Benefits of Starting an LLC for Real Estate Investing

Setting up a real estate LLC is the simplest and best way to protect your personal assets in the event your real estate business is sued.

A real estate LLC can be used for wholesaling, real estate rental properties, house flipping, and brokering. Read on to learn more about the benefits of LLC for rental property, tax benefits, and more. Also, find out why forming an LLC could be a good choice for your real estate business.

Recommended: Use ZenBusiness ($49 + State Fees) to form your real estate LLC for you.

What Is an LLC?

A real estate LLC is a formal, legal  business structure that allows you to do business without putting your personal assets at risk.

An LLC can have one or more owners, who are known as “members.” Based on whether there is one or more than one member, an LLC is called either a single-member LLC or a multi-member LLC.

Setting up a real estate LLC for your investing business provides you with:

  • Easy business structure formation and maintenance
  • A simple default tax structure where owners can report profits or losses on their personal tax returns. 
  • Tax benefits for owners, especially when electing S corporation (S corp) status
  • Personal asset protection in case the business gets sued

While some of these benefits will not be immediately useful to real estate investors, real estate investors can take advantage of nearly all of these LLC features in time.

Ready to form your real estate LLC? We recommend ZenBusiness ($49 + state fee), a fast and easy formation service that allows you to focus more on real estate investing and less on paperwork.

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5 Benefits of Starting a Real Estate LLC

Forming an LLC benefits many different business types, but some advantages can specifically benefit a real estate LLC.

Using an real estate LLC is the smart move to protect your assets and your family while investing in real estate. Beyond that, a real estate LLC allows you to facilitate transactions that would otherwise be complicated or might cause the buyer or seller to back out.

Here are some examples of how forming a real estate LLC is useful in different types of real estate investing scenarios.

  1. Buying Property Through LLC — Rental Properties
  2. Wholesaling
  3. Real Estate Investing Through House Flipping
  4. Multiple Real Estate LLCs
  5. Additional Real Estate LLC Benefits

1. Buying Property Through LLC — Rental Properties

If you purchase a rental property through an LLC, your personal assets are protected in the event that a tenant sues. Forming a real estate LLC will also give you greater options should you decide to eventually sell the property.

When a property is owned by an individual, all rental contracts are between the individual and their tenant. If the property is sold to someone else, the current rental agreements are no longer valid. This means that if the new owner wants to keep renting out the property, they would have to either convince the current tenants to sign new leases or wait to find new tenants. This can be an expensive and time-consuming endeavor for the new owner.

Benefits of LLC for Rental Property

When an LLC owns a rented property, all rental contracts are between the tenant and the LLC. As the managing member of the real estate LLC, you can decide to sell the LLC instead of selling the property. The new LLC owners immediately start receiving rental income since the current tenants are still in contract with the LLC.

Learn more about the types of loans available to LLC owners. Read our guide to Types of Mortgages for Business Owners.

2. Wholesaling

Real estate wholesaling is when an investor enters into a purchase and sale agreement with a homeowner. The investor can either purchase the property themselves at a set price or locate a different buyer to take the investor’s place in the agreement.

If the investor locates a different buyer to take their place in the agreement, the original contract must be amended with the new buyer’s details. When this information is added to the contract, the homeowner is also allowed to make any changes they would like.

Sometimes homeowners, especially homeowners with off-market properties, may become nervous or uncomfortable about another buyer coming in. They may suddenly decide they want more for a property or add clauses to the contract that makes the property no longer desirable to the buyer.

To avoid these problems, savvy wholesalers use a real estate LLC to enter the wholesale agreement. The LLC will have a purchase and sale agreement with the homeowner. When the wholesaler finds a new investor to take their place, instead of amending the original contract, the wholesaler will just sign over the membership of the LLC to the new investor.

With this strategy, the wholesale transactions can take place without any disturbance or re-opening of the original sales agreement contract. Of course, the wholesaler needs to explain this to the homeowner for transparency, but it allows the wholesale transaction to go smoothly.

3. Real Estate Investing Through House Flipping

When investing in house flipping, it is better to use a real estate LLC to purchase the property. This will protect you and your personal assets in the event of an accident or loss during the house flipping process.

When it is time to sell the property, you will have the option to either sell the property or sell the LLC that owns the property.

Recommended: If you’re looking for low-cost (distressed), foreclosed properties that are more difficult to find, search foreclosure.com to maximize your inventory and business opportunities. The website’s database updates twice on a daily basis, which will give you access to the most current, local properties on the market.

4. Multiple Real Estate LLCs

We have already discussed the advantages of using an LLC to purchase and sell real estate investments. It can also be advantageous to have one LLC own another LLC. When an LLC owns another LLC, it is called the ‘parent’ LLC. The LLC being owned is referred to as the “child” LLC.

Example Scenario: Mykayla owns Pacific Real Estate LLC. She wants to purchase a rental property owned by Bob’s LLC. Bob and Mykayla agree that instead of buying the property, Pacific Real Estate LLC will purchase Bob’s LLC and thus take control of the rental property. Now Pacific Real Estate LLC is the “parent” LLC, and Bob’s LLC is the “child” LLC.

A parent LLC can have multiple child LLCs. For serious real estate investors it may be advantageous to have a separate child LLC for each real estate property. If a child LLC gets sued, it can only be sued for the assets in the child LLC. Any of its earnings already transferred to the parent LLCs would not be at risk.

5. Additional Real Estate LLC Benefits

Flexible Operating Agreement

An LLC can have multiple owners with different levels of involvement. An LLC’s operating agreement can be adapted to fit any agreement between investors.

Immediate Credit History

If you are a new investor looking to establish a credit history, one easy way to immediately get a good credit history is to purchase an LLC with a good credit history.

A “seasoned” LLC with established credit history will allow you to apply for business loans, mortgages, refinancing, and home equity lines of credit (HELOC).

Even new investors who form an LLC will usually gain more financing options. You’ll get the instant benefit of owning and managing a legal structure with established credit necessary to obtain a loan or line of credit.

If you’re starting a new real estate LLC for your investment properties, you can learn more about how to build business credit, improve your business's credit score, and apply for a business loan with our business guides.

Recommended: Looking to Build Business Credit? Apply for an easy approval business credit card from Divvy and build your business credit quickly.

Privacy Benefits

A real estate LLC also can be used to protect your identity. It can allow you to keep your businesses separate and protect the privacy of your personal life.

Recommended: Consider setting up a business phone line by using phone.com to protect your personal phone number and other information.

Real Estate LLC Tax Benefits

Both single-member and multi-member LLCs report tax filings on their individual tax returns, simplifying tax preparation time and expense. Once your real estate LLC starts making a significant profit, you can also elect to be taxed as an S corp.

How to Form an LLC

You can use our step-by-step guide to Form an LLC yourself or use a professional formation service.

Best LLC Services

Conclusion

A real estate LLC is a vehicle to provide greater opportunities in real estate investing while protecting your personal assets in case anything goes wrong. Learning to use LLCs to your advantage can open new doors in real estate investing.

Get to know lenders willing to work with business owners. Read our Best Mortgage Lenders for LLC Owners review.

Frequently Asked Questions

Should I start an LLC for real estate investing?

Yes, forming an LLC is an excellent legal structure for real estate investing. Whether you plan to house flip, buy and rent, or wholesale properties, an LLC could give you greater opportunities while protecting your personal assets as long as you maintain the corporate veil.

How do I form an LLC for real estate?

You can read our simple guide to forming an LLC in your state. You can also read our review of the best professional service to start your LLC.

Can my LLC get a mortgage?

Yes, an LLC can obtain a mortgage. Often, an LLC with a good credit history will be able to obtain more favorable loan terms than an individual.

Most banks and mortgage lenders will also require proof of income and will check your personal credit history; however, if the LLC with good credit history is applying for the mortgage, it can give you an advantage in securing a mortgage with favorable terms.

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