In a recent post we discussed three drawbacks to owning real estate in a LLC. For a lot of investors, especially what I’ll call mom and pop investors like me, those drawbacks outweigh the benefits in my opinion. Having said that, there are reasons to own real estate in an LLC.
1. Personal liability protection
Personal liability protection is perhaps the most popular reasons for owning real estate in a LLC. Managed correctly (see our previous post on what that means) owning property in an LLC protects your personal assets in the event you’re sued or can’t pay a debt. For example, say a tenant trips and falls on the steps of your property injuring himself/herself. The tenant sues you for negligently maintaining the steps. If you own the property in a properly managed LLC, the maximum that your tenant could recover are the assets in the LLC – likely the $$$ in the LLC’s bank account and equity in the property. The tenant would not be able to touch any of your personal assets like your savings account or other assets not owned by the LLC.
Note: You should still carry plenty of insurance on the property. Being being under insured can be one criteria a court uses to invalidate the LLC’s protection.
2. Partnering
If you are looking to invest in a property with friends or other partners, owning the property in a LLC has some benefits. First, the operating agreement will lay out the responsibilities of the various owner/members. Second, the agreement should cover what will occur under certain scenarios. Third, because the members own shares of the LLC, members can invest in different amounts . Finally, should a member need to recoup his/her investment before other members are ready to sell the property, that member could potentially sell his/her shares to a third party.
3. Property has 5 or more units
As discussed in our previous post, one of the biggest drawbacks of LLCs is that they are not eligible for Freddy Mac/Fannie Mae backed mortgages which offer the best terms and lowest rates. Freddy/Fannie only back mortgages for 1-4 unit properties. As a result, this makes properties with 5 or more units ineligible so that consideration is a nonfactor. Additionally, with more units comes more tenants which = more people who might sue you. Thus, making the limited liability protection of the LLC even more attractive.
4. Property has no mortgage
Similar to 5+ units, once a property is owned free and clear, the financing disadvantage of LLCs disappears. Furthermore, odds are once you own a property out right you’ve also accumulated other properties/investments that you’ll want to protect from liability.
5. Anonymity
LLCs provide some anonymity, thus minimizing some of the calls/mail asking about your property. Of course, some information such as organizer of the LLC and agent for service of process for the LLC are publicly available but it takes a bit of research.
That covers some of the reasons to consider owning real estate in a LLC. Let us know if we missed any by leaving a comment below.
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