Purchase under an LLC or not?

Question

Hello, I’m hoping to buy my first property next year, and am wondering if I should create an LLC to do so. The reason is I want to separate my personal debt to income ratio from my real estate investing “business” and of course reduce personal risk. Is complete separation even possible? Thanks!

Ashish Acharya · Answer

@Charlie Martin Buying under an LLC offers liability protection and separates business finances, but it can complicate financing with higher rates and stricter terms, and lenders may still require a personal guarantee, impacting your DTI.

For your first property, consider purchasing in your personal name for better loan terms and transferring it to an LLC later if needed, while using strong umbrella insurance to mitigate risk. As your portfolio grows, an LLC can streamline management and enhance liability protection.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Jay Hurst · Answer

Your business (the LLC) is still owned by you. The income/loss flows to your personal tax return.  An LLC has no effect negatively or positively on how a full doc lender will calculate your income. A real estate business is not different then any other self employment income.

Neither for that matter will a DSCR loan when/if you go to get a full primary home loan for example for the same reasons. The income/loss still flows to your personal return. IF you cannot qualify for a full doc loan then a DSCR loan does NOT look at your returns. But, understand DSCR loans are only for investment properties, not for a primary home you might want to buy in the future.

But, nothing of this really should matter. You are planning on buying cash flowing properties correct?  If so, the income on your tax returns will be positive so the whole rational of trying to avoid the income is moot.

Jay Hurst · Answer

@Charlie Martin  You cannot separate the two as the real estate business will be on your tax returns one why or another. So, the only way to buy a primary home without providing tax returns is if you are self employed and use a bank statement type loan. Again, have to be self employed to do this AND rates are higher on these loans.

You will be able to add back your paper losses on your rental business by your lender using this form (if they are competent which not all when it comes to investment real estate) :  https://content.enactmi.com/documents/calculators/Form1038.C...

The majority of investors I work with after using this form more or less break even on the rental business which makes it a non event and very little impact to your debt to income ratio. Just make sure you file your taxes correctly. I do see mistakes where the property was rented  for 6 months in a tax  year but the tax returns state it was rented for 12 months. That can skew the numbers the wrong way.

Diego Curbelo · Answer

Hi Charlie, very exciting that you're planning on buying your first investment property, congrats! In real estate (and probably other industries) this is referred to as a Single Purpose Entity, and it's usually a smart move. Aside from the Debt-to-income ratio and risk benefits you've already mentioned, it also just helps keep everything organized. Just keep in mind, the costs of setting up and maintaining an LLC and the bank account that goes with it, not exorbitant but important to consider.I'm not a CPA or an attorney, but I would suggest taking the time to diligently put together a trusted team to facilitate your long and successful investment journey! Here if you need anything.

Brandon Croucier · Answer

The main way to reduce your DTI from RE is using a DSCR loan, however using an LLC is recommended to do so more effectively.

Greg Kasmer · Answer

Charlie - If you start an LLC as a single-member LLC the profits and losses will flow through your personal income tax return without filing a business tax return. If you have two or more members of the LLC you'll file a business return and then have those financial flow over to your personal return via K-1. "Separation" may not be possible, but I'd like to think of an LLC as an "extra layer" of protection, although you're not completely isolated from risk... just makes it harder for others. Good Luck!

Purchase under an LLC or not?

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