10 Aug Should I Buy Real Estate in my Own Name or in an LLC?
It depends. There are pros and cons to each. Everyone’s situation is different.
Buying in your own name
Pros:
- Financing is usually less costly due to lower interest rates and lower fees than commercial loans. Residential non-owner occupied mortgage loans are typically at fixed rates over 15 or 30 years, so you don’t have to worry about balloon payments and refinances every few years.
- Insurance is usually less costly.
- Signing up for utilities is usually less costly.
- You could save on banking fees since you have only one account.
- You could save on bookkeeping and accounting fees because you are not filing multiple tax returns.
Cons:
- You have less protection from creditors. A judgment could attach to all of the assets in your name. Having a huge judgment against you could prevent you from buying or selling properties until you resolve the judgment.
- If you do not have an entity, you do not build up credit in that entity’s name. Imagine getting loans for your LLC too.
- You could make yourself a target for legal action since it would be easy to look up how many assets you own. The more assets you have in your own name, the more likely an attorney could encourage their client to sue you since you are worth going after.
- When you buy, own, rent, and/or sell in your own name, other people can easily look you up and see what you are doing. With an entity, you could maintain some anonymity with making offers, owning or renting property, and selling property.
- One day your LLC could have a sufficient credit history that you do not have to personally guarantee loans for your LLC.
If you choose to own investment real estate in your own name, you can mitigate some of the risk by purchasing an insurance umbrella policy. You could also subscribe to legal insurance, like Legal Shield.
If you already own a number of assets in your own name, discuss asset protection with your advisors. If you are starting out in real estate investing and planning to grow a big portfolio, talk with your advisors. Even if you are planning to just buy one or two properties, consult your advisors.
If you decide to own investment real estate in an LLC, consult with your advisors about how many properties or units to hold in any one LLC. I once met a person who created an LLC and then bought 20 properties with that single LLC. The problem for them is that they defaulted on mortgages on several of those properties, which affected all the properties in the LLC. What’s the point of having an LLC for segregating assets if you are going to put every single property you own into the same LLC? Personally, I don’t want more than three properties in any one LLC.
Some investors may buy in their own name for the lower cost financing, and then they transfer the property into their LLC using a quit claim deed. There are pros and cons to that. Many lenders have a clause in which they could call the loan due if they discover that ownership has changed. Some states charge realty transfer tax. There may be income tax incurred too.
If you are flipping houses in an LLC, there may be liability issues regarding past properties that were in the LLC. Some states have a tail of liability, meaning that the former owner of a property could be sued years later. For example, imagine if you hired a handyman to fix electrical wiring on a flip and they failed to follow code. Five years after you sell the house, a fire breaks out and harms the occupants. Your LLC and the handyman could be liable. A lawsuit or judgment would affect any real estate and other assets currently owned by the LLC. Of course, if you flip houses in your own name, the tail of liability follows you personally. You mitigate this risk by hiring professionals and ensuring that work is done properly.
There are other entities besides LLCs. There are Limited Partnerships, Corporations, and Trusts. Corporations include C Corporations and Subchapter S Corporations. There are also Joint Ventures and other ways to work with partners and investors.
This article is not intended as legal advice. Consult with your tax advisor, legal advisor, insurance agent, and mortgage loan originator, as every situation is different. I recommend that you have at least one meeting a year (a virtual meeting or conference call are simple to do) involving all of these parties so they can help you brainstorm which actions to take in the coming year. Read my blog on that: https://investandtransform.com/why-you-want-to-have-an-annual-powwow-with-your-cpa-attorney-and-insurance-agent/
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com.
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