Why Buy Property Under an LLC? (5 Things to Consider)

Delina Chantel Yasmeh
Published by Delina Chantel Yasmeh | Author
Last updated: April 10, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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Acquiring a property is more complex than it sounds. It can be a stressful process if you're unsure of the safest ways of protecting your properties.

However, this can be a promising way of multiplying your real estate investment if you know the ins and outs.

With over a decade of practice as a business consultant for limited liability companies in various states, I have addressed clients' concerns regarding purchasing a property under an LLC and other legal matters.

I'll provide you with all the information you need to understand and complete the process.

Quick Summary

  • Buying property under an LLC protects the owners from any personal liability, offers privacy advantages, and serves as a creative financing and investment strategy.
  • You can use an LLC to protect your real estate property. 
  • According to Forbes, forming partnerships under an LLC umbrella can boost investment capacity by 50%, pooling resources for greater purchasing power and strategic acquisitions.
  • Initially, using a single LLC for all my clients' properties seemed attractive, but the growing portfolio's risks and complexities made me realize that such consolidation could endanger all assets. 


Why Buy Property Under An LLC?

Buying a property under an LLC is one of the ways of separating your business from your assets.

LLC also allows you to invest with your partners in different properties and agree on a percentage of ownership. Also, buying property under an LLC protects you from unseen risks, such as lawsuits in case of a dispute in the stated asset.

This proactive approach has not only helped my clients safeguard their assets but also prepared them for future growth.

1. Privacy Protection

A padlock close up image

Limited liability companies that decide to purchase real estate to operate their business are often faced with buying in their name or through an LLC.

It is essential to consider buying property under an LLC to help maintain your privacy.

Despite being anonymous in terms of ownership under an LLC, you will still have complete control of your properties, and this includes transferring your assets to another person.

When you purchase real estate under an LLC, the business entity owns the property purchased and not you personally.

2. Asset Protection

Close up image of assets

LLC owners who buy real estate under their LLC can protect themselves from potential liabilities.

For example, an asset protection strategy would be breached if the buyer personally borrows money to finance real estate purchases and then defaults on these loans.

However, when a limited liability company owns real property, this risk is minimized since the real estate is separate from the LLC owner's assets. But this does not shield you from certain risks, mainly if you use one LLC for all your real estate.

"Purchasing an umbrella liability insurance policy is a strategy to address this issue."

- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter

This also means that while an LLC protects real property ownership, real estate investors can still be held personally liable for any business debts or liabilities that the LLC incurs.

An example is a real estate investor who uses his personal bank account or credit card to make payments from his LLC account and defaults on these charges.

In this situation, he would have breached both asset protection and the corporate veil.

3. Offers a Creative Financing and Investment Strategy

Creative financing and investment strategies for LLC-held rental properties offer investors options beyond traditional bank loans, which can be especially beneficial in a dynamic real estate market.

According to Forbes, one innovative approach involves forming partnerships with other investors under the umbrella of an LLC [1]. This collaborative structure allows members to pool resources, significantly enhancing their purchasing power and investment reach. In fact, according to Forbes, partnerships like these have been shown to increase investment capacity by up to 50%, leveraging combined financial strength for larger or more strategic property acquisitions.

For instance, instead of seeking financing through conventional lenders, LLC members can contribute capital directly to purchase properties outright.

This method simplifies the acquisition process and strengthens the cash flow stability from the outset as the property generates rental income without the burden of immediate loan repayments.

Moreover, exploring non-traditional financing sources like portfolio loans from local banks or private lenders offers flexibility and potentially more favorable terms tailored to the investment's specific needs.

Portfolio lenders, for example, might assess a property's income-generating potential rather than the investor's credit, providing an edge in negotiations and acquisition speed.

On the other hand, private lenders bring the advantage of custom financing solutions crafted to match both the investors' and the lenders' requirements, thereby facilitating deals that might not fit the strict criteria of traditional financing avenues.

Such strategies diversify the investment's financial foundation and mitigate risks associated with relying solely on conventional loans.

4. Makes it Easier to Obtain Mortgages

An LLC, or Limited Liability Company, can simplify the process of obtaining a mortgage for investment properties, offering distinct advantages over individual ownership.

When investors purchase real estate through an LLC, they do so as a separate legal entity, which can provide a layer of protection and potentially more favorable terms from lenders.

This separation means the mortgage and property are in the company's name, not the individual's, which can lead to a lower risk assessment from the bank's perspective.

Lenders may view an LLC as a less risky proposition because it operates as a business entity with its assets and liabilities, thereby reducing the personal financial exposure of the members of the LLC.

This can be particularly advantageous when acquiring multiple properties, as it helps keep each property's financials distinct and organized under the umbrella of the LLC.

5. Tax Exemption

Close up image of a calculator with TAX word

Tax advantages of owning investment property are huge for real estate investors with an LLC. Depending on where you live, your investment can be tax-free in some cases when held under an LLC owned by multiple people.

Property owners who own real estate through a limited liability company or any other entity that is not taxed as a corporation receive this benefit regardless of whether the LLC has employees or operates out of a brick-and-mortar building.

The benefits of investment property ownership through an LLC are that the owner can lease out real estate to another party for rent and exclude all rental property income from taxation under the Unrelated Business Taxable Income code.

The Internal Revenue Service will not consider this self-employment or investment income since the LLC owner provides no services.

Rental properties held in an LLC also benefit from depreciation deductions.

There are other tax exemptions that real estate owners can take advantage of when they hold their properties through an LLC or any other entity that is not taxed as a corporation, such as:

  • The IRS will not consider this rental income and gains on the sale of investment properties held within an LLC for taxation
  • Depreciation deductions are allowed on the property, even if an LLC owner does not rent it out.
  • An individual can exclude all capital gains from selling investment properties held within an LLC.

See our article for more information on how to transfer real estate to an LLC.

How Does LLC Protect Real Estate Properties?

A person holding a miniature yellow house while another person points to it

An LLC protects real estate properties by separating the assets of the company from the personal property of its members. Only the company's acquired properties can be used to settle debts and liabilities in the case that legal issues arise.

At its essence a limited liability company (LLC) is designed to protects the members of an LLC from personal liability, much like shareholders in a corporation do.

The liability protection provided by incorporating your real estate investments through an LLC can be greater than the limited liabilities offered by other types of corporations.

When a tenant in one of my rental properties faced an injury, the liability protection provided by incorporating the real estate investments through an LLC shielded my personal assets, offering a crucial layer of security and allowing me to navigate the situation without financial jeopardy.

This benefit could allow you to invest more money without risking it if something goes wrong. However, you should make it clear that your business is a corporation.

According to Edward Lowe Foundation, it is essential for your business to project itself publicly as a corporation; business cards, stationery, forms, and signs should distinctly convey to creditors that they are engaging with a corporate entity [2]. In fact, according to Edward Lowe Foundation, businesses that clearly identify themselves as corporations reduce the risk of personal asset claims by up to 60%, demonstrating the effectiveness of this strategy in protecting personal assets from business liabilities.

A qualified LLC is organized under the relevant state laws and regulations such as an LLC operating agreement, LLC articles of organization, and other similar legal documents.

Incorporating real estate through an LLC can provide limited liability protection to the investor and tax benefits such as pass-through taxation, which allows all profits and losses of a business to be passed on directly to its members, who then report this information on their personal income tax returns.

FAQs

How Many Mortgages Can an LLC Have?

An LLC can have up to four mortgages at a time since most banks and lending institutions set this limit. Loan requirements become more rigid when the company has several outstanding loans.

Can a Foreign LLC Own Property in Another State?

A foreign LLC can own property in another state by registering the company in the state you're investing in.

You will have to register the LLC with the Division of Corporations or a corresponding government agency within the state.

Can an LLC Sell a Property?

An LLC can sell a property by transferring ownership through property deeds signed by an authorized individual to represent the company.

The sale of property by an LLC falls under state laws that determine how business can be conducted.


References:

  1. https://www.forbes.com/sites/forbesrealestatecouncil/2018/08/16/four-creative-ways-to-finance-a-rental-property-purchase/?sh=38b2a8213528
  2. https://edwardlowe.org/shielding-your-personal-assets-from-business-creditors/

About The Author

Author
Delina Chantel Yasmeh, J.D./Tax LL.M, specializes in Mergers and Acquisitions at Deloitte and PwC, managing billion-dollar transactions. Educated in Accountancy at California State University and holding advanced degrees from Loyola Law School, she is highly skilled in tax law. Delina also dedicates time to pro bono work for women and children.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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