Do You Need an LLC for Your Rental Property?

Do You Need an LLC for Your Rental Property

With interest rates continuing to hover around record low rates, Gen X’ers and Baby Boomers are swallowing up investment properties all around the United States. Even though recently an article came out from the N.Y. Times that home ownership is down to a record low of 62.9% (which is the lowest in fifty years), the developments being built around your neighborhoods seem to continue to sell at a record rate.

One of the main questions we get all the time from people who buy investment real estate or rental properties centers around whether to hold the property individually, hold it in an LLC, and whether or not you need a separate company if you plan to manage these properties on your own.

Let’s go through an example of why you might want to have an LLC. You have a tenant who has rented your property up on the lake this summer. They decide to bring a few friends out to your property and one of their friends becomes intoxicated and decides to jump off of your boat dock and hits their head in the process. Even though you may have done nothing wrong, the renter claims that the boards on the boat dock were loose and this is why the drunk friend took a header. Since you are the one who has the money, they decide to sue you. This is the main reason people will set up an LLC to protect the rest of their assets. The LLC will shield you from personally getting sued even though the LLC could face a lawsuit in this particular case.

An LLC (a limited liability company), is a business structure that allows for something called pass through taxation. The LLC can be set up as a sole proprietorship, a partnership, or you can elect to have the LLC taxed as an “S” corporation. Within this LLC, you can collect rents, pay expenses, and then determine what profit you have earned at the end of the year. Remember that LLC’s aren’t free and will add to the annual cost of you filing your tax returns. An LLC can cost from a few hundred dollars to a few thousand dollars to set up initially, plus costs that you need to pay your state. What you will need to determine is if the asset protection strategy of setting up an LLC makes sense for your situation.

One challenge you could run into if you have an existing property with an existing mortgage is whether or not you can move the property into that LLC. The reason being is that the bank may see this transaction as a sale of the property to the LLC and this could cause you to lose out on the great low interest rate you have locked into at this time. It is better to get the LLC established at the time you actually buy the property and take out the mortgage. This gets even more complicated if you have multiple people on the property and mortgage.

If you have multiple properties, it will likely make sense to get each property into its own LLC to limit liability. If you own enough properties and are considering being your own management company, you may set up your own holding company that manages the properties and holds the properties. It is advisable to seek out a quality lawyer who has experience doing this if you go that route.

While interest rates continue to stay low and no end in sight for the declining rate of home ownership in America, more and more people in their 30’s, 40’s, and 50’s will continue to buy investment property. Think about whether or not an LLC will make sense for you when it comes to your overall financial plan.

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Ted Jenkin

Ted Jenkin, is co-CEO and Founder of oXYGen Financial and is a top ranked personal finance blogger at He is also a weekly contributor to the Wall Street Journal. Request a FREE, no obligation consultation: Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. Kestra IS and Kestra AS are not affiliated with any other entity listed. and