There are advantages and disadvantages to buying an investment property under an entity name like a limited liability company (LLC). Before determining the best strategy for you, here are some factors to consider.
Understanding the Pros and Cons of Buying Investment Property Through an LLC
One of the most significant advantages of doing business under an entity name is that it offers a level of personal asset protection you don’t get as an individual investor. In the event of a lawsuit or creditor claim, the business entity will be liable whereas your personal assets should be shielded. Reduced personal liability as well as many of these other benefits can make purchasing property under an LLC a wise choice depending on an investor’s situation and strategy.
Advantages of Owning Property Under an LLC
- Personal and business assets are kept separate – Barring any fraudulent activity that a Court would deem wrongful, an LLC limits one’s personal liability if there were to be a claim against the entity. It also makes it easier for individual investors to avoid commingling their funds. Personal assets stay in one account; business assets in another.
- It enables you to add members/investors to the LLC – A business structure allows members to jointly contribute capital and share in the income or losses per the entity’s operating agreement.
- It offers tax advantages – Income and losses from an investment property are generally not subject to tax withholding, however always consult with your tax advisor.
- It offers personal privacy – Property acquired through an LLC will list the entity’s name on the deed, not your own.
Disadvantages of Owning Property Under an LLC
There can be some hurdles to investing in a property as an LLC. Here are some considerations.
- Financing can be tricky – If you aren’t purchasing the property with cash or capital contributions from other LLC members, it can be difficult to secure a loan under the entity’s name. A personal guarantee will almost certainly be required – and maybe not just from you but from every member of the LLC.
- Business formation costs – There are costs associated with forming a business entity and ensuring its ongoing management. You’ll want to ensure your business is formed correctly and in compliance with local and state laws. Talk to us about registering a U.S. entity in Florida.
- “Due on sale” clause considerations – If you already own an investment property as an individual and want to transfer it to an LLC, it could trigger what’s called a “due on sale” clause in your current loan agreement. This means that the full balance of the loan may need to be repaid if you are attempting to transfer ownership.
The choice to invest in real estate as an individual or entity is a personal one. Consider the above advantages and disadvantages as you evaluate your investment strategy, and don’t hesitate to reach out to us at the Law Offices of Alex D. Sirulnik, P.A. | ADS Title Services for professional guidance and legal advice on business and real estate law matters in Miami.