Renting out properties as an individual or a business?

5 Replies

I'm in a position to purchase a property at any time, just waiting for a deal to pop up within my purchasing budget. Here's my question:

Rent as an individual or as a business? I know that a lot of expenses can be written off if I start out as a business (probably an LLC), not to mention the whole "pay yourself first" concept. When I'm ready to pull the trigger, I'd like to have everything in place. However, it may not be for another several months before I make a purchase. Is it okay to start an LLC now, even though there may be no business activity whatsoever until I make a purchase? Perhaps I should wait until 2018?

@Spencer Herrick I would wait, I don't know how much it is to start an LLC by you. but in New York its around 1000 dollars. To make an LLC and spend the money and may not have something for half a year seems like a waste. I would wait till you close on something and then create and LLC to put the unit into.

Hi @Spencer Herrick , I get this question from clients pretty frequently. I've helped form various entities in multiple states, and one thing has held true in each of them: a new LLC can be formed in much less time than a property can be offered on, inspected, appraised, and closed (absent a cash deal where you're differentiator is closing quickly).

I would certainly advise waiting to actually form an entity, but I'd get your road map in place in advance. While I'm new to investing, I've learned from many client interactions that there are several things that can be done to prepare for an eventual new entity, such as meeting with lenders to discover who is most friendly to commercial loans, meeting with realtors to see who operates most in the space you want to occupy, meeting with a CPA for advice of which type of structure would be most beneficial for your goals and intended purchases, and finally meeting with a good RE attorney who can walk you through what will be necessary when the timing is right.

Best of luck!

Your expenses on the property will be a matter of fact - the legal ownership of that entity won’t really matter from the perspective of what you can write off. The thought that forming an LLC to hold the property will give you some big tax advantage over owning it personally is simply not valid.

Spencer,

From a tax perspective, particularly at the federal level, there is no advantage to having a single member LLC own your rentals rather than owning it outright. In fact, the federal government considers single-member LLCs disregarded entities, meaning for federal tax purposes they do not exist.

There are benefits to having an LLC, but those primarily revolve around limited liability protection.

Until you own a property, I wouldn’t set up an LLC. I would definitely talk to a CPA and possibly an attorney before buying a property.

@Spencer Herrick

LLC's are mostly served for Asset protection purposes.
You can deduct business expenses if your business is in your personal name or in the name of an LLC.

It appears that you have decided to go with the LLC. I would just have items ready so that you can set up the LLC quickly.
Do you have a name in mind?
Do you have the operating agreement ready?(if the state requires it)

If you have everything set up - you can create the LLC once you are under contract. 

Another thing to consider is if you plan to have the property purchased in the name of the LLC - you will not be able to qualify for a conventional mortgage.
If you plan to get a conventional mortgage and transfer the title to the LLC - you risk the due on sale clause.

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