Let’s talk about how to buy rental properties with an LLC, otherwise known as a limited liability company.

Now whether you are an aspiring real estate investor or a current real estate investor, you may want an LLC for various different reasons like having a tenant that’s a little “sketchy?”

Now spoiler alert: Buying a rental property with an LLC is a lot easier than you may think, especially if you are a new investor because you don’t have to go backward.

So in this post, we’re going to give you everything you need to know on how to buy rental properties with an LLC.

As well as review the pros and cons of doing using an LLC. Keep reading!

We love real estate investing because it gives you some major tax benefits such as depreciation and tax-free passive income. 

But before we dive in, let us first briefly go over this…

What Is An LLC and Do You Need One?

So there are plenty of real estate investors that buy and own their rental properties under an limited liability company.

This is simply because it separates the legal liability between your personal assets and your company’s assets (aka the rental property).

So, if one of your tenants slips and falls in the bathroom and decides to sue you, the most you could lose would be your rental property, instead of your personal assets like your house or your car.

Now whether or not you need an LLC really depends on your personal situation.

And we think this is a good place to mention that this is not financial advice. This is simply for information and education purposes, but we’re sure you’re going to learn a lot.

You can check out our CFO services for better advice regarding your specific situation.

So if you want to buy rental properties with an LLC, here are some of the things you need to consider before actually deciding to own an LLC.

1. If you have personal assets you are trying to protect, then of course you should have an LLC.

But oftentimes when we investigate the assets that our younger clients have to protect, they often don’t have many assets.

In fact, unfortunately, some people have more debt and negative net worth.

So if you don’t have a lot of assets, that may be a reason not to rush into an LLC and save yourself some money.

2. If you are buying real estate with a business partner.

It may be a good idea to have an LLC because that will open up more ways for partnership.

For example, real estate LLCs make it possible for foreign ownership.

Speaking of foreign ownership, we have a post here that tackles the foreign earned income inclusions that you might want to read next.

3. Financing a property (or getting a loan for a property) can be much more challenging than buying a property as an individual.

That’s because as an individual you have a track record like you have income, your credit history, etc.

On top of that, you would likely have to get a commercial loan that has less favorable financing terms such as:

• higher interest rates,
• larger down payments, and
• a shorter-term loan (no 30-year fixed terms).

This means that you will have higher payments and potentially less profit.

So those would be our 3 top reasons why you may want to or may not want to buy rental properties with an LLC.

One other big question that we want to cover for existing investors is “can you transfer an investment property you already own to an LLC?”

And the answer is yes.

However, an existing property requires a few additional steps and it usually involves working directly with your mortgage lender.

The biggest thing to look out for here is that sometimes there is a clause in your mortgage agreement called “due on sale” which would be similar to selling your property to someone else.

But in this case, you’re like selling it to yourself…

And basically, you may incur closing costs, have to pay a higher interest rate than before, and even pay a title transfer tax.

So yes, you can do it but make sure you are weighing all the pros and cons.

Steps on How to Buy Rental Properties With an LLC

Step 1: Understand the business structure

If you buy rental properties with an LLC that means your company will operate as the landlord, not you as the individual.

So that means you will need to completely separate your personal expenses from your LLC expenses.

And this is very very important because if you mix all your expenses together, then in some courts (like Nevada) you will lose your limited liability protection and be exposed to having your personal assets ceased.

Step 2: Get setup

Here are the things you need to do. Now it sounds a little intimidating at first but all of these things are very easy.

a. Register your LLC

This one’s a no-brainer. If you don’t know how to do it, start by going to your secretary of state website and start the process.

b. Get an EIN number

EIN stands for employer identification number.

This is basically like a social security number but for your business. You’re going to need this number for important documents and setting up assets.

To apply for EIN, simply visit this IRS page.

c. Setting up your business bank account

So remember we want to keep everything separate and business bank accounts are how to do it.

Some you want to set up a business account for all your transactions such as the rental income you collect and the expenses you incur like advertising fees.

So get an account, a debit card, or if you’re comfortable with it a business credit card for all your related rental property transactions, go ahead and get one.

4. Put together an operating agreement

Your lender may want to see a copy of your operating agreement to get your percentage of the business owned and make sure your company is legit.

We have a post on how to set up an LLC operating agreement so be sure to check it out right after you finish this one.

Step 3: Get a mortgage loan under your LLC’s name

There are three types of loans we want to talk about for your LLC.

• Conventional mortgage

So you can get a conventional mortgage under your LLC name and get pretty good interest rates too. But it is definitely a hassle.

Of course, most conventional lenders don’t want to write a mortgage for an LLC, they aren’t designed for it and make it super difficult for you.

On top of that, most conventional lenders will report the mortgage on your personal credit report.

And this is a problem because you are typically only allowed four mortgages on your credit report before they stop lending to you.

So if you plan to build a portfolio of rental properties then you are going to hit a ceiling. But again, you can still talk to your current lender and try to make it happen.

• Portfolio loan

A portfolio loan is a loan that the lender keeps in-house, within their own portfolio, rather than selling it off on the open market like conventional lenders.

With a portfolio lender, they don’t report mortgages on your personal credit report which means there is no limit to the properties you can buy.

In fact, you actually get rewarded for having more properties in the way of getting lower interest rates.

They will recognize that you have more experience and in their eyes, you would be a less risky borrower.

And the icing on the cake is that getting portfolio loans is cheaper, faster, and more flexible.

For example, not only can you get a mortgage under your LLC name, but you can get mortgages under other types of legal entities as well.

So portfolio loans are more closely related to commercial loans with great advantages.

• Rehab loans

Lastly, for properties that need to be renovated, you have a few options, but a popular one is getting a purchase-rehab loan.

Rehab loans often come from hard money lenders, crowdfunding websites, portfolio lenders, community banks, and even private investors.

These are typically short-term loans that just help you get through a renovation or rehab project, so the interest rates you pay are a lot higher.

And after the loan ends, you still need to get a long-term loan so you would need to refinance or apply for a loan likely by using one of the first two options.

So that’s how to buy rental properties with an LLC. Now since you made it this far, we have a few bonus tips for you if you end up using an LLC.

Bonus Tips If You Buy Rental Properties With An LLC

Tip 1: Keep cash reserves

Many new investors focus only on the down payment and minor costs to acquire the home, but don’t there are other fees to consider.

For example, the lender may have administrative fees, processing fees, settlement fees, and “we’re charging because we can fees.”

On top of that, some lenders may require you have cash reserves for at least six months in the event that something unexpected happens.

Of course, even if the lender doesn’t require it, it’s still something you should have because you never know when you may have unexpected expenses such as:

• long-term vaccines,
• repairs,
• legal fees

…and so on.

Tip 2: Are you completely protected if you default on your LLC mortgage?

Now just to clarify, this question is talking about if you just stop paying your mortgage, not in the case where something like a tenant sues you.

So again, this is especially for new investors who don’t have a track record yet.

Because many lenders will have a clause that says something along the lines of even though the LLC is the borrower of the loan, you are personally guaranteeing the payments.

Therefore, you are personally liable for the mortgage, meaning the lending company can come after you and your personal assets.

So moral of the story, don’t think you’re off the hook for the loan just because its in an LLC name and make sure you read your mortgage agreement.

Wrapping Up

We’ll close with agreeing that setting up an LLC is pretty easy to do, but just comes with a few extra steps and costs for that extra limited liability protection.

So always make sure that you personally weigh the pros and cons to make the best decision for you.

If you need help with your wealth management, our team of LYFE savers is here to help you out. Get in touch with us today!