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Posted almost 5 years ago

Should You Form An LLC When Buying a Turnkey Rental Property?

When you’re buying your first investment property you may be thinking about forming some kind of official business organization like an LLC. This usually comes up because you intend to run your investment like a business, which is as it should be. But you can still run your turnkey rental like a business without having to formally incorporate. And there are lots of reasons why you don’t necessarily want to form an LLC when buying a turnkey rental property. While I’m not a legal counsel or able to offer official legal advice, I can offer my opinion based on my extensive professional experience.

1. Conventional Financing Will Be Unavailable

Many of the most attractive conventional loan options will be inaccessible to you if you form an LLC for your turnkey rental. Government loans such as Fannie Mae are only available to individuals, not LLCs. Since Fannie Mae loans only require 20% down, this frees up tons of your capital for up to ten more investment properties under this program. But if you’re an LLC, count yourself out because Fannie Mae doesn’t lend to businesses. Unconventional lenders will certainly let you borrow on your LLC with a personal guarantee, but you won’t get the favorable terms and rates that traditional lenders offer. With Fannie Mae, you get the best rates available for investment properties. Why would you knowingly turn your back on that?

2. You Can Take The Same Tax Deductions Without an LLC

Holding an investment property as a rental entitles you to the same tax deductions as an individual as it would if you were an LLC. You’re still entitled to all the same tax benefits, such as interest expense, repairs, maintenance and depreciation, just as if you were organized under a formal business entity. As an individual taxpayer, these deductions can be used to offset other tax obligations on your personal tax return. If you held the turnkey in an LLC, you wouldn’t necessarily be able to offset those real estate investment costs against your personal tax liabilities.

3. You Get the Same Protection With an Umbrella Policy

One common reason that investors think about setting up an LLC is for the liability protection. This makes smart business sense, but you can get the same kind of protection with a good umbrella insurance policy. Your insurance representative can give you the details, but in general, you’d be protected against claims on your investment property. With the right insurance coverage your property will also be protected against damage.

4. Unnecessary Added Expenses

No small matter, but there are unnecessary added expenses when forming an LLC. There’s the time and research involved, the cost to set it up, and the cost in time and money to manage it. If you’re actually looking to form a business, that’s time and money well spent. But if you’re just looking to own a few turnkey rental properties, it’s an unnecessary expense.

Exceptions When Considering Whether to Form an LLC for Real Estate Investing

There are times when it makes sense to form an LLC. If you’re NOT investing in a turnkey rental or if you’re doing a heavy rehab project where you’re buying a distressed property and fully renovating it. The reason is because if, for example a worker falls off the roof and decides to sue, they’ll be suing the LLC, not you personally. In instances where you’re significantly altering the property, forming an LLC might make sense.

Considerations When Forming an LLC

If you decide that an LLC makes sense for your non-turnkey rental, then make sure you incorporate in a state where they have non-piercing laws. This simply means that if a claim is made against the property, the corporate veil cannot be pierced and your personal assets are safe from an judgements against the LLC. Remember that you don’t have to incorporate in the state where you reside. You would simply pay for a registered agent to represent your “presence” in the state. Consult with an attorney to decide which state makes the most sense for your needs if you decide to form an LLC.

The bottom line is that you don’t necessarily need to form an LLC in order to own and operate a turnkey investment property. In fact, doing so may overcomplicate the process in a way that can discourage you from even going into the landlord business. If you cover yourself with a comprehensive umbrella policy, you’ll be adequately protected against most of the things that can possibly go wrong.



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