Owning and managing a rental property is a big investment that has massive potential to generate rental income. However, it also comes with its risks. One of the ways to reduce the risk associated with real estate investments is to create an LLC and work with professionals who can streamline the business side of the rental process. Our team shares what you should know about creating a rental property LLC.
What Is an LLC?
An “LLC” is a limited liability company, which is designed to mitigate some of the risks of personally owning and operating a business. The LLC business structure makes sure you are not personally responsible for debts or claims against the business. For this reason, it is a popular way to set up a business.
There are multiple ways to set up an LLC, including:
- On your own
- In a partnership
- With a group
In any of these scenarios, the LLC owns all the assets and has a tax ID number, bank account, and keeps business transactions separate from you personally. It is important to remember that although there are advantages to creating an LLC, you must still have strong business strategies in place to be successful. This is particularly true when considering an LLC for your rental property.
RELATED: Which Type of Rental Property Should Investors Purchase?
What Are the Benefits of an LLC?
When deciding if an LLC is right for you, there are several key benefits to creating an LLC for rental properties.
1. Limits Your Personal Liability
When you own a rental property, your personal assets are at stake if anything were to happen. For example, if somebody files a legal claim against you, it puts you at risk of losing your personal assets in the lawsuit. However, when you create an LLC, only the assets owned by the LLC are vulnerable.
2. Protect Individual Assets From Each Other
Another benefit to creating an LLC is being able to keep your rental properties or other assets separate from each other. This is particularly helpful if you have multiple rental properties and want to keep each of them separate from risks and liability claims. It protects the others from any individual claims against one of your properties when you create separate LLCs for each property.
3. Tax Benefits
You may have heard that corporations are taxed twice—once on the corporation’s profits and again when the owners are taxed on their income from the business. However, an LLC benefits from a pass-through tax, which allows the LLC’s income to pass through directly to the business owner. That way, the income from your rental property LLC is only claimed once on your tax return.
4. Separate Business and Personal Expenses
When you operate your rental property as an LLC, you are able to keep business expenses and bank accounts separate from your own. This way, you can easily claim operating expenses while doing your taxes because they are entirely separate from your personal expenses.
Are There Drawbacks to Creating a Rental Property LLC?
While there are several benefits to creating an LLC as a rental property owner, there are also some drawbacks to consider before making your decision.
1. Set-Up Costs and Filing Fees
When you set up an LLC, there are costs associated with creating the LLC. In addition, you are required to pay filing, administrative, and regulatory fees to maintain your LLC every year. Before you commit to the LLC, check your state’s LLC requirements to get a better understanding of how much setup costs and fees will be for you.
2. Administrative Costs
Operating the LLC separately from your personal assets is generally a good idea. However, in many ways, it means you will be doing double work when it comes to maintaining bank accounts, balancing expenses, and ensuring leases, contracts, and other legal documents are filed under the LLC name. This can increase your administrative costs in the long run.
3. Time Consuming
Another element that can come into play when operating your rental property as an LLC is the time it takes to do it right. Just as you will be dealing with more administrative costs, you may also find yourself spending more time on the administrative duties associated with running a successful LLC.
4. Difficulties with Financing
One of the biggest drawbacks of an LLC is difficulty with financing. Not only is it more challenging to secure financing options, but it is also usually more costly due to higher interest rates compared to individuals. An LLC needs to demonstrate a track record with a bank and get commercial loans that require bigger down payments on a shorter term.
Should I Put My Rental Property in an LLC?
Weighing the pros and cons of creating an LLC for your rental property, it may or may not be the best decision for you. If it is important that you protect your personal assets and operate multiple properties separate from each other, it may be time to consider an LLC. However, it is vital that you understand the risks and challenges that come with it.
A lot of the challenges of running a rental property LLC are the cost and time associated with administrative issues. Working with a professional property management company can help you streamline these business processes to minimize drawbacks and make the most out of this type of corporate business structure.
How Can a Property Manager Help with a Rental Property LLC?
An experienced property manager can help you build a strong rental income business by handling many of the administrative, financial, and managerial aspects of your LLC. These include:
- Lease agreements
- Security deposits
- Collecting rent
- Statements and accounting
- Tenant communication
Whether you are a landlord who personally owns a rental property or have created an LLC, the Black & Cherry property management team can help you maximize your rental income while freeing up your time to focus on your investments. To learn more about our Henderson and Las Vegas property management services, contact our team today to schedule a free consultation!
