Own Rental Property? Consider an LLC.
Have you decided to invest in a rental property? Congratulations! While this is often a smart investment for your future, there are many things to consider before placing your property on the market.
Many people prefer the option of renting, rather than buying, a home. There can be many reasons, such as job relocation, real estate prices seeming out of reach, etc. This is great news for property owners, but do the risks outweigh the financial gain? Here’s why an LLC could the right choice.
Additional Layer Of Protection
An LLC (limited liability company) can be put in place to help protect your assets. If your rental property is in your name, you could be held liable should an injury or emergency occur on the property. An LLC can be put into place so that if such an incident occurs, your personal assets are protected by the LLC. An example of this would be if your tenant, or guest of your tenant, is injured while on your property and an LLC is in place, they cannot sue you for personal assets. All attorney fees and awards given will be from what is held by the LLC, rather than your personal assets, which will be protected.
Money Management Benefits
Managing your money can be made simpler with the help of an LLC. When you put your real estate rentals into an LLC, it can prevent you from co-mingling funds between personal and LLC accounting. If you have more than one rental property, then putting each property in its own LLC makes money management much easier. Each property has its own LLC, which in turn has its own bank account. Rental income goes into the bank account, and mortgage payments, repair costs, and other property costs come out of the same bank account. At the end of the month, you will have an easy tracking method for the cost of each property that is kept separate. This way, you will not have to remember to mark the receipts to determine which property they belong to.
For doing your taxes, everything is kept separate. That way it’s easy to see that the deductions that need to be taken from a certain property are sure to go with that property. This could make a big difference in how your tax burden is handled, depending on things such as the amount of interest you are paying on the mortgage for one particular property and how the LLC is set up. You may have to file additional forms, such as a Schedule C, if you set the LLC up a certain way.
Most people prefer using a credit card for costs, and each LLC property may be able to get its own credit card. If you need to purchase items for upgrades or repairs, use the credit card or bank account for that property only (this is very important).
If you apply for a loan for the properties, a property that may be struggling financially will have less of an effect on a property that is doing well. Because the properties are in different LLCs, a profitable property that is doing well has the income to support the loan. However, if you have a property that is not doing as well, the losses will bring down the income for the property that is thriving if both are contained within the same LLC. If they are kept separate, you will have an easier time getting the loan for the property that is doing well.
As always, our Cincinnati based small business attorneys can help you with guidance and details.