Considerations for Using an LLC to Own Investment Real Estate

November 2018

Over the past decade, more and more people have been looking to diversify their investment strategy beyond just putting money in their 401(k) or otherwise investing in the stock market. One alternative investment strategy has been nonprofessional investors purchasing single family or multi-family homes as investment properties. Often these individuals will directly purchase the investment properties instead of doing so through a limited liability company (LLC). However, you should consider the benefits of investing through an LLC, together with certain related considerations, as described below.

Benefits:

  • Limited Liability Protection – One of the main attributes of an LLC is that its owners (known as “members”) have “limited liability” protection. Thus, if you were ever sued by a tenant or creditor, the “limited liability shield” protects your other assets absent some personal wrongdoing.
  • Tax Benefits – LLCs are eligible for “pass-thru” taxation, which means that unlike in a corporation where you typically have “double taxation” – taxes are only paid at the member-level in an LLC. Thus, an LLC allows for a tax-efficient mode of owning investment properties.
  • Easier Transfer of Ownership – By holding an investment property in an LLC, you can more easily transfer ownership to others, whether in whole or in part. Instead of re-titling ownership of the real property within the applicable real estate records, the member can sell or gift ownership in the LLC. Thus, this can be an efficient method for gifting partial ownership in connection with your estate planning.

Considerations:

  • Maintain Separate Bank Account – In order to maintain the limited liability protection offered by an LLC, it’s essential that you treat the LLC as a separate and distinct entity from you personally and any other businesses you may own. This means setting up a separate bank account for the LLC. Checks from tenants should be made out to the LLC and deposited into the LLC’s bank accounts. Additionally, when paying for costs and expenses related to ownership and maintenance of the investment property, you should be paying using checks (or other payment methods) associated with the LLC’s bank account.
  • Lease – If you already have tenants in your investment property, you need to make sure that the lease is between your tenant and the LLC. If you are transferring your existing investment property into an LLC, make sure to assign the lease from you personally to the LLC.
  • Insurance – As with any business, you should always ensure that the LLC has the proper insurance in place. Just because you’ve put your investment property in an LLC, does not mean you don’t need insurance. Further, if you are transferring your existing property from you personally into an LLC, you need to make sure that your insurance policy is updated to cover the LLC.
  • Assignment of Mortgaged Property – If you already own the property and it’s subject to a mortgage, you need to first obtain the consent of the mortgage holder (typically a bank) before assigning the property to the LLC. Some mortgage holders permit these assignments while others don’t, so you should always check with the mortgage holder on the front end.

This article was written by Corporate attorney Jesse Klick – if you have any questions about owning real estate through an LLC, he can be reached at jesse.klick@fmjlaw.com or 952-995-9500.