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Glick Watch: Why an LLC Might Not Be Right for You

by | 0 comments | Nov 16, 2016 | 2 min read |

Now you’ve decided to buy an investment property. As a first timer, you are probably going to get a mortgage by putting at least 15% down. You may or may not have partners but you have to think about how to hold title.

Usually, the first thing out of people’s mouths is that they want to form an LLC, limited liability company. Though by law this structure protects your assets that are not in the LLC, in my experience lawyers have increasingly been attempting to argue claim for personal assets also. Learn more in detail about LLC’s, including how to file, how they’re structured, and common arguments for and against them. At the end of the day, it should come down to your opinion. In most cases, I’m more of an advocate for taking the property in personal names. Here’s the three things I always consider:

First, financing. Fannie Mae, Freddie Mac and most private lending institutions will not allow you to take title in an LLC. If they do allow the LLC, you will pay higher rates and probably higher fees for the mortgage. That may affect your cash flow and make the property not worth it. Also, depending on how the financing is structured you might not be able to transfer your property to an LLC after closing without risking defaulting on your mortgage, which would allow them to foreclose. Why take that chance?

Second, if you take it in a personal name, you can always buy a $1,000,000 personal umbrella that covers your liability in the event a tenant or guest were to hurt themselves. You can add it to your homeowner’s policy for a low price. In most common suits this would limit just as much of your liability as an LLC.

Third, taxes…there is no difference to owning a property by yourself or in an LLC. LLC’s use what’s called pass through taxation, meaning that the taxes the business incurs pass through to your personal tax rate instead of the higher corporate rate. Depending on how your accountant bills you, it could even be cheaper to hold the title in your name because they won’t have to file any LLC returns every year. Of course, you should consult professionals to assess your unique situation.

how to form an llc

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Fred Glick
About the Author
Fred Glick is the VP of Real Estate and Broker of Record at Onerent. As a licensed broker and experienced real estate professional of over 30 years, Fred has contributed to stories on CBS television, Wharton Business radio, NPR’s Marketplace, the New York Times, the Wall Street Journal, and the Philadelphia Inquirer. He is also CEO of US Loan Mortgage Inc., US Spaces Inc., and Arivva Real Estate Brokerage.

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