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Can You Buy a Rental Property Through an LLC?

You can buy real estate through a limited liability company, but here's what you should know first.

[Updated: Mar 04, 2021] Mar 04, 2020 by Matt Frankel, CFP
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The short answer to the question is yes, real estate investors can certainly buy an investment property through an LLC they create. However, that doesn't mean that it's the right move for everyone, and it isn't practical to do in all cases. Here's an overview of why buying a rental property through a limited liability company, or LLC, could be a smart move for you, the downsides you need to consider, and what you need to know before deciding to pursue an LLC-owned rental property of your own.

What is an LLC?

LLC is short for limited liability company. It's a business structure that is a type of pass-through entity. This means that any profit or loss generated by the LLC flows through to its members and is taxed on the individual level.

An LLC can be created with one person (a single-member LLC) or in partnership with other individuals. The exact process of forming an LLC for your real estate investments and the ongoing reporting obligations vary considerably by state, so check with your state government for the specific procedures you'll need to follow.

Advantages to buying real estate through an LLC

Your liability is limited

As the name limited liability company implies, using an LLC, rather than operating your real estate business as a sole proprietorship, can limit your legal liability by protecting your personal assets. While there are some exceptions, such as in cases of extreme negligence, the only assets at stake in legal actions against an LLC are those that the LLC owns. For example, if your LLC owns two rental properties, those are the only assets that would typically be at stake if a tenant were to sue you. You can also create a separate LLC for each property you own, further enhancing your asset protection if someone files a lawsuit.

Investing with partners is easier

You don't have to have an LLC to buy an investment property with someone else, but it can be more convenient to do so through one, especially if each owner has a different percentage ownership, as this will be stated in the LLC operating agreement.

It allows for pass-through income

There are tax advantages through LLCs. Unlike corporations, LLCs pass their income through to the owners. Pass-through taxation avoids the potential of being taxed at the corporate level in addition to paying individual income tax on your rental profits.

It keeps your business separate

Using an LLC to buy an investment property can be a great way to keep your business finances separate from your personal income. If all income is paid to the LLC and all property expenses are paid from the LLC using a separate bank account in the LLC's name, that can make it much easier to keep track of your rental income and expenses.

You'll be anonymous

In most states, it isn't impossible for people to figure out who an LLC's owners are, but it does keep you mostly anonymous. In other words, if you own an investment property yourself, your name is on the deed as the owner of record. If an LLC owns real estate under its business name, that's the name that's listed on the deed, and LLC members are not disclosed. If you own a property through an LLC and hire a property manager to deal with the day-to-day operations, the tenants typically never know the names of the individuals who own the property.

Drawbacks to using an LLC to buy real estate

Despite the benefits, using an LLC to buy rental properties isn't the right move for everyone. Here are a few things to consider before deciding to create an LLC to buy your next investment property.

Personal liability isn't always nonexistent

To be perfectly clear, an LLC doesn't imply that you'll have no legal liability whatsoever in any case. In some cases, you could still be held personally liable even though assets are owned by a business. Talk to an attorney if you're concerned about how much legal insulation an LLC provides you.

Setup costs can be high

Depending on where you live and how comfortable you are with doing legal paperwork, it can cost quite a bit of money to set up an LLC. And most states have annual fees associated with keeping an LLC operational. While it's cheap to set up an LLC in certain places, it's important to do your homework when it comes to cost versus benefits in your state.

Financing can be difficult

We'll discuss this in the next section, but it can be difficult and/or costly to obtain financing for investment properties through an LLC. Obviously, this isn't an issue if you plan to pay cash, but it's still important to know for future investment properties.

The pros and cons of buying real estate through an LLC

Pros Cons

• Your liability is limited.

• Investing with partners is easier. 

• It allows for pass-through income. 

• It keeps your business separate. 

• You'll be anonymous.

• Personal liability isn't always nonexistent. 

• Setup costs can be high. 

• Financing can be difficult.

Can you get a mortgage when buying a property through an LLC?

As mentioned earlier, it can be very difficult to get an investment property mortgage through an LLC, especially if it's a newly formed LLC. Specifically, conforming mortgages (those that meet Fannie Mae and Freddie Mac's real estate lending standards) must be made to individuals, not to any other entity.

There are some specialized lenders that will originate a real estate loan directly to an LLC. Asset-based lenders are one example. These lenders primarily base their lending decisions on the value and rental income potential of the property itself, although you'll likely be asked to personally guarantee the loan. In fact, many asset-based lenders prefer to loan to LLCs and not to individuals.

However, if you choose to pursue an asset-based loan, be prepared to pay a little extra for it. You can generally expect an APR that's at least one to two percentage points higher than you'd pay for a conventional investment property loan. To be sure, asset-based loans can still be a great way to buy an investment property without using your personal qualifications. I've used the asset-based lending route myself. Just be prepared for a bit of sticker shock when you ask for a quote.

Can you transfer an investment property you own to an LLC?

If you own the investment property free and clear, transferring it into your LLC shouldn't be terribly complicated. A real estate attorney should be able to set this up.

However, be careful if you plan to purchase a property, obtain a mortgage in your own name, and transfer it into an LLC later on. Many mortgages have "due on sale" clauses, and although you might not be "selling" the property to your LLC, these clauses can kick in as soon as you as an individual are no longer the official owner of the property.

The last thing you want is to transfer your property to an LLC for legal protection, only to find out that your entire mortgage becomes due right away. The point: Check with your lender before attempting to transfer a property you own into an LLC.

An alternative could be to own the property in your own name, but set up an LLC for the purpose of collecting rent and paying expenses. By having tenants pay their rent to your LLC, you could get the legal protections of the LLC structure without the complications or disadvantages of buying a property directly through an LLC. (Note: This is not legal advice. Talk to your real estate attorney to find out the legal implications of your investment property ownership structure.)

The Millionacres bottom line

Buying a rental property through an LLC is certainly possible. The question is whether it's the best move for you. Not only is the legal protection provided by an LLC not bulletproof in all situations, but there are some other potential drawbacks you should consider.

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