Should You Use an LLC for Rental Property?

Should you put your rental properties in an LLC?

The short answer is “YES” because it protects you.

I have all my rental properties grouped into a few different LLC’s. I’ll elaborate on the reasons below, but if you own a rental property and want to protect your personal assets, starting an LLC is definitely something you should do. I HIGHLY RECOMMEND using a company called CorpNet to incorporate your LLC. It is vastly less expensive than using an attorney, and they will handle everything for you.

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Asset Protection
The top reason to put your rental properties into an LLC is to protect your other assets.

Let’s look at an example. Your tenant trips and falls down the stairs suffering a serious injury. They hire a lawyer and decide to sue you. If your rental property is in your own name, they will be suing you personally, going after your personal assets, savings, etc. You are not protected.

Now lets say a year ago you were smart and had started and LLC called “ABC LLC.” You had deeded your rental property (learn about this here) into the LLC. The lease signed with the tenant names the Landlord as ABC LLC, not you. So the same tenant falls down the stairs and decides to sue. They will now only be able to sue ABC LLC. If they win, the most they could take from you would be the assets owned by the LLC (the house). They could not go after your personal savings, investments, or get a judgment against you personally. So the small cost of starting an LLC literally saved you from financial ruin.

Remaining Somewhat Anonymous
Where I live in Texas, if someone wants to snoop on someone else, they go to the County appraisal district website and type in that person’s name. If that person owns real estate in their own name, you can see all their properties and the value of those properties. Do you really want the world to easily access how many properties you own and the value of them? I’d rather have people think I’m broke. Imagine if a lawyer is trying to decide whether or not to sue you. He may do a quick search there to see if you own real estate he can go after. It’s better if he finds nothing. Keep in mind that nothing is totally anonymous because if someone digs deep enough they could still figure out the owner of the LLC.

Tax Reasons
This will depend on each person’s individual situation, but generally there will be some kind of tax advantages you can find. Some examples that could apply to you would be avoiding double taxation (pass through taxation), reducing self employment taxes, and other allowable write-offs. My tax guy had me do the “Subchapter-S election” (makes the LLC be taxed as an S-corp) so any profit from my LLC just passes thru and shows up on my personal return.

What are  The Steps to Put Your Rental in an LLC?
It’s really quite simple. Here are the steps:

Pick a name (Fun Part)
Use a service like CorpNet to find a name nobody else is using. CorpNet even offers a Free Corporate Name Search. You really should have fun with this, but also pick something that sounds professional. Many people pick a random word (maybe “pencil”) the word “properties,” so for example “Pencil Properties, LLC” would be the business name. I used to browse through thousands of names of paint colors to get ideas for LLC names. Once you nail down the name, follow the directions and order the LLC. All the paperwork you need will be sent to you.

Take it to the Bank
Once you get the LLC Paperwork, take it to your bank and open a business bank account. This is important. If you are ever sued, you need to show that you kept the LLC finances separate from your personal finances. So from now on, when you collect rent, it goes into the business account. When you pay mortgages or other expenses, do it from the business account. Keep your rental business separate from your personal finances. Of course when the money builds up in your business account, you will transfer it to your personal account (that’s the reason we do all this work, right).

Put the Property into the LLC
Now it’s time to protect yourself! Simply create a quitclaim deed that “deeds” or transfers the ownership of the property from your own name to the LLC. The deed will list you as the “Grantor” and the LLC as the “Grantee.” This deed then must be filed in your county records (you can do this by mail). This part is easier than it sounds- you can do this. To create a simple quitclaim deed, check out this LawDepot Quitclaim Deed Form. Then go to the website of your County Clerk and look for instructions on how to “record” or file a deed. There is usually a small filing fee.

Changes future Leases
So now you own an LLC and the LLC owns the rental property. Therefore the Landlord is now the LLC. So when you sign a lease with a tenant, on the lease the Landlord should be “ABC LLC,” NOT you. So if a tenant ever wants to sue over something, and goes to visit an attorney with this lease, the attorney will see that he needs to sue ABC LLC (let’s still hope your LLC never gets sued!).

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