Creating an LLC for Rental Property (2024) - MarketWatch (2024)

LLCs are known for their combination of flexible management structure and tax benefits. Their pass-through taxation status is ideal for real estate investing because many expenses can be written off. This can help you save money on your income tax returns.

Any time real estate investors open their property to renters, long- or short-term, they open themselves up to personal liability risk. If anything — even an accident — happens on your property that involves others, there is a chance that you can get sued for damages. For most accidents, liability insurance will help pick up the tab. However, depending on the limits of your insurance policy, you may be responsible for covering costs that go above your limit.

Without an LLC, your personal assets can be garnished by court order to pay out those remaining damages. However, if your property is held by an LLC, then only the assets of that LLC are at risk. In a worst case scenario, you’ll need to sell the property where the accident occurred (or other properties held by the LLC) to pay off the damages — but your personal wealth can’t be touched even if selling that property doesn’t add up to the total damage sum.

Another advantage to using LLCs to hold rental property is that there are no limits on the number you can start. Some people choose to have a separate LLC to hold each of their properties so they maximize their liability protection.

Lastly, LLCs can have one member (single-member LLC or SMLLC) or multiple members. If investors are coming together to purchase properties for rent, doing so without a multi-member LLC opens each person up to liability risk. The LLC structure provides protection to all investors’ personal assets. Additionally, if there is a strong LLC operating agreement in place, the financial input and output will be easily decided ahead of time, making it a more simple transaction.

Even though you can start an LLC at any time during your rental business operation, the best time to start an LLC is before you purchase your first property that you’ll be renting. This will help you avoid having to transfer the property from your personal name to your LLC, which can get complicated.

Depending on how you purchased the property, you may face unexpected fees when you go to transfer the property. If you purchased the property without a loan, you shouldn’t have any issues. However, if you mortgaged the property, you’ll need to check with your lender to determine whether you’ll have any unexpected consequences.

For example, your mortgage holder might exercise an option to close your loan, triggering closing costs or a “due on sale clause.” If you start your LLC before purchasing any rental properties you can avoid unexpected costs and complications that come with transferring property from one name to another.

When you’re naming your investment property LLC, along with following all state guidelines, you’ll want to choose something that’s simple and professional. In the real estate world, marketing is more about reputation than anything else. Using a formal name (your own name or initials of member(s)) is an easy and professional way to establish your company. Some common state naming guidelines include:

• Your LLC’s name must have some variation of the phrase limited liability company or one of its acronyms (LLC or L.L.C.)
• Your name can’t be confused with a governmental agency (e.g., IRS, Department of Treasury or University)
• Use of any restricted words must be approved by the city or state (e.g., University or Bank)

A registered agent is an individual or company that is responsible for receiving all legal and state correspondence on behalf of the LLC. The agent must be located within the state and accessible during normal business hours. The LLC can choose a member of the company to serve as the agent or they can hire a registered agent to take on the role.

If you choose to use an LLC formation service to start your LLC, many services offer to be your registered agent at an additional fee — some offer free services for the first year after forming your LLC.

Next, you’ll want to complete and file your LLC formation documents with the office in your state that’s responsible for processing business affairs (usually the secretary of state’s office) and pay the filing fee. The formation document (usually called the articles of organization or certificate of formation) differs from state to state but generally requires the following details:

• Name and address of your LLC
• Registered agent name and address
• Business structure (whether your LLC will be member-managed or manager-managed)
• Date of formation
• Date of dissolution (if pre-determined) otherwise agreement that it’s perpetual
• Signature of founding member

Since your LLC will be dealing with real estate, creating an operating agreement should be one of your first priorities. An operating agreement is a contract between members and the company that details the LLC’s day-to-day operations, broad picture goals and financial accounting information. You’ll also want to list information about property management.

Even though only some states require all LLCs to have an agreement in place, we suggest that your LLC have one even if it’s not required in your state — especially if you’ll have multiple investors. Property entails a lot of liability risk and an operating agreement is your core line of defense if your LLC faces a lawsuit.

If you’ve already got property under your personal name, you’ll need to transfer the title to your new LLC. If you bought the property without a loan, you should easily be able to transfer the deed. You’ll need to sign it over to your LLC (usually in front of a notary) and then record the deed by visiting your local courthouse. You may also need to pay transfer taxes when you change the property over to the LLC.

If you have a loan on the property, you’ll need to contact your vendor to see their procedure on transferring title. This might trigger a “due on sale clause” that will close your mortgage and make the remainder of your loan due immediately.

You’ll need to give notice to your current tenants that the property is now owned by an LLC and that payments will be made to the company and not to you personally. Since the current rental contract with tenants will be between you and the renter(s), you’ll also need to update all leases to reflect the contract is now between the renter(s) and the LLC.