Do you recommend starting an LLC?

26 Replies

I have a plan to start a real estate rental company? I haven't even purchased my first property. Do you recommend I start an LLC before I start? What is the benefit of forming an LLC? If it is not necessary or beneficial at this stage, when will it be? Thank you!!

At this point, I wouldn't see the benefit for you. It's not necessarily something that "moves the needle." I think your time would be better spent analyzing properties, reading books, and networking.

Not a lawyer.

Hi @Kyleigh Morgan - If you own your property as an individual and someone files a lawsuit against you, then your personal assets may be at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.

In addition to separating the rental property from your personal assets, you may also want to separate your rental properties from each other. If you own multiple properties, you can “insulate” each property from liability claims by setting up separate LLCs for each property. If you have all of your properties under separate LLCs, then if someone files a lawsuit pertaining to one of your properties, then the rest of your properties will not be affected by the lawsuit. This effectively separates and protects each of your properties. Additionally, Pass-through taxation is a benefit. 

With an LLC, you get the benefit of the company's income "passing through" to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes.

It may be better to create an LLC before you buy a rental property so you can avoid having to notify your mortgage holder that you are transferring your title to the LLC, in which case they may choose to close the loan and issue you a new loan. Additionally, you'd probably need to notify your tenant that the property is now owned by the LLC and update your rental lease whereas doing it beforehand can save you some of that headache. Lastly, converting the property to an LLC after the property purchase may trigger new taxes, specifically a Title Transfer Tax. 

Just a few things to consider/think through. I hope this information helps! Let me know if you need anything else.

    @Kyleigh Morgan yes you definitely want to set up a management company LLC and each property as a separate LLC. This keeps everything separate as @Rob B. mentioned. For the properties you can look into series LLC. This may work better and more efficiently if you are doing SFR.

    As always make sure to speak to your accountant and your attorney to make sure you are set up and structured correctly for your individual situation.

    @Kyleigh Morgan 2 philosophies exist, buy under your name for the benefit of easier and better financing, utilize insurance for general liability OR form and buy as LLC, harder to get traditional financing, rate will likely be higher and shorter term, but you may have some protections.

    Not legal advice, consider consulting an attorney.

    @Rob B.

    Wow. Thank you so much! That is excellent advice as I do plan on scaling and would want that sort of protection. Is it a lot harder to get a refi on a rental property if it is under an LLC? Are the requirements/terms different usually? Thanks again for all the good info! :)

    @Kyleigh Morgan if the LLC is just formed—yes it's harder. Your rate will also be higher. Also remember—if you buy in cash hoping to renovate and refi, if the market turns—it may be harder to get a refi so your capital will be tied up, form relationships with a variety of lenders.

    Lots of discussion on BP about forming an LLC or not. Since you are just starting out I would suggest waiting a bit long to establish an LLC. You will have difficulty finding lenders that will loan solely to a startup LLC that has no revenue whatsoever. There are ways around this; however it will come at a higher cost. Same for insurance.

    Instead of an LLC get a $1-2MM personal umbrella insurance policy that covers "all risks". Once you build up your portfolio then move over to an LLC. Still keep you personal umbrella policy just as a backup to the LLC as any decent lawyer suing your LLC may find a way around the LLC and go after you directly. If you are truly serious about it you need to talk with a lawyer about specifics to starting up an LLC. Umbrella policies should cover legal fees too.

    This is just my 2 cents, others will disagree. Ultimately it's your choice. There really is no right or wrong way with pros and cons for going down either path. 

    @Greg Dickerson

    Thank you! I’m going to begin taking yours and Bobs advise and begin getting in touch with an attorney and ask my accountant too. I am worried that I will face unexpected problems when I go to refi. What should I expect in terms of taxes, insurance, IR and period length then? Thanks again! :)

    @Kyleigh Morgan I'm not a lawyer but I would recommend analyzing deals and making offers. Once your offer is accepted create a LLC for the specific property- I name my LLC the actual address. The reason to do that is it shelters your personal assets away from the property. For example if a tenant sues you and wins they can't come after your personal assets.

    @D.J. M.

    Thank you so much! I am going to speak with some lenders this week to help me get a better idea of what to expect. I like that it is easier to refi without the LLC but I like the protection that the LLC brings, so I am definitely going to look into everything you all mentioned to figure out what will work best for me and my current situation. Thanks again for all your help!

    @Mathew Spray

    Thank you!! This gives me a lot to think about. I'll be doing lots of research this week! To form an LLC or not to form an LLC? That is the question :) and now I know where to start looking for the answer. Thanks again guys!

    @DJ Berry who do you use as your lender? Are the terms and rates vastly different in your opinion when it comes to refinancing your properties under an LLC rather than under yourself?

    @Kyleigh Morgan The question of when to start the LLC can be a tough one. It usually takes an hour conversation before I know how to advise the client. If you are buying cash, using a private investor, or using a hard money lender, you can start an LLC now and get things set up the correct way so you can scale up your business. The greater majority of people that sit with me already have 5-10 properties and either don't have an LLC yet or did it themselves online and realize its inadequate. This happens because many new investors end up using conventional lending that requires them to apply for the loan in their personal name and hold the property in their personal name. After they've bought a few single family rentals in their own name, and maybe deeded a couple into an LLC, and try to buy their first apartment building, they realize they need to restructure everything.

    I would take a hard look at your strategy, your target properties, and how you plan to finance the purchase. Once you have that component isolated, you can come up with a plan to structure the business. 

    @Bob Floss II thanks for all the advice! I'm happy to get an attorney's opinion on the matter. I'm thinking starting an LLC will be the way to go when I buy my first property so I am going to begin talking to lenders now to better understand what kind of requirements and terms there are for lending to an LLC. Thanks again for reaching out! :)

    @Kyleigh Morgan Hey Kyleigh, I think setting up an LLC is a great idea in the front end because Real Estate Investing is a business and if you are serious about scaling up fairly quickly you might as well set the LLC now rather than later. 

    In addition, having an LLC does afford you some pretty cool tax benefits as you start to run your company. 

    Undoubtedly, making offers, analyzing deals, reading books AND setting up your LLC need not be a sequential process and/or mutually exclusive. You can (should) do both.

    Good luck and you are off to a good start by asking questions 🤗

    @Kyleigh Morgan

    Newbie here, but I would advise against an LLC when starting out. You have to pay to open and maintain it.

    Build up your portfolio and then open LLC's for the properties. This is my plan and I hear great opinions about this approach from mentors!

    Good luck!

    Originally posted by @Kyleigh Morgan :

    I have a plan to start a real estate rental company? I haven't even purchased my first property. Do you recommend I start an LLC before I start? What is the benefit of forming an LLC? If it is not necessary or beneficial at this stage, when will it be? Thank you!!

    Whether you start and LLC now of later down the road after you purchase an investment, you should def do it. All my homes are in an LLC and always will be. This was the advise from my dear mentor that always swore by this. He past away last year handing down a wealth of knowledge to his students and MILLIONS of dollars in assets to his family. I think he knew something


    @Kyleigh Morgan

    This is not so straight forward as some people proclaim. It varies by individual circumstances and personal preferences. For instance, some banks have different financing requirements if you are financing via an LLC or holding in personal name. Amortization schedule, rates, etc can all vary widely.

    From a liability perspective it can also depend. We have properties in our personal name survey no LLC and help protect us with an umbrella insurance policy. We choose to mitigate risk this way vs. insulating ourselves via an LLC. Is that the correct way for all? Maybe not, but based on the financing we wanted to make our deals work, that's what we chose.

    It's really up to you and what path you want to take. If I'm not mistake, From a tax perspective the LLC income is being passed thru to your personal tax return so it will be taxed at your personal tax bracket anyway

    @Kyleigh Morgan as a lender, I would tell you to get an LLC. Buy the investment property in your primary name and then transfer it to a 100% member LLC or it can be 50/50% with a spouse/partner. A conventional lender's interest rates are not based on the fact the property will be inside a LLC, it's because it is an investment property. Being a duplex or multi unit can affect the interest rate or fees as well.

    Be sure to have a strategy, if you do want to get cash out from the property in the future then waiting to put the loan in the LLC may be better. A property will need to season 6 months from point of purchase in order to get a traditional loan if you are considering to get cash out.

    There is always a risk that a lender can call the note due in you add it to an LLC but that's a limited risk. A 100% member LLC should not be an issue and if there is a problem quit claim the property back to yourself individually. Sometimes having a junior partner inside the LLC is good for several reasons.

    Know the costs of keeping or maintaining the LLC in your state. Each state is different.

    If you don't have a lot of personal assets then you don't need the LLC right now. There is not a need to get into the Series LLC's right now if you are a new real estate investor. A Series LLC is very specialized. I would interview several CPA's. Find someone in your area to suggest CPA's that are familiar with Real Estate and get their feedback. Someone that you like and build your strategy towards how you want to build your real estate portfolio and protect your assets.


    @Rob B.

    "With an LLC, you get the benefit of the company's income "passing through" to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes."

    It may be worth mentioning that there is an additional step after creating an LLC. Without an election a taxpayer would remain a single-member LLC and the activity would be reported on their schedule C or E(page1) of their individual income tax return depending on the character of the activity. 

    If there are multiple members the LLC would be taxed as a partnership. Another alternative would be to make an S-election to be taxed as an s-corporation. The pass-through would occur in the partnership or s-corporation scenario.

    The taxation of the income would depend on the designation of the taxpayer whether they are considered a real estate professional or passive investor as well as whether they are renting or flipping for example.  

    A pass-through doesn't necessarily minimize the tax liability from income earned.  

    Thanks everyone for all your advice! I realized after reading everyone's comments that I need to consider looking into a good real estate attorney in Charleston, SC to look over my personal situation and help me decide when the best time would be to form an LLC, but I think from my understanding that I WILL want to do it at some point. I also learned so much just from reading your comments, and realized I have a lot more to learn, so going to pick up a book about forming an LLC or something of the sort. If anybody has any book suggestions or attorney referrals in Charleston, SC let me know!! Thanks again! :)

    Give you an idea of what we did. We did not form our LLC till we had something under contract. Don't pay for something you don't need just yet.

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