Owning investment property is a lucrative and exciting venture. With 2,654 new renters entering the market every day, it’s easy to see why. However, there are drawbacks. In an increasingly litigious society, your rental property can easily create liabilities. For instance, a tenant tripping on a wobbly staircase can sue you for damages. This is why smart investors choose to protect their assets through an LLC (limited liability corporation). Let’s go over the reasons why you should consider investing with LLCs rather than personally.
Advantages of Using an LLC to Buy Investment Property
Protection of Personal Assets
You’ll get sued by tenants and predatory litigants for the flimsiest reasons. A disagreement could easily land you in court. Forming an LLC enables you to protect your personal assets since your liability is limited to the amount of equity you hold in the entity. Any amount beyond these parameters is the responsibility of the LLC. This means your personal assets won’t be affected. We recommend that you consult an asset protection expert for sound advice on the type of structure to use for your particular situation. An LLC on its own is not a foolproof solution.
Separation of Properties
Using an LLC not only allows you to separate your property from your personal assets but also your rental properties from each other. Setting up a separate LLC for each property insulates it from liability claims. This means that if someone filed a lawsuit on one property, then the rest of your properties would not be affected by the claim. If you have multiple pieces of property, go for a series LLC instead of a normal LLC. A series LLC includes an umbrella LLC that oversees other LLCs that are separate legal entities for liability purposes. Some of the benefits of setting up a series LLC over an LLC include:
- Lower startup cost
- Less Administration
- Less Complex Structure
- Less Sales Tax
- One tax return
- One state registration
Establishing an LLC allows you to take advantage of “pass-through” taxation whereby all income passes through to you as the business owner. This way, you get to report the LLCs losses or profits on individual tax returns, which attract a lower rate. This reduces the amount of money taken out of your income for taxes.
Easier Ownership Transfer
Want to transfer your property through gifting or inheritance at some point? Then an LLC is the way to go. You won’t need to execute a new deed to transfer ownership shares in the LLC, and you’ll have less paperwork and lower fees. It is recommended that you set up the LLC sooner rather than later to avoid the hustle of trying to convince your lender to approve the transfer after you’ve made the purchase.
Whether you have one or several properties, you will definitely benefit from creating an LLC and structuring your business the right way. Get in touch with us at (512) 757–3994 for your free asset protection consolation.