Financing - to LLC or NOT to LLC?

Question

I am still new to RE Investing. I am a small business owner and have been trying to figure out how to purchase an investment property under an LLC for the protection it provides. It have tried a local credit union in the past and the business rate they offered rendered the deal unprofitable. I have recently reached out to a BP sponsored lender but am facing a similar challenge. They are offering DSCR under an LLC, however they have a minimum of 100k loan. With the standard 20% dp that puts the property at $120k. Using standard assumptions (like the BP calculator), I am not able to find profitable properties in my area at that price. I can however make the numbers work for properties closer to 100k w/ 20k dp. This would unfortunately require a personal mortgage. My main concerns are personal liability and that public records reveal my home address. In your collective, experienced wisdom, how risky is owning a rental personally?

Stuart Udis · Answer

A few things to unpack here.

1. Your margins are too thin if a slight difference in financing charges makes or breaks the deal.

2. I urge you to educate yourself on asset protection. This means understanding the risks most likely to affect you as a property owner, taking steps to reduce the likelihood of those events occurring, and ensuring you are adequately protected if they do. Based on what you wrote you appear to be confusing anonymity with asset protection.

3. The biggest liability exposure has nothing to do with an LLC or anonymity, its purchasing $100K rental properties. The value of the real estate is rarely able to absorb the cost of licensed and insured vendors & a few minor underwriting misses can leave the property upside down. Keep in mind many cap ex items are closer to fixed expenses, particularly the larger ones which become mere rounding errors in more expensive properties. Even with an LLC you are personally guaranteeing the loan and therefore on the hook if the property value is less than the loan or alternatively you end up spending more than the property is worth. 20-25% equity cushion is not the same in a $100K property as it is in a $500K property. That 20-25% evaporates very quickly.

Jake Latimer · Answer

Brad, a few distinctions that usually clear this up:

1) Liability vs. tax. An LLC is a state-law liability tool. For federal tax, a single-member LLC is generally disregarded by default (Treas. Reg. §301.7701-3), so it doesn't change your tax picture on its own.

2) What the shield covers. In Texas, for example, Bus. Orgs. Code §101.114 says a member generally isn't liable for the LLC's debts unless the company agreement says otherwise. That shield doesn't cover a loan you personally guarantee, which most DSCR lenders require anyway.

3) Anonymity isn't protection. Privacy and asset protection are separate goals and get solved with different tools.

So the practical order is: make sure the deal works on its own numbers first, then decide which structure fits. Talk to a local attorney about the entity and an insurance agent about umbrella coverage. General info, not advice for your situation.

— Jake Latimer, Blueprint Advisors, The Woodlands/Houston

Brad Schroeder · Answer

@Henry Clark , You make a good point on estate planning. I assume the plan would need to be updated with every property purchased which would be additional costs that should be figured into the deal.

@V.G Jason , I do believe in LLC's which is why I am trying so hard to own properties that way.

I have been told by lawyers here in Indiana that piercing the corporate veil is extremely uncommon and not likely to happen.

If anyone has had any personal experience with a plaintiff attempting to pierce the veil and would care to share, I'd love to hear about it. Feel free to DM me.

Some of you have mentioned having good landlord insurance. Is there anything particular I should look for in a policy or questions to raise to my agent?

Henry Clark · Answer

OP no extra cost for new asset. Just buy under the LLC or Trust name.

About liability you need to ask yourself.

• Anyone can be sued.
• LLC veil can be pierced if you are derelict
• Insurance won’t cover if you are derelict

Anyone can be sued.

LLC veil can be pierced if you are derelict

Insurance won’t cover if you are derelict

Your exposure will be due to your policies and procedures. Even if a claim goes against you it will be less if you had good policies procedures, required renter insurance with you as additional insured. Even if they don’t take out insurance.

V.G Jason · Answer

Every lawyer has an incentive to tell you that because they get to draw up the LLCs, the agreements, etc. You need to ask them how, and ask them how they're setting you up to that. Ask them if it's happened to them-- what did they do? Then be the devil's advocate.

To keep it separate-- you literally need to do everything separately. Bank accounts at minimum, mailing address, etc. There should be zero confusion, zero link between you and the entity at the financial & operating levels.

V.G Jason · Answer

Always an LLC, but it’s entirely useless if it just exists on paper. You have to enforce absolute, ruthless separation between the entity and yourself.

I know it works because it has protected me firsthand.

To the skeptics always demanding “proof” that an LLC actually shields your assets, it's kind of funny. When an LLC does its job perfectly, its because the victory is dead silence.

And rarely will anyone go online to broadcast that they were legally targeted and had to use their entity as a shield to survive. Why the hell would anyone advertise that?

Henry Clark · Answer

OP. Have a lawyer also review your LLC operating agreement.

All lawsuits are to be in your jurisdiction. Not in another state. Have that in your rental contract.

You can vote to cancel distributions from your LLC at anytime. No one wants to sue if there is no cash stream.

Divorce, death dissolving business, valuation, 1st right of purchase, etc. You have a greater chance this happens than a lawsuit.

If your concerned and haven’t planned:

Power of attorney

Medical power of attorney.

Bank accounts TOD

Term life insurance

etc.

Henry Clark · Answer

OP

LLC no impact on financing.

Asset protection.

LLC No impact on your liability.

IF. IF. You don’t have procedures and policies. Court will “See” thru the veil.

Why did you not clear ice snow? Or remediate black mold? Fix the sidewalk? Remove the dead tree?

Why did you not rent to me- I’m Vulcan, 11 toes, from Croatia, belong to a Coven??? Documentation and process.

You can still get sued and lose in the above even with policies and procedures. But the judgment will be less.

Insurance- will help, but only if you followed good practices.

So LLC, Policies/processes/documentation have your insurer audit you, Insurance.

Require all of your tenants to have insurance with you every year listed as Additional Insured, renew every year. Make part of your rental agreement. Offer them insurance coverage source.

Vendors- every year have them add you as additional insured.

If these are new questions for you on your rental business. You need to address your professional business also.

Have your lawyer review your rental contracts.

Divin Kanyama · Answer

@Brad Schroeder , this is a common challenge for newer investors. Owning a rental personally is not automatically too risky, and an LLC is not a complete shield—especially when the loan requires a personal guarantee or the owner is personally negligent. For many small landlords, the first layers of protection are strong landlord insurance, adequate liability limits, an umbrella policy, good leases, proper maintenance, and careful recordkeeping.

It usually does not make sense to force a property into more expensive business financing if the higher rate turns an otherwise workable deal into a loss. Some investors purchase with conventional financing in their personal name and later discuss a transfer to an LLC with their lender, insurer, attorney, and tax adviser—but transferring without approval can create loan or coverage issues. Other options may include a lender that permits vesting in an LLC at closing while still requiring a personal guarantee.

For privacy, an LLC may reduce how prominently your name appears, but state filings, loan documents, permits, and other records can still reveal personal information. A registered agent or business mailing address may help, subject to local rules. The bigger question is whether the $100,000 property remains a good investment after including realistic expenses and the cost of proper insurance. If it does, personal ownership with strong coverage may be a reasonable starting point; if privacy or liability exposure is especially important, review the structure with a local real estate attorney before closing. The right entity should support a sound deal—not turn a weak one into an expensive deal.

Erik Estrada · Answer

There are a few lenders that can below $100k minimum loan amount

Financing - to LLC or NOT to LLC?

Financing - to LLC or NOT to LLC?

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