LLC or business structure for rental investment property?

[Dalton Chmelik]

Just curious how rental property investors structure their business. Would like to learn what the best business structures are for rental property investing.

[Evan Polaski]

@Dalton Chmelik, any sole member LLC will be a disregarded entity, and if you have a partner, you will likely want an LLC or LP structure to legally structure the partnership. Even then there won't be an additional layer of taxes, per se, since LLCs and LPs are pass through entities so any gains or losses are passed directly over to the owners via a form K-1. What Todd may be referencing is a corporation, which would be liable for corporate taxes, but S-Corps are also pass through entities, and typically not subject to taxation. BUT, a non-disregarded entity will have a second layer of tax filing, which is an additional cost.

Beyond taxes, setting up an LLC for a rental may or may not make sense. It really depends on your priorities. If you open and hold all assets in your LLC, when handled correctly, it will shield you from personal liability. That's all well and good, but every document must be signed as a member of the LLC. If you are getting sued and you signed a document personally, you could have pierced the corporate veil and now are liable personally anyways. So there is an ongoing maintenance cost and administrative burden to operating under an LLC.

Additionally, if you are buying assets in the name of the LLC, then all assets (bank accounts, other properties in the LLC's name, etc) are now available to go after, so you may shield your personal liability, but if most of your assets are within the LLC anyways, what does it matter. You could open multiple LLCs, but that more administrative burden.

Secondly, if the LLC is the titled owner of the property, you will not be able to get personal mortgages. You can get commercial mortgages, but those often carry higher interest, lower leverage limits, and generally less desirable terms. The upside to commercial mortgages: more negotiable and don't show on your personal credit report. When starting out, they will still look at your income, credit score, assets like a personal mortgage and likely have you sign a personal guaranty for the mortgage, but again that is a contingent liability and not reflected on your credit report.

Third, and sort of back to the first point, an LLC is only beneficial if you get sued. Now, you cannot always help being sued, but in my decade of investing, I have never been sued, and so my LLC is a bit more of a liability than it is an asset, but really it is an insurance policy. It costs money and takes a certain level of effort to maintain, and ideally I will never need it, but it is there in case I do.