Creating LLC for Rental

9 Replies

Hey BP,

I've read a bunch of posts, and listened to a few podcasts relating to whether or not you should form an LLC for a property. There are arguments on both sides, and I'm still leaning towards creating one. I guess what I'm looking for here is feedback on my reasoning. Planning on partnering with my cousin on a property and since obviously we file separate tax returns, I figure it'll be easier to manage profit sharing through the LLC.

Whether or not we buy the actual property through the LLC is to be seen, but based on the bit of research I've done, that is unlikely. I briefly spoke to a lawyer that recommended we create an entity for each individual property, so if anyone can chime in on that. That part does make some sense, especially since the first property we're looking at is out of state and it would cut back on legal fees to just file in that state.

My thought process then is to create an LLC for the property, open a bank account for the LLC where rent will be collected and any expenses(repairs & renovations etc) will come out of.

I understand that no one will directly give me legal advice on here, but just in general any feedback would be greatly appreciated!

As you have state you have read the arguments on both sides. Other than it being a additional cost to do business and financing being more difficult under a LLC as long as you have adequate insurance coverage there is little other difference.

The primary advantage for most is the psychological security that comes with believing it will better protect your assets. You will not hear much first hand antidotal evidence to support the need.

Whether you do or don't is simply a personal decision in my opinion rather than a business decision. Investors are split about 50/50 whether to have a LLC or not to my understanding again reflecting a personal as oppose to business/legal decision.

@Jose Romero

Your plan will work. It sounds like you did your research- you feel compelled to have an LLC -it's not gonna be that big of a difference so go with your gut and your research form the LLC. It sounds like the LLC might own the property and/or manage it. Either one is fine if this is your first. Good luck -getting in the game is important so don't get paralysis by analysis.

Originally posted by @Carl Fischer :

@Jose Romero

Your plan will work. It sounds like you did your research- you feel compelled to have an LLC -it's not gonna be that big of a difference so go with your gut and your research form the LLC. It sounds like the LLC might own the property and/or manage it. Either one is fine if this is your first. Good luck -getting in the game is important so don't get paralysis by analysis.

Thank you Carl, definitely getting in there either way! Just waiting to meet with the seller and check out the property. Truly appreciate the input!

Originally posted by @Thomas S. :

As you have state you have read the arguments on both sides. Other than it being a additional cost to do business and financing being more difficult under a LLC as long as you have adequate insurance coverage there is little other difference.

The primary advantage for most is the psychological security that comes with believing it will better protect your assets. You will not hear much first hand antidotal evidence to support the need.

Whether you do or don't is simply a personal decision in my opinion rather than a business decision. Investors are split about 50/50 whether to have a LLC or not to my understanding again reflecting a personal as oppose to business/legal decision.

Thanks for your input Thomas.

An LLC is established by state statute, for federal taxes you'll be treated as a disregarded entity (if you're the sole member) or if you have multiple members you'd be treated as a partnership, or you can elect S or C corp treatment.

What is your cousin bringing to the table? If it's just money, maybe it'd make more sense to structure his part as a loan? You'll definitely need a good operating agreement. Partnership taxation can be very simple but can also get very complicated very fast, especially when you get into substantial economic effect issues. Calculating basis gets tricky too especially with combinations of sweat equity and cash infusions. 

The long and short of it is I'd pay a CPA to do it right upfront. 

Thank you all for the feedback!

I was just looking this up here, because I am just getting started and have an S-corp because I am a 1099 contract tech worker. From what I can gather a lot here form an LLC but file taxes as an S-corp which apparently has some tax benefits.

I would look into what an S-corp has to offer as well.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.