if you were found to be responsible and didn’t have an LLC in place, you’d most likely need to pay for damages out of pocket. This could mean going into your savings or even selling off assets until you could comply with the court’s demands.
If you had an LLC in place, all the plaintiff could do is go after the company and whatever it “owns.” Even if you lost the case, your personal assets would most likely remain out of reach.
2. Keeping Your Properties Separate
You can also take this kind of protection a step further and use an LLC rental property for each home you buy. By doing so, every one of these LLCs will be separated. This kind of insulation will keep all of your other properties safe in the event that a lawsuit is filed in relation to another of them. Remember, anything an LLC “owns” is fair game if the courts rule against it. So, as you grow your real-estate portfolio, be sure you protect each home by making it its own LLC rental property.
3. Enjoy Two Big Tax Advantages
This concept refers to the way in which the IRS treats an LLC when it’s a sole proprietorship. In short, they essentially don’t tax the company. Even though it bestows all the aforementioned perks on its members, the IRS will allow your LLC to “pass-through” taxes to you. So, you’ll pay your personal income taxes, but your company won’t be forced to pay business taxes, as well.
For most investors, that’s enough reason to build their portfolios using an LLC rental property. After all, the cost of forming and maintaining an LLC is negligible compared to the savings you’ll enjoy every year come tax season.
That’s not the only tax advantage, though. Using an LLC for each for your rental properties also makes it simple to keep their accounts separate from your personal bank account. As a result, you should have no problem proving what expenses are related to your business and, thus, deserve to be deducted on your taxes.
4. Keep Your Real Estate Holdings Anonymous
Typically, when you buy a house, your name is on the deed. That’s information that is publicly accessible, and anyone could access.
As far as someone’s primary residence goes, that’s probably not a big deal.
However, many real-estate investors would rather their portfolios not be available for public scrutiny. Some investors worry that they might become the target of frivolous lawsuits if the wrong people had any idea about how much their portfolio is worth.
The deed for a rental property could also be used to tell a tenant who was recently evicted where they can find the landlord “responsible,” even if the owner actually has very little knowledge about this because their property-management team handled it.
When you form an LLC rental property, it’s the actual company that shows up on the deed. This can go a long way toward offering you anonymity and peace of mind knowing that information about your investments is not sitting out there where anyone can find it.
5. It’s Never Too Late to Form Your LLC and Transfer a Property to It
The good news is that, even if you already have a sizable portfolio of investment properties, it’s never too late to form LLCs that and transfer them over.
Of course, as you’ll soon learn, it’s much better to form the LLC first and then purchase the property in question. Among other things, you’ll need to notify the holder of your mortgage before the transfer, and they’ll be well within their rights to close the loan. If they do, you’ll have to pay the closing costs. They could even issue you another loan, including an increased interest rate.
Similarly, you have to update your tenants about the new “owner,” your LLC, and update all of your lease agreements.
Still, given the advantages we’ve already covered, it’s still worth transferring any of your current holdings to separate LLCs if you haven’t already.
Financing Your LLC Rental Property
While maintaining your rental property portfolio is an ongoing priority, one simple step you can take to keep your investments safe is always using an LLC rental property to secure mortgages and transfer any holdings you currently own into this legal entity.
In terms of securing the actual mortgages you need going forward, our company can help with that. For 20 years, Rental Home Financing has been serving experienced investors just like you with a wide array of investment products.