I can’t make the decision for you. I really can’t. But what I can do is give you as much valuable information as possible so you can make a well informed decision on your own.
When it comes to real estate investing, one of the most debated topics revolves around whether investors should hold their properties in a limited liability company (LLC) or keep the deed in their personal name. (My partner and I decided to go with an LLC).
Both approaches have their advantages and disadvantages, and the decision ultimately depends on individual circumstances and goals. Let’s dive right into the pros and cons of each method so you can make an informed choice that suits your real estate investment strategy.
Holding Properties in an LLC:
1. Liability Protection: One of the biggest advantages of using an LLC is the personal liability protection it offers. Holding properties in an LLC separates personal and business assets, shielding your personal assets from lawsuits or claims related to the property. Basically, it is very difficult for someone to come after you personally. They would have to go after the LLC and your personal longings, in most cases, are protected.
2. Asset Protection: An LLC can provide an extra layer of protection for your real estate assets, in the event of legal disputes, such as tenant lawsuits. Creditors may only pursue the assets held within the LLC, leaving your personal assets unaffected. As you scale and grow you may want to consider multiple LLC’s for this reason.
3. Tax Benefits: LLCs offer tax flexibility, allowing you to choose how you want the entity to be taxed. Usually an LLC is treated as a pass-through entity, meaning the profits and losses are on your personal tax return, potentially reducing your overall tax liability.
4. Estate Planning: Holding properties in an LLC can simplify estate planning and make the transfer of assets to heirs upon your passing much smoother. This structure can help avoid probate (Usually court supervised, this is an analysis and transfer of your assets. It could mean that your holdings do not go where, or to whom, you intended them to go). It will also ensure a seamless transition of ownership. If you are concerned about the future of your holdings, you should speak to an advisor about this.
Keeping the Deed in Personal Name:
1. Simplicity and Lower Costs: Holding properties in your personal name is generally simpler and less expensive to set up and maintain compared to establishing and managing an LLC. There are no annual fees, extra filings, or requirements specific to an entity structure, such as an LLC.. These fees, filings, and requirements can vary drastically state by state so make sure to check with an accountant or tax professional.
2. Financing Flexibility: Securing financing for investment properties may be easier when the property is held in your personal name, especially in the beginning. Lenders usually prefer to lend to individuals rather than entities (your LLC), providing more flexibility in obtaining mortgages or other financing options.
3. Tax Considerations: Depending on your personal tax situation, holding properties in your personal name may offer certain tax advantages. For example, you may be eligible for deductions or benefits that are not available to entities. Again, be sure to speak with a professional about your specific situation.
4. Limited Compliance Requirements: Unlike LLCs, personal ownership does not require annual reporting or compliance obligations specific to the entity. This simplifies record-keeping and reduces boring administrative tasks. (Although in my opinion you should keep track of this information anyways).
Factors to Consider:
1. Risk Assessment: Evaluate your risk tolerance and the potential liability associated with your real estate investments. If you are involved in high-risk properties or have multiple properties, the liability protection offered by an LLC may be more beneficial.
2. Scale of Investments: Consider the scale and size of your real estate portfolio. As your investments grow, holding properties in an LLC may provide more structure and protection, especially if you engage in active property management or have partnerships.It may be beneficial to have multiple LLC’s if you have multiple partnerships or multiple types of entities.
3. Legal and Professional Advice: Consult with legal and tax professionals who specialize in real estate and entity structuring. They can assess your specific circumstances, provide tailored advice, and guide you towards the best option for your goals. I can’t stress this one enough. Unless you are already an expert, let someone who is guide you.
4. Personal Preferences and Long-Term Plans: Your personal preferences and long-term plans should play a role in your decision. If you value simplicity, cost savings, or have specific exit strategies in mind, personal ownership may be the better option for your goals.
As I stated earlier, my partner and I decided to start with an LLC. We know that we don’t want just one or two properties; we want to grow and scale. Down the line, we would likely have to switch our entities to LLCs for many of the reasons listed above, so we decided to just start out with one instead of dealing with the hassle. We also made the decision after speaking with a tax professional and the bank about loan options. Make sure to do your research before making any decisions.
The decision to hold real estate properties in an LLC or personal name is a significant one that depends on various factors, including liability protection, tax considerations, financing options, and personal preferences. Both approaches have their pros and cons, and it’s essential to evaluate your specific circumstances and long-term goals. Seek professional advice to ensure you make an informed decision that aligns with your real estate investment strategy. Ultimately, whether you choose to utilize an LLC or retain ownership in your personal name, it’s important to prioritize proper risk management to thrive in the world of real estate investing. Don’t let this be something you’ll just “figure out later.” It could have some major drawbacks and penalties if you don’t employ the right strategy, so talk to the professionals and get investing!
