Should You Be Financing a Rental Property as an LLC?

When investing in rental properties, there are a lot of responsibilities to juggle. On top of taxes, homeowner’s insurance, linens, and cleaning costs, you’ll have substantial liabilities. Engaging in real estate investment and renting out a property as an individual can be extremely risky.

Unlike other aspects of being an entrepreneur, the risk isn’t noble, or advantageous, it’s impractical and potentially ruinous.The smart thing to do is to finance a rental property as an LLC, or limited liability company.

There are a number of strong reasons why you should not finance your rental properties as an individual. First of all, when you take out a loan to acquire a rental property as an individual, your personal assets can be counted as collateral. Given the vicissitudes of the rental market, this is not a good idea.

Savvy real-estate investors separate personal assets from the equation by applying for financing as an LLC.

While there are other corporate forms to take when looking to protect your personal assets and identify yourself of liability, the LLC is arguably the most advisable to form to take.

Why not just file under subchapter S? For one thing, doing your taxes will be a whole lot simpler if you file as an LLC instead. For limited liability companies, taxes only have to be done once per annum on April 15^th. Subchapter S corporations are subject to more paperwork, and you’ll be busy enough running your rental properties.

By forming an LLC, you will be enveloped in a blanket of legal protection that helps offset any liability.Many rental property owners run into legal issues with the properties, or tenants more specifically.Anything can happen, and investors who ignore this fact often run into trouble. For example, if not protected by LLC status, you can be sued and held personally liable for damage to neighboring properties. Your guests, if aggrieved, can also sue you.

The risk just isn’t worth it. There’s no glory in being a sole proprietorship if you end up getting sued by tenants, or even your neighbors if your occupants damage adjacent property. The costs of such lawsuits can be enormous and overtake any profit you make with your rental.

Another major advantage of financing your property as an LLC is that there are two substantial tax benefits you can enjoy. Firstly, you can opt to be taxed as an individual sole proprietor which will mean your revenue would be treated as personal income by the IRS.

The second option is much more attractive as you can choose to be taxed as a corporation. Even your initial startup expenses such as hiring an accountant, tax professional, and an attorney to draw up the paperwork are amortizable and can be great tax deductions.

The benefits of tax deductions like these become more significant with the amount of rental properties you accumulate. The money you can save on deductions each tax period are compounded with each additional property in your possession. 

Now that you know how important it is to finance your rental property acquisitions as an LLC, you might be wondering how to go about it. For the most part, creating an LLC is a straightforward process.

To start, you’ll need to pick a name for your LLC. Some states have laws regulating what can be included in the name of an LLC. For the most part, steer clear of words like bank, city, insurance, or corporation. Your company name must end with an LLC designation like limited liability company, limited company, or an abbreviated form of the two such as, Ltd. Liability Co. Also, be sure to pick something original as it is prohibited to choose a name that is already in use on the market.

After filling out the appropriate paperwork with your state’s LLC filing office, you’ll need to pay the filing fee. The fee varies from state to state but generally falls under a range of between $100-800. The Articles of Organizationcomprises most of the paperwork you’ll need to complete.

While you can fill out the paperwork and submit everything to the state yourself, it’s a good idea to have an attorney fill it out for or with you. A lawyer will know what would be most advantageous for you and be able to point you in the right direction. If you’re going to go through the trouble to form a limited liability company, it pays to do it right by hiring an attorney to help you through it.

If you have a partner, or multiple partners in the venture, hiring an attorney to do the paperwork is less an option than a necessity. Having it drawn up by a legal professional when everyone is in an agreement can save you plenty of headaches down the line.

Once you have completed the crucial step of forming an LLC, you are almost ready to plunge into the rental market. You’ll still need to find financing to pump your company full of capital to start snatching up properties, and working with the right financier can make all the difference.

Companies like Vacation Rental Property Loans have been helping launch rental home ventures for years, making us one of the most trusted creditors around.

Once you’ve got the protection of an LLC under your belt, you’re ready to apply for a loan with Vacation Rental Property Loans, call today!