LLC vs. Individual Purchase for First Rental Property Investment?

Question

Hello BP community! I am looking at purchasing my first investment property (SFR/long-term rental) and was wondering if it's better to buy this first property in my name or create an LLC (I'm aware of the liability protection benefits etc. with an LLC and plan on creating one eventually). I know there are different/more restrictive conditions with lending options for an LLC however I have read various threads about it being more advantageous to buy the first property under your name first then pass it through the LLC (maybe risky there if bank calls in loan?). Just trying to learn more before pulling the trigger!

I live in Colorado and the house I am looking to purchase is in South Carolina!

Jonathan R McLaughlin · Answer

Ask a cpa familiar with your situation. Less complicated/less filing is usually better. Single person LLCs don’t offer much.

John Underwood · Answer

One property with a mortgage, you really don't need an LLC. Get the correct insurance and you can add an umbrella policy if you like.

An LLC gives you no tax advantages.

Zane Kampfer · Answer

Hello TJ O'Connor,

Congratulations on considering your first investment property! It's great that you're taking the time to research and gather information before making a decision. The choice between purchasing a property in your personal name or through an LLC is an important one and involves various factors to consider.

Here are some points to keep in mind:

Purchasing in Your Name:

• 1. Easier Financing: Obtaining a mortgage in your name may be easier compared to securing one for an LLC, as banks often have more stringent requirements for business entities.
• 2. Lower Interest Rates: Interest rates for personal mortgages can be lower compared to those for commercial loans.
• 3. Transition to LLC: You can transfer the property to an LLC later, but you should consult with a legal professional to ensure a smooth process. There may be due-on-sale clauses in your mortgage contract to consider.

Purchasing Through an LLC:

• 1. Liability Protection: As you mentioned, an LLC offers personal liability protection, which can be valuable in case of unforeseen circumstances or legal issues related to the property.
• 2. Tax Benefits: There can be potential tax advantages associated with owning property through an LLC. Consult a tax advisor for personalized advice.

Considering you're in Colorado and the property is in South Carolina, you may want to consult with professionals familiar with the real estate and legal landscape in both states. They can provide specific advice based on local regulations and best practices.

Ultimately, it's advisable to consult with a real estate attorney and/or financial advisor who can provide personalized guidance based on your specific situation and long-term investment goals. They can help you weigh the pros and cons and make an informed decision.

Remember, this information is for general guidance and does not constitute legal or financial advice. Always seek advice from qualified professionals for your specific situation.

Best of luck with your investment property venture! If you have any further questions or need more information, feel free to ask.

TJ O'Connor · Answer

Thank you so much for the advice!

Sarah Downey · Answer

Hi TJ,

I recommend setting up an LLC since you plan to do it anyway. It is pretty easy to set one up, and the loan process should not be more restrictive by using one if you plan to work with a private lender. DSCR loans require a lot less paperwork than conventional loans. Usually, for an LLC, you need the articles of organization, an operating agreement, an EIN letter, and a certificate of good standing.

Many of our borrowers use Bizfiling, or you can set the entity up yourself directly with the Secretary of State of South Carolina. To create your operating agreement there are a lot of templates online or there is a website called Legal Nature that I really love. For your EIN letter, you can get an that directly from the IRS with this link https://www.irs.gov/businesses/small-businesses-self-employe...

I hope this helps!

Erik Estrada · Answer

Hey TJ,

You may finance a rental property under an LLC or a personal name with a DSCR loan .