BUYING RENTAL PROPERTIES IN AN LLC (PART1)
Before I get started, let me say, I’m not an attorney or CPA so the information in this post is the result of the information that I’ve gathered as a result of personal and client experiences.
Most of my clients form an LLC for their rental portfolio because of ONE reason…limiting liability that falls on them personally. Most of the entities are pass-through entities when it comes to reporting income or paying taxes, but if anything happens at one of their properties that’s in the LLC the liability may fall on the entity and it’s assets rather on someone’s personal assets.
I’ve seen investors form individual LLC’s for each property but that seems to be super cumbersome and time consuming given all of the paperwork and tax filings that you would have to keep up with. Most investors that I know, will put up to 5 or 6 properties in one entity.
Another positive of using an LLC for your portfolio is the fact that you can avoid double taxation as the entity itself can be a pass through entity where any tax liability/income passes through to the members of the LLC.
Each LLC should have an operating agreement that outlines who is a managing member or what percentage each member owns in the property. You have a high degree of flexibility when it comes to adjusting the percentage of ownership or transferring ownership of a property.
If you’re in a state where maintaining an LLC is costly, some folks opt for leaving the property in their name personally and adding an umbrella liability insurance policy so that you’re covered. You’ll want to read the fine print and rules about liability coverage and consult with an attorney and/or insurance guru.
Click HERE to see one more important consideration you should take if you’re considering getting rental property in an LLC.