Understanding How to Utilize an LLC for an Investment Property

If you decide to take your investments to the next level and consider real estate, you should really understand the ins and outs of starting an LLC.

If you are like me, you started your investment career off small. You started a brokerage account and began to buy a small number of shares. You then started adding money to the account when you could and have slowly grown it from there.

The next step (for many) is a new type of investment. Stocks and mutual funds are fun, but the next step for many is real estate. The investment to get started is much larger than trading stocks, but the return on investment can be huge if you play the game right.

On the flip side, the loss can also be huge if you don’t time the market just right. More than ever, millennials are realizing the value of owning vs. renting, so the flip market has remained strong. And with interest rates on the rise again, the game of renting has also remained strong.

I’m not here today to tell you how to flip a house and resell it, or how to fix up a duplex and rent it; I am here to discuss how to utilize an LLC for an investment property. With all investments come risk, and an LLC is the best way to minimize risk when dealing with real estate.

Not only will I talk about the pros of using an LLC, but I will also discuss some of the negatives that come with the territory. However, if you do plan on getting into the real estate side of investing, I strongly encourage you to make a plan first to protect your personal assets.

What is an LLC?

Depending on your level of knowledge to begin this process, you may be thinking, “What is an LLC?” Easily enough, an LLC is a Limited Liability Company that combines certain elements of a Corporation, Partnership, and Sole Proprietorship. LLCs are typically far less complex entities and are not available to all businesses.

The most important feature to remember about an LLC is the limited liability portion. What this means is the owner of the LLC is protected from personal liabilities for business debts and claims.

The Benefits of an LLC For an Investment Property:

Personal Asset Protection: By far the most obvious benefit of the LLC for an investment property is the protection of your personal assets. Obviously, no one gets into an investment with the plans of losing, but if you do, an LLC will make sure it goes no further than the assets inside the company.

For example, if you had a project go south on you, debt collectors would not be able to go after your personal home, car, or bank accounts. Please note that anything tied to the LLC would be at risk for collateral.

I used the example of an investment property losing money, but a real-life example that is better would be from a liability perspective. Say that someone enters your rental home and trips down the stairs breaking several bones and is in the hospital for two weeks. First, you should also have some sort of insurance on each of your rental properties, but if you weren’t properly insured, it would help limit the downside of the accident.

In the example above, if you didn’t have an LLC and the person who tripped took you to court, your personal assets would be at liberty as collateral for payment in the suit. The bottom line: keeping business and personal as separate as possible is huge, and an LLC for an investment property is an absolute necessity to protect personal assets.

Taxation Benefits: This is the rare occasion of being able to get your cake and eat it too. So, with an LLC for an investment property, not only are you protecting your personal assets, but you are able to claim the income or loss on your personal taxes.

Basically, you are protected from losing your personal assets but can use the profit or loss in a personal tax return and utilize your personal tax rate.

In my short experience of utilizing an LLC for an investment property, the best time to use this is for a big gain or a big loss. On one tax return, I had sold a personal property and made a big chunk of money that would have been eligible for capital gains. With my LLC, I purchased a rental property and had a major loss for the year because of the cash going out.

That offset my gain on the sale and saved me almost $9,000 in taxes. Now, my job is not to teach you how to trick the government, but these are the rules in place so you might as well know how to take full advantage of something that is 100 percent legal and ethical.

Simple and Flexible: When starting any new investment venture, the words simple and flexible will be your best friends. And when it comes to starting an LLC for an investment property, it provides you with exactly that.

With an LLC you aren’t required to have officers or directors, board or share meetings, or any type of administrative burden that often comes with a corporation model.

There is also no maximum or minimum number of owners that you can have. Many times, an LLC is a single owner, but you can have thousands of owners if that is what works best for you. The bookkeeping must be kept separate from any personal spending of any owners, but that is the only requirement for an LLC.

It’s also worth noting that an LLC makes it possible for foreign ownership and investment options that aren’t available to corporations. If you do have someone from overseas that wants to be involved, an LLC is a great option.

The big benefit of this in my experience is with a partner or multiple partners in a business. So, when looking to buy an investment property, you can easily have three people on the LLC and all their personal assets are protected. Do keep in mind that if you have multiple “owners” on the LLC, taxes will likely need to be filed separately to make it clean.

But, in the situation of needing hundreds of thousands of dollars, it’s great to have partners who are easily protected, especially in the beginning. You may miss out on a portion of the profits, but if there is a loss, only having to pay part of them is a huge relief.

With most financial decisions you’ll notice my final take is “do what’s best for you”. I encourage you to do your homework and figure out a plan that best suits you and your family. However, if you are considering an investment property, please make sure you protect yourself. There are certainly other options available, but an LLC is a very simple solution that checks a lot of boxes.

The Downside of an LLC For an Investment Property:

As with anything in life, all good things do have some negatives to them. I must say, when it comes to having an LLC for an investment property, there isn’t a ton of downside, but still a few things I would like to cover today.

Time and Cost: Perhaps the biggest burden is the paperwork and cost associated with getting an LLC set up. There is typically a cost to file for the LLC, and then the cost for the company to draw up the paperwork. You can easily find online sites to do this, but I know when I created mine, I paid an attorney $150 to file, and the actual cost of the LLC was an additional $100.

The biggest pain I must warn you of is the wait time. Like anything nowadays, the wait to receive my tax identification number took over a month. That may not seem like a long wait, but I had a property I wanted to jump on and didn’t realize the amount of time it would take to get everything finished.

The bottom line: if you are considering an LLC for an investment property, get the LLC finalized well before you are ready to dive in. There are also fees and taxes each year for an LLC, but prices can vary depending on the state. I live in Ohio, and it is less than $100 a year for me to operate my LLC. Some states may not be quite as friendly.

Keep in mind that you can transfer the deed of a house after the fact from your personal account to the LLC. This may take some time and paperwork but is a work-around to not having your tax identification number if you are ready to make a purchase.

Before finalizing your LLC plan, it is a good idea to check your state’s Secretary of State website and figure out all the fees associated. As someone who lives by a budget, I can’t, for one second, recommend proceeding with a plan without knowing the exact costs.

Maintaining Limited Liability: As mentioned above, one of the biggest perks of an LLC for an investment property is taking personal assets out of the equation. I also mentioned above that you can use an LLC profit or loss on your personal taxes to take advantage of your personal tax rate.

That all sounds good, but it is highly recommended to try and keep everything as separate as possible. That means filing a separate tax return for the business and keeping books for the LLC only. Not only does this make things easier to track, but it also keeps your personal assets completely out of the equation. The more the LLC owners can demonstrate the LLC does act as an entity separate from the owners, the more effective the limitation on your liability is.

Don’t take this as what I said above is false, this is just going above and beyond to make sure your personal assets are covered. I listed an example of how I was able to use a tax break to my advantage by filing my LLC under my personal return, but I have since separated the company completely to avoid any red flags.

Costs Can Add Up: An LLC is a very smart technique when acquiring an investment property, but there are some hidden costs if you aren’t careful. For one, if you have multiple people on the LLC as owners, all are required to claim a profit on their taxes, whereas in a corporation, you would only have to claim a distribution that was paid out.

Last but certainly not least, one of the biggest things to remember when using an LLC for an investment property… You should consider an LLC for every investment property in the beginning. Remember, if you have three properties under ABC LLC, all three of those could be used for collateral in a lawsuit or debt collection situation.

If you have one house under different LLCs, you can protect every asset in your portfolio from each other. Now, that is the safest way to do things, but you have also seen the costs for starting and maintaining an LLC, so with a ton of properties, the cost can add up.

A tip from me: start with multiple LLCs, but once you get the business going and a decent cash flow, you can move them all to one to make things much simpler. It’s far too complicated to have 30 different checking accounts, and 30 different books if you truly want to start getting involved in investment properties.


Real estate has proved to be one of the best returns on investment in the last few decades. However, that doesn’t mean that trend will last forever. There are several things to consider before getting involved in an investment property but applying for an LLC is one of the first things you should do, especially if you are just getting started.

Not only is starting an LLC simple, but it’s also relatively cheap for the protection it provides and can ensure that your personal assets aren’t at risk in case of the worst possible outcome. I know it’s hard to live only expecting the worst, but when it comes to your house, savings account, and family, you can’t be too cautious.

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