Do I need an LLC to buy my first rental property?
Hello Mark. That is not a newbie worry at all, that's good business. An LLC protects you and your other assets from just the scenario you brought up. Better safe than sorry is always the way to go. Some investors keep each property under separate LLCs.
I'm sure you will get all the pros from others which is basically just litigation protection.
Cons include expense of creating the LLC, extra CPA fees at tax time, difficulty getting a loan on a property in a new LLC which can really impact the BRRR strategy. Most of all though it is an excuse not to get started.
One of the benefits of an LLC that people often bring up is that there is liability protection if you get sued by your tenant, etc. If this is your only concern, this can generally be accomplished through a good insurance policy.
However, an asset protection talk I attended last year (that was focused on California law, so you will need to check to see how this applies in Michigan) pointed out that if you are sued personally (say you are in a car accident) having property in an LLC can protect it from being seized as damages.
From a federal tax perspective, there are no real differences between having rental property in an LLC or owning it individually.
@Paul Ewing is correct that there are definitely more costs associated with having an LLC.
I would talk to a Michigan CPA and/or attorney to talk about what is right for your situation. There is general advice than can be given to you, but without knowing your personal situation we cannot tailor the advice to you.
@Mark Bushong A tenant can not only sue the LLC, but their attorney would most likely name the owner of the LLC (YOU), the property manager, the city, and anyone else they think will give them money as settlement. The hard part for them is to actually prove that you or the LLC is at fault. If they win the suit, they will come after all parties named in the suit. So to answer your question, no you don't need a LLC to start. There are other ways to protect yourself from litigation as well. The fact is that if you only own one property and your net worth is zero, nobody is going to sue you anyway.
Here's an article I wrote that explained what I learned about it all as I was researching it for myself back in the day, but well beyond that, there are a million comments with additional information.
https://www.biggerpockets.com/renewsblog/2013/08/1...
Hope that helps!
The LLC will give you anonymity you will most likely be a pass-thru anyway for tax purposes.
In the case of litigation any lawyer worth a dime will be able to break down the barrier of your LLC and you personally. It simply makes it harder. You have to really make sure nothing is in your name. You switch the utilities from tenant to property owner it switched to the LLC. Correspondence with the Govt entities same thing. I had a really good buddy who was still jammed up via lawsuit because though he maintained separate finances the courts viewed him and his brother and the LLC as one in the same because everything in the business was signed by himself or his brother.
The best thing with an LLC is the TIN you receive and after 2-3 years of operation your business can hold debt versus yourself or giving personal guarantees.