With 2,654 new renters entering the market every day, it’s easy to see why owning investment property is a lucrative and exciting venture.
However, in an increasingly litigious society, your rental property can create liabilities. This is why protecting your assets through an investment property LLC (limited liability corporation) is a smart approach.
Let's go through the biggest advantages of using an LLC to buy investment property:
You’ll get sued by tenants and predatory litigants for the flimsiest reasons. Sure, if a tenant trips on a wobbly staircase, they can sue you for damages. But some injuries aren't your fault. That doesn't mean a disagreement won't 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.
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 traditional 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:
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 LLC's 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.
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.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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