A limited liability company (LLC) is an ideal business structure for rental property owners.
Since real estate investing involves plenty of capital (i.e., the property) and unique risks, an LLC crucially separates your private and business dealings. Creating an LLC for your rental property business can shield your liability, minimize your risks, and ensure that your real estate investment keeps running smoothly.
Recommended: Use a professional service like Northwest ($29 + State Fees) to form your LLC for you.
Why Choose an LLC Over Other Business Structures
In short, an LLC formalizes your business. This builds your credibility and gives you the opportunity to grow in the future.
There are two types of business structures that you can choose for your rental property:
- Informal: This includes sole proprietorships and partnerships (for group real estate investing). Since a buy and rent business involves plenty of assets, cash, and legal obligations, a formal structure is more efficient than an informal one.
- Formal: LLCs and other corporate structures fall under this category. When you first get started, the straightforward process of creating an LLC is more advantageous than a more complex corporate entity. This is the case for individual and group real estate investing.
Check out our article on the main types of business structures for more in-depth information.
The Advantages of an LLC
Here is why an LLC is more advantageous than other business entities:
- Liability: If a tenant gets injured and decides to sue you, for instance, you are personally liable for the damages and legal costs if your rental property has an informal structure. LLCs, on the other hand, separate your personal risks from your business-related ones.
- Growth: With an LLC, you can always add other co-owners to your buy and rent business when it grows. You can do so with a partnership, but the ownership proportions will always be blurrier than with an LLC.
- Credibility: Whether you are reaching out to potential tenants, lenders, or investors, an LLC makes your business look much more credible.
- Simplicity: In comparison to a complex corporate structure, LLCs are easy to set up. The process of creating an LLC is as quick and affordable as forming an informal entity such as a partnership.
Read our guide on the many other benefits of forming an LLC to discover how they apply to your rental property investment. You may also consider specifically setting up an S corp for your LLC’s business structure as it may provide additional tax benefits.
Forming an LLC for your buy and rent business is easy — just follow these three steps.
Step 1: Setting Up Your Rental Property's LLC Structure
Decide if You Will Work with Business Partners
LLCs are ideal for both individual and group real estate investing. In fact, even if you initially start as your LLC's only owner, you can always expand and add other co-investors in the future.
Choosing the right rental property LLC ownership structure sets you up for success at an early stage. Determining which LLC tax structure is the most advantageous and efficient for your business is equally as important.
Here are a few ideas that will help you get started:
- Consider whether you want to separate your personal and business taxes, which is ideal for group real estate investing.
- If you are working with other investors partners, allocate your rental property LLC ownership proportionately. Outline this in your articles of incorporation and other formal documents.
- Consider an S Corp business structure for your LLC. It may provide you with additional tax advantages. You can learn how to set up an S Corp in our article How to Start an S Corp.
- Do you have an existing mortgage? If so, you can easily add your LLC to it and start building your business entity's credit. We will discuss this topic later.
Choose a Location
Your LLC's location allows you to understand what your legal requirements and obligations are. Similarly, you can account for registration and licensing fees ahead of time.
For example, some states require investors to obtain a business license if they want to add the LLC as a co-owner of the rental property.
Here are a few ways to learn about your area’s state laws and requirements:
- Visit the resources on the local landlord association’s website. Consider asking for help if you need it. Many associations are willing to answer questions and offer guidance, especially when you are a new or aspiring landlord.
- Visit the relevant state, county, and city government’s websites. Find relevant filing fees and discover what the LLC creation process entails. LLCs are typically registered with the state, but determine if there are any municipal rules in your location.
- Find out if the state, county, or city has specific laws that pertain to real estate businesses and landlords.
- Search for registered agents online and compare fees. This largely varies from one state to another.
We recommend registering your LLC in the same location as your rental property. Firstly, you save money because you only have to pay one state’s fees. Secondly, you save time by focusing on a specific location and learning how to create an LLC there.
Pick a Business Name
After you pick a name for your business, you can officially register it with the state. Choose a unique name that stands out and connects with your audience.
Start by doing some brainstorming and come up with a few potential LLC names for your rental property investment. Here are some ideas:
- How do you want renters to feel? Do you prioritize affordability, comfort, or convenience? Pick a name for your LLC that reflects that.
- What does your business stand for? For example, some investors want to help their community by offering affordable housing opportunities or purchasing and renovating unused homes. Your LLC's name should remind you of your external goals and keep you motivated.
- Are you investing alongside friends or family? Does financially helping a parent or close relative through your rental business motivate you? If so, you could always name the LLC after a person or a family. John Smith, for example, could use Smith Homes and Smith Real Estate. John and Co. is a similar option.
After you narrow down your list of potential LLC names and decide on one, obtain a doing business as (DBA) name registration. In fact, this is the first step in getting your rental property business formally set up.
For additional help, make sure to try our free, AI-powered Business Name Generator.
Complete the Formal Requirements
Many of these next steps are non-recurring, one-time requirements. Once you complete these official steps, your LLC will be ready to hit the ground running.
Find a Registered Agent
A registered agent receives and sends service of process on your LLC's behalf. This allows you to maintain your privacy. You can also adequately separate your personal letters and files from your business ones.
You can choose to be a registered agent for your own LLC. However, this means that you must be available during regular business hours (i.e., Monday through Friday, 8 a.m. to 5 p.m.) and have a physical street address (no P.O. boxes) in every state that you rent property in. Because of this, we recommend that you choose someone else to be your LLC’s registered agent.
You can easily look for registered agents online. Since their cost varies from one location to another, check the fees that registered agents charge in your LLC’s state of incorporation and add it to your budget.
Pick an agent whose office you can easily access in person. This is because your mail will be sent to your registered agent’s address. Being able to directly pick it up minimizes your gas expenses and the cost of delivering the mail to your personal address.
Register With the State and Local Government
Your business should be registered with the appropriate government entities. Based on where you live, check if you need to file with any of your city, county, and state agencies.
Above all else, you should register the right business category for your LLC. For example, in some states, one or more of the LLC's owners must obtain a real estate license if the entity acted as a rental property management company.
Naming the LLC as the property's owner typically doesn't come with any licensing requirements. Yet you should always check your state's laws and business categories based on the capacity that your LLC will act in.
Obtain a Federal EIN from the IRS
In short, your LLC's Employer Identification Number (EIN) is the equivalent of its Social Security number. Once your business is assigned an EIN, use it for all governmental communications and when you file your taxes.
Needless to say, if you add your LLC to your mortgage or real estate loan, provide the lender with the entity's EIN. In turn, when they report your timely payments, your LLC will build credit.
You can get an EIN online through the IRS's website. The process is free.
If you want a detailed guide on completing each of the formal steps, our article on how to form an LLC will provide you with all that you need to know.
Recommended: Once you’ve taken the necessary steps to formalize your business, consider adding a phone service. By using a business phone line, you can protect your personal information and add credibility to your LLC. We recommend phone.com for your phone needs.
Open a Bank Account
Now that you formally established your LLC, you can open a bank account for your business. This step will help you accept multiple payment methods from your tenants and make it easy for you to access your earnings.
Open an LLC bank account that has all of the features and characteristics that you prefer. Here are some important ones:
- Business Services: Rather than opening a regular checking account, opt for one that is specifically designed for business uses. You can always sit down with a banker to learn about the different business account types and their pros and cons.
- Online Check Deposits: You save time when you can deposit rent checks through your bank's smartphone app or website.
- Payment Apps: If you want your tenants to pay online, make sure that your bank has a payment processing software that you can add to your website. In turn, once your renters make a payment, it will be automatically deposited into your LLC's account.
- Fees: The fees should be within your budget. Some banks may require you to deposit a minimal amount per month in order to avoid the fees. You can do so when the required amount is lower than your rental revenues (which you will deposit into the account).
After registering your business and opening a bank account, you can officially add your LLC as the owner of your rental property.
Step 2: Add Your LLC as the Rental Property Owner
When your LLC is listed on the property's title, you can use your entity's name for marketing and official communications.
Moreover, your LLC, as opposed to your official name or your business partners' official names, will be listed on the tenant's lease. This makes your rental business much more credible to potential tenants.
Equally as important, your insurance might lower your premiums when you do business as an LLC.
Here is how you can add your LLC as an owner of the rental property:
LLCs and Mortgage Loans
Since your LLC is newly created, putting it on your mortgage will help build your business's credit.
If you haven't purchased the rental property yet, apply for a regular mortgage. This will dramatically boost your odds of getting approved, especially when you have a good credit score and meet the lender’s income requirements.
After that, as you make timely payments and grow your rental revenues, your LLC will have the track record it needs to qualify for a larger commercial real estate loan.
Nevertheless, whether you have an existing mortgage on the rental property or not, here are a few things to keep in mind when you want to add your LLC to your loan:
- Make sure that the lender's policies allow you to include an LLC on the mortgage. Most of them permit this as long as the property and the LLC are owned by the same person.
- Pick a lender that will report your payment history under your Social Security number and, at the same time, the LLC's EIN. This is important when you want to build your business's credit score.
- Try to work with a lender that offers both personal mortgages and commercial real estate loans. As you establish trust with them over time, the financial firm is more likely to grant your LLC a commercial loan when it has the credit and income history to qualify for one.
Learn about the different types of home loans available to LLC owners by reading our Types of Mortgages for Business Owners guide.
Insurance Coverage for Your LLC
It is important to add your LLC to your existing homeowners or business insurance policy. This way, you can protect your personal assets from liability. Any potential future disputes would also go under your LLC's name instead of your private records.
Homeowners and business insurance policies are both relatively cheap. In other words, you don't need to worry about affordability and pricing. Instead, you can focus on finding a policy based on your preferred type and amount of coverage.
Just as with your rental property mortgage lender, your homeowners or business insurance company may have a few rules regarding an LLC.
Homeowners vs. Business Insurance and Your LLC
Here are a few ways to make sure that you're on the right track:
- Review your existing coverage and check if you can add an LLC to it. Insurers will typically allow it as long as you maintain your stakes in the property (which, as the LLC's owner, you do).
- If you have a homeowners policy on your rental property, check whether you can include your LLC. Otherwise, you may need to obtain a commercial business policy.
- Since an LLC limits your liability and formalizes your buy and rent investment, determine if your insurance company will lower your premiums. After all, a formal business structure limits the insurer's risk.
- Similarly, after establishing your LLC, compare the premiums and coverage amounts of both homeowners and business policies. Next, pick the one that has the most advantageous features.
- Above all else, check how liability is assigned. In other words, if a dispute or problem comes up, will the insurance company pay for your legal costs or the LLC's? This is important when it comes to homeowners insurance, especially since business policies, by default, are designed for corporations and entities that have a formal structure.
Don't forget to compare what different companies have to offer. In other words, if you can't find what you're looking for through your existing insurer, don't be afraid to shop around and consider other options.
3. Transfer the Rental Property Ownership Through a Quitclaim Deed
Once you add your LLC to your loan and insurance policy, you can officially list it as an owner of your rental property.
A quitclaim deed is a relatively easy way to do so without violating your mortgage or homeowners/business insurance's terms. This method is also ideal for group real estate investing and LLCs.
Here are some of the advantages of using a quitclaim deed:
- Simplicity: Apart from having to add your LLC as the property's owner, your mortgage payments and other obligations stay exactly as they are. In other words, you can change your rental property's ownership structure without having to refinance your mortgage or qualifying your LLC for a loan.
- Cost: Quitclaim deeds can be filed and submitted for free. Real estate investors don't need to pay any fees.
- No Financial Exchanges: You can modify and transfer your property's ownership without exchanging any funds. This is ideal for group real estate investing, particularly when the house's owner wants to add their business partners and the LLC to the title.
- Liability Protection: While you are still personally responsible for paying the mortgage, a quitclaim deed transfers other liabilities to your LLC.
As mentioned earlier, don't forget to check your lender and insurance company's policies regarding adding the LLC to your property title.
When you understand their rules and requirements, the process of transferring ownership through a quitclaim deed becomes even more simple and straightforward.
Step-by-Step: Drafting and Using a Quitclaim Deed
Here is the process of how you can create a quitclaim deed for your rental property:
- Create the Document: You can easily obtain a standard quitclaim deed or template online. However, your form should be based on state and local government requirements. That is to say, make sure that the document (or template) is specifically designed for property owners in your location.
- Fill Out the Form: In general, a quitclaim deed contains certain information, including the type of property, its usage (personal vs. commercial), and who the grantor (i.e., yourself) and the grantee (your LLC) are.
- Notarize the Document: While some states don't require this, it is generally a good idea to have a certified public notary verify your quitclaim deed. This will make your document look authentic and credible when you present it to lenders, investors, the government, and/or others.
- File the Form: Depending on where you live, quitclaim deeds are submitted to the state, county, and/or city government. Check your state's laws and file your document with the appropriate agency.
- Renew: Quitclaim deeds are only valid for a certain amount of time, which typically ranges from two to four years. Put your document's expiration date on your calendar and renew it ahead of time to minimize future delays.
The Next Steps: Your Rental Property and LLC
LLCs are ideal for rental property investors because they limit your risk, separate private and commercial dealings, and establish your business's credibility.
After you learn about your state's requirements, file the necessary paperwork, and sit down with your lender and insurance provider. You can formally add the LLC as an owner of your rental property through a quitclaim deed.
In short, the process is simple and affordable, just as much as it is important.
Recommended: Once you’ve set up your real estate business structure, we recommend using foreclosure.com. The website is a great way to find great deals on the most up-to-date, local, and low-cost (distressed, tax liens, etc.) investment properties that would otherwise be difficult to find. With a database that updates twice a day, you can quickly secure your next real estate deal.