How to Buy Rental Property with an LLC

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Contributor, Benzinga
September 15, 2023

If you plan to create a rental business, the first step is often to create a limited liability company (LLC). Can you buy a property with an LLC? Yes, you can. Buying a rental property requires in-depth market research and understanding. But beyond that, using an LLC requires a few additional steps. Read on for how to buy rental property with an LLC. 

Can You Buy a Rental Property With an LLC?

You can buy a rental property with an LLC. Investors choose to buy a rental property with an LLC to reduce personal liability and the ability to invite new members. Sometimes, lenders are more hesitant to provide financing to an LLC. However, you can secure financing and buy a property with an LLC through private financing, cash or working with mortgage lenders. 

Requirements to Buy a House Under an LLC

While there are no specific requirements for purchasing a house or rental with an LLC, you should be aware of possible additional criteria from lenders. You might get higher interest rates on an investment property or have difficulty qualifying for a mortgage. 

To increase your chances of securing a mortgage for a rental property purchased by an LLC, consider a larger down payment and build the credit score of the LLC to increase your chances of approval. 

Steps for Buying Rental Properties with an LLC

Here are the steps to buying rental properties with an LLC.

Choosing the Right LLC Structure for Buying a Rental Property

You can choose from different LLC types, such as single-member LLCs, multi-member LLCs, Series LLCs (only available in certain states) or anonymous LLCs (certain states). Once you've decided on an LLC type, you can form an LLC, depending on state requirements, within a day to a month. 

Establishing an LLC

The steps to establish an LLC are:

  1. Select a unique name for your LLC
  2. Register your LLC with the state
  3. Obtain an Employer Identification Number (EIN) with the IRS
  4. Draft an Operating Agreement
  5. Open a business bank account
  6. Get any state or local licenses or permits
  7. Get relevant business insurance

Once the LLC is established, you're ready to purchase a property. You can also use an existing LLC to buy a property as long as rental properties fit with the stated purpose. Learn more on how to start an LLC

Financing Your Rental Property with an LLC

If you plan to apply for a conventional mortgage, the first step to securing financing may be building business credit for the LLC. You'll need to establish a separate business bank account, obtain a business credit card and consistently make on-time payments to vendors and suppliers.

Once the LLC is established, various financing options are available to purchase a rental property. These include:

  • Conventional mortgages
  • Commercial loans
  • Portfolio loans
  • Partnerships with other investors
  • Private loans
  • Mortgage brokers

You can consider networking with other investors or securing private loans to secure financing that's not conventional. In addition, mortgage brokers can help you connect with the best options available. Find more ideas for financing rental properties here

Identifying Potential Rental Properties

Once you've established which financing options to pursue, it's time to set investment criteria for rental properties. This process includes conducting thorough market research and evaluating property opportunities based on profitability, long-term cash flow and return on investment (ROI). You can work with local real estate agents to identify target markets and research comparable properties. 

Making an Offer and Closing the Purchase

Once you've located the property, it's time to make an offer and negotiate the purchase price with the seller. After the seller accepts the offer, you'll need to secure financing and obtain loan approval. This is also the time to perform thorough due diligence with an inspector and appraiser. Once everything is satisfactory, you can finalize the purchase agreement and close the deal.

Operating and Managing the Rental Property with Your LLC

After the property purchase, you'll need to act as property manager or hire property management services. Responsibilities in managing a rental property include:

  • Marketing for and securing tenants
  • Tenant screenings
  • Maintaining proper record-keeping and accounting for the LLC 
  • Managing tenant relationships 
  • Collecting rental income collection
  • Performing property maintenance and necessary repairs

While you can do this yourself, if the time commitment is too great, a property management company typically takes a set percentage of monthly income. Using professional management allows you to earn on the rental property without active day-to-day property management. 

Insurance and Risk Management for Rental Properties Owned by an LLC

Even though a limited liability company protects your personal liability, you'll also want insurance to protect the LLC. Consider obtaining landlord insurance to protect the LLC from liability claims. You'll also need property insurance to protect the investment value. 

Another good option for landlords is umbrella liability insurance. An umbrella policy covers various liabilities that could arise as a landlord, not only those related to the rental property.

Tax Considerations for Rental Properties Owned by an LLC

When a rental property business is an LLC, the income is generally taxed to the LLC's members as pass-through income. That means you must report all LLC income on your individual income tax return or elect for the LLC to be taxed as an S-corporation or C-corporation. 

The LLC can report rental income and qualified business expenses to reduce total taxable income. Consider using tax deductions or tax advantages available to LLCs. You can consult a tax professional like a CPA for guidance and to ensure correct reporting and compliance.

Advantages of Buying Rental Properties Under an LLC

You can take advantage of several benefits when you buy a rental property under an LLC, including:

  • Protection of personal assets
  • Pass-through taxation
  • Easier to separate business funds from personal funds
  • Makes it easy to partner with other investors
  • Protect the property owner's privacy

Disadvantages of Buying Rental Properties Under an LLC

The disadvantages of using an LLC to buy a property include:

  • Additional fees to start and maintain the LLC
  • More challenges to secure a conventional mortgage
  • Can be difficult to transfer an existing rental property into an LLC if you have a mortgage on the property

Becoming a Real Estate LLC Owner

Whether buying your first rental property or planning to build a real estate investing business, using an LLC to purchase properties and grow the business can make sense. You gain liability protection, privacy and simplified business entity management. As an investor, having a business entity also adds credibility to your business and makes it easy to add other investors. 

Frequently Asked Questions 

Q

What entity is best for rental property?

A

If you want to use a business entity for a rental property, the simplest solution is often an LLC. You could also consider an LLP or forming an S-corporation.

 

Q

Is it better to buy property as an LLC or S Corp?

A

Many investors prefer to use an LLC to purchase a rental property. However, there may be cases, such as establishing a rental property business, where an S-corp offers more favorable solutions.

 

Q

What rental properties make the most money?

A

Generally, multi-unit or high-tenant properties are the most profitable real estate investments. With multi-unit properties, you have diverse income streams that can hedge against loss of income in case of vacancies.

About Alison Plaut

Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.

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