One of the most lucrative and exciting decisions you can ever make is to own investment properties. But, if you are planning to invest in real estate, whether for resale, a long term rental, or a vacation rental, you have to keep in mind that these properties can create liabilities as well.
If you have a real estate property, there is a chance that you plan to place it in a limited liability company or LLC. In case you don’t know it yet, protecting your assets is one of the primary reasons why an LCC is being formed in the first place. For you to decide if owning real estate under an LLC is for you or not, you might want to know its different pros and cons.
Pros of Owning Real Estate under an LLC
- Asset protection
This is among the top reasons investors are turning to LLCs. There will always be liability involved if you buy a real estate property and decide to rent it. If ever the tenant gets injured on your property, he or she will most likely collect damages through filing a lawsuit against you, the property owner. Through owning real estate under an LLC, you can keep your personal assets protected.
- Protection in the event of lawsuits
If you ever find yourself in a lawsuit related to the rental property you own, it is very likely that you will be named in this lawsuit. It means that you need to make sure that your personal assets will not be taken. But, if this property is under an LLC ownership, you as the investor will be shielded through the protection of the company. Any personal asset you have will not be exposed.
- Ownership transfer
When you are an LLC owner, you get the chance to transfer the ownership shares in the LLC through inheritance or gifting with no need to execute a new deed. It means less fees, less paperwork, and flexibility if you wish to transfer your shares.
Cons of Owning Real Estate under an LLC
If you have plans to receive funding from a lender, you shouldn’t have very high expectations because many lenders are not that forthcoming when it comes to lending to LLCs. Even when they decide to veer away from the norm, you still need support from your credit history and your own name. Although it is possible, the road is not an easy one for lenders.
Even if this factor is dependent on different variables like your hired lawyer and where you live, if you choose to form an LLC, you will still fork out some cash. Since you will establish a company, you will have to pay the costs of setting up the LLC. You also need to pay its yearly fees. Some might not be so bad, but a place like California can run you $800.00 a year. Aside from taxation, that is just an annual fee for a basic LLC.
- No 100% guaranteed asset protection
There are cases when lawsuits can pierce LLC’s corporate veils. You have to know these situations before you form an LLC. Even though lawsuits don’t mean happy times, there are instances when the situation can become more complicated when you have an LLC because it is not easy to reach resolutions. Typically these involve obvious cases of fraud by the owners of the LLC. Setting up a protecting LLC just to fraud people yet protecting your assets is not going to go over well. Also, things like mixing personal and business finances can't pierce an LLC veil. It is important to understand all aspects of this, so please consult a lawyer if your goal is to start an LLC for properties. It can save you a lot of headaches in the long run.