Wednesday, 15 August 2018 00:00

Creating an LLC for Single Family Rental Properties: Advantages & Disadvantages

LLC for Single Family Rental Properties

Single family rental properties offer a number of advantages to the owner.

Generally, the time between when you acquire one and when you can begin renting is minimal – meaning cashflow begins ASAP.

Nonetheless, many provide great returns with low overhead and the promise of tremendous resale values.

However, the means by which you own one of these properties will have just as big an impact on your portfolio as the actual home itself.

That’s why most investors choose to use an LLC for single family rental properties.

 

Three Pros of Using an LLC for Single Family Rental Properties

Limited Liability Companies (LLCs) were introduced more than 40 years ago. However, they’ve really grown in popularity among real estate investors over the past decade.

Here are the three key reasons why.

1. Superior Protection Against Personal Liability

The main reason to form an LLC as the owner of a single-family rental property is because it offers protection against personal liability.

There is no shortage of opportunities for a resident to sue their landlord over injuries or other problems related to the property.

Even if you go to great lengths to ensure that your property is safe, there are endless scenarios you probably wouldn’t consider.

For example, imagine your tenant throws a party and one of their guests slips on the stairs, requiring medical attention. Whether or not they’re justified, they probably wouldn’t have too much trouble finding a lawyer who would sue you for your property’s “unsafe condition.”

If you don’t have an LLC, this kind of lawsuit would name you as being personally responsible, which means you’d need to defend your personal assets.

If you do have an LLC, then your personal assets are protected and only those held by the LLC are exposed to the lawsuit.

2. Reduced Exposure vs. Liability Insurance

Many real estate investors assume that the work involved with forming an LLC isn’t worth the “trouble” – a topic we’ll explore a bit more below.

Instead, they opt for conventional liability insurance.

The problem is that liability insurance comes with limits and exceptions. While it’s unlikely to happen, a loss that eclipses the limits of your policy would produce absolutely devastating consequences.

Given the very low-barrier-to-entry involved with forming an LLC and the massive downside of being caught without one when you need it, it’s hard to argue against taking out this extra layer of protection.

3. The Advantages of Pass-Through Taxation

Finally, the IRS treats real estate holding companies with just one owner just like they do a sole proprietorship.

Therefore, as an LLC, your income “passes through” the company and right to you, the owner. You only need to pay taxes on that income once, yet you still receive all of the protections owed to you because of the LLC.

 

Three Cons of Using an LLC for Single Family Rental Properties

Even with the above advantages to using an LLC for single family rental properties, no solution is completely perfect.

Here are the three potential drawbacks of this solution.

1. It Costs Money to Register an LLC for Single Family Rental Properties

The aforementioned benefits come at a cost. You’ll need to pay to form an LLC and to maintain it. There will most likely be an extra cost involved for preparing your taxes, too.

2. Vague Asset Protection

This isn’t so much a drawback as a word of warning. Every LLC isn’t the same. Simply adding those three letters to a deed doesn’t guarantee protection during the worst-case-scenario.

Instead, you need to do your due diligence to ensure that the professional who helps you create your entity. There’s a world of difference between someone with experience helping rental-property owners and a rookie who creates LLCs for anyone.

3. Financing Can Be Difficult

Most lenders want to know that someone will be held personally liable before they provide a loan. This is why some people avoid using an LLC for single family rental properties. They’d actually rather make their purchase in cash.

 

Make the Most of an LLC for Single Family Rental Properties

For most investors, the advantages of using an LLC for single family rental properties far outweigh any drawbacks, provided they can find a lender who will work with them.

At Rental Home Financing, we specialize in providing investors with the funding they need to continue expanding their portfolios.

And, yes, this even includes offering blanket loans for LLCs, often even it its brand-new.

Apply online today and you’ll be one big step closer to the financing you need for the single-family rental property you want.

 

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