The Pros and Cons of Buying Real Estate as an LLC

basecamp Nov 16, 2021

Many people investing in real estate for the first time are wondering whether they should do so under LLCs, since they can provide tax advantages and limit liability while building wealth. In this article, we discuss the pros and cons of purchasing property as an LLC.

Investing in real estate is a great way to build wealth, and it’s a strategy that is increasingly used by businesses, rather than individuals. Because of this trend, many individuals who are interested in investing in real estate for the first time may be wondering whether they should buy an investment property in their own name or in a limited liability company, or LLC.

Unfortunately, there’s no simple answer. There are a multitude of factors that your client should consider, such as whether they have prior experience in real estate investing, what they intend to do with the property, whether they have an exit strategy and the risks associated with owning property.

The Benefits of an LLC

An LLC is a business structure that limits liability, meaning that the LLC’s assets and liabilities are separate from the business owner’s personal assets. If something happens to the business, such as a lawsuit or bankruptcy, only the business assets are liable, thereby protecting the business owner from losing their home or car, for example.

Should you choose to purchase real estate and become a landlord, the primary benefit of holding property under an LLC is that the tenants can sue only the LLC and not you should something happen. There are exceptions in extreme cases of fraud or neglect, but the bottom line is that the rental properties would be the only assets at stake in case of a lawsuit. It’s even possible to form separate LLCs for each property to further reduce liability.

There are other advantages of holding a property under an LLC. For one, it’s easier to invest with partners in an LLC or to add an additional member by selling a percentage of the LLC. There are also tax advantages to be had by working with an accountant or a lawyer. Finally, forming an LLC allows the owner to separate their real estate income from any other income, making it easier to keep track of real estate activities.

The Challenges of an LLC

Despite the benefits, there are reasons to avoid an LLC, especially if you are investing in real estate for the first time. Although LLCs eliminate personal liability for properties, if you fall into financial difficulty, your bank may decide that your personal mortgage and property take priority over their commercial properties.

This is why mortgages for an LLC are more difficult to obtain, interest rates are generally higher and larger down payments are expected.

One must also consider the expense and hassle of setting up an LLC. The filing fees range anywhere from $40 to $800 depending on where the property is located. There is also the cost of hiring a lawyer to make sure that the LLC is set up properly, and you absolutely want to go through a lawyer rather than trying to set it up yourself. You will also need to pay an annual fee to maintain the LLC. While these costs are generally small compared to the cost of buying a property, it is something to consider.

How to Buy Real Estate in an LLC

Fortunately, buying real estate under an LLC is not significantly different from buying real estate as an individual. However, it is important that you have the LLC set up well before you buy a specific property. A delay while you scramble to form your LLC may lead the seller to look elsewhere.

Once you make an offer and it has been accepted, you will need to go to a lender and discuss the details of getting a mortgage. In addition to the challenges mentioned earlier, you will need to submit personal documents proving your own income, as the LLC will not yet have income or tax records as proof it can pay. When the mortgage is approved, the property will be titled in the name of the LLC.

Partially excerpted by Mark Pierce

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