Creating an LLC for Your Rental Property

In this article, we’ll go through what an LLC is, how landlords can benefit from LLCs, and how to create an LLC. We’ll also answer common landlord questions.

What is an LLC? 

A limited liability company (LLC) is a business structure. You can create an LLC by yourself, with a partner, or with a group. If you own an LLC you are a “member” of the LLC.

LLC’s are regulated at the state level, so the process of creating an LLC will differ state-by-state. This article will provide an overview of benefits of creating an LLC and how to create an LLC. We strongly recommend doing state-specific research to further understand how to create an LLC in your state (and the specific fees and costs).

What are the Benefits of Creating an LLC? 

There are four benefits of creating an LLC for your rental property.

Limit Your Personal Liability

If you own your property as an individual and someone files a lawsuit against you, then your personal assets are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.

Keep Your Rental Properties Separate From Each Other

In addition to separating the rental property from your personal assets, you should also separate your rental properties from each other. If you own multiple properties, you can “insulate” each property from liability claims by setting up separate LLCs for each property. If you have all of your properties under separate LLCs, then if someone files a lawsuit pertaining to one of your properties, then the rest of your properties will not be affected by the lawsuit. This effectively separates and protects each of your properties.

Pass-through Taxation

Pass-through taxation is a benefit of individual-owned businesses. Normally, a corporation is taxed directly on its profits and owners are taxed again when they make income from their business. With an LLC, you get the benefit of the company’s income “passing through” to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes.

Easily Separate Business and Personal Expenses

When you create an LLC, you should create a separate bank account for your LLC. That way, your personal expenses are separated from business expenses.

This makes it easier to claim business expenses when it comes time to do your taxes. It will be visually clear to you when you check your bank statements which expenses are business and personal.

Who Should Create an LLC? 

Any landlord can benefit from creating an LLC. Whether you have one property or several, you will benefit from pass-through taxation and protecting your personal liability.

LLCs can be especially helpful if there are multiple owners of a property. When you create an LLC, you’ll create an operating agreement that outlines the rights and responsibilities of each member of the LLC. This can help you seamlessly manage the property and protect each member of the LLC in case of legal trouble.

When Should You Create an LLC? 

You may be wondering if you should create an LLC before or after you buy a rental property. The good news is that either way, you’ll be able to transfer ownership of your property to the LLC. However, it’s better to create an LLC before you buy a rental property so you avoid the following headaches:

  • Notifying your mortgage holder that you are transferring title to the LLC.
  • Your mortgage holder may choose to close the loan (which would create closing costs for you) and they may issue you a new loan (with an increased interest rate).
  • You’ll need to notify tenants that the property is now owned by the LLC and update your rental leases.
  • Converting the property to an LLC after the property purchase may trigger new taxes, specifically a Title Transfer Tax.

If you create an LLC first, then you can buy the property under the LLC’s ownership, in which case the property deed will be in your LLC’s name.

If you already own a rental property and want to create an LLC, you’ll need to transfer the deed for the property to the LLC. This is also commonly called a “transfer title.” See our answer below for more on how to transfer title to the LLC, what a property title is, and what a property deed is.

How Do You Transfer Title to the LLC?

First, let’s define some legal terms. In property law, property title is a bundle of rights that outline ownership of a property. These rights can be held by several parties or by a single individual. Titles can also refer to a formal document known as a property deed that serves as evidence of ownership. Your property deed is a legal document that states who owns the property.

If you bought the property as an individual, then the property deed will state your name. This means you are personally liable if any claims are brought against the property. The benefit of creating an LLC is that you don’t need to have your name on the property deed. Your LLC’s name should be on the deed.

In order to “transfer title” to the LLC, which means to transfer ownership rights to the LLC, you need to create a Quit Claim Deed and file it at your local County Clerk’s office. Quit Claim Deeds allow you to edit information on previously recorded deeds.

You can create a Quit Claim Deed by contacting a real estate lawyer or you can use a service like Rocket Lawyer to create one for free.

Be aware that there is sometimes a title transfer tax, which charges you for the privilege of transferring title.

Does Creating an LLC Impact Your Financing?

If you have an existing mortgage when you transfer your property into an LLC, then it may affect your financing.

If you transfer title to your LLC but have a mortgage in your individual name, then the name on your mortgage note will not match the name on your property deed. This likely compromises the foreclosure rights of your lender. For this reason, we recommend contacting your lender to find out if they allow you to transfer title to the LLC.

This should be the first step to take if you are interested in creating an LLC. See our steps below for a complete outline of steps to take.

If your lender allows you to transfer title despite an existing mortgage, then find out what conditions they may have. Some lenders allow you to transfer title, but will increase your interest rate, charge an assumption fee, or have other requirements.

How Do I Create an LLC? 

Below are ten steps to help you create your LLC:

  1. If you have an existing loan for your property under your name, contact your lender to find out if they allow a title transfer to your LLC. Find out if they have requirements for allowing the transfer (they may increase your interest rate, charge an assumption fee, etc.)
  2. Choose an available business name. See more below on how to name your LLC.
  3. Fill out the Articles of Organization for your LLC, which state basic information about your LLC.
  4. Create an LLC Operating Agreement, which sets out the rights and responsibilities of the LLC members (even if that’s only you).
  5. You may need to publish a “notice of intent” to form an LLC (this is only required in a few states). This notice has to be published in an official newspaper and states your intention to incorporate in your county. There may be a publishing fee of about $40.
  6. Obtain licenses and permits if they are required for your business. This will differ state-by-state.
  7. Register your LLC with your state. You’ll turn in all formal documents to the state so they can register your business. There may be a filing fee.
  8. Transfer title to the LLC. This effectively transfers ownership from you to the LLC.
    1. To do this, create a Quit Claim Deed. The deed will list you as the “Grantor” and the LLC as the “Grantee.”
    2. Go to the website of your County Clerk and search for instructions for how to file a deed. There is usually a small filing fee.
  9. Set up a bank account for your LLC and keep funds separate.
  10. Update your rental leases moving forward. Your lease should state the LLC as the owner and rent payments should be deposited in your LLC’s bank account.

You can create an LLC here.

What is the Cost of Creating an LLC? 

Cost of Creating an LLC

The cost of creating an LLC will differ state-by-state. Below are possible costs associated with creating an LLC:

LLC Cost Table

Check out Rocket Lawyer for affordable legal guidance, such as creating legal documents, protecting your documents and getting advice.

Are There Ongoing Costs Once You Create an LLC? 

Below are two possible ongoing costs once you create an LLC:

  • Annual franchise tax can be $250-800.
  • Most states charge an annual fee for having an LLC. It can be as low as $9 and as high as $500.

In addition to the above costs, there is the possibility that your interest rate will change as a result of transferring title of your property (if you have an existing mortgage).

Keep in mind that transferring ownership to your LLC may trigger tax consequences depending on the value of your property when you transfer title. This is because the value of your property may have increased from the time you bought the property. These additional tax consequences can be avoided by creating an LLC before you buy the property.

How Do You Name the LLC for Your Rental Property? 

You can name your LLC anything you want, as long as it’s not a name already registered in your state and it’s appropriate for your rental business.

Most landlords use their property address to name their LLC. For example, “123 Main Street Chicago LLC.” There are two benefits of naming your LLC this way. For one, it’s easily recognizable to your tenants. Second, it’s likely a unique address in your city or county, meaning you’ll be able to register it without a problem.

You can check if an LLC name is available by searching your Secretary of State’s webpage. There are also many services available online that allow you to search the availability of business names.

What Are the Pros and Cons of Creating an LLC? 

Pros:

  • LLCs limit your personal liability, which potentially saves you a lot of money.
  • They separate and protect each of your rental properties.
  • You get the benefit of pass-through taxation, so your income is not taxed more than once.
  • You can easily separate business expenses from personal expenses by having a separate bank account for your LLC.

Cons:

  • It’s a headache to do the additional paperwork.
  • It’s potentially more difficult to qualify for a mortgage as an LLC and you’ll possibly have a higher interest rate.
  • LLCs have annual filings that can be expensive (up to $500 per year).

Despite the additional work and costs, the protection LLCs provide is often worth it for landlords.

Does an Umbrella Policy Offer the Same Protection as an LLC? 

Landlords often try to mimic the liability protection of an LLC with insurance, specifically with an umbrella policy. An umbrella policy can help cover costs that go above your standard insurance policy. For example, let’s say your insurance covers damages and lawsuits up to $250,000 dollars, but you’re sued for $1 million. Your standard policy would not be sufficient and your personal assets would be at stake for the remaining balance. However, if you purchase an umbrella policy, it would help cover the remaining balance, adding more protection for your personal assets.

That being said, your umbrella policy will still have a limit. Your personal assets will be vulnerable if the lawsuit exceeds the umbrella policy’s coverage amount. Creating an LLC is a more effective way to protect your personal assets so they are never vulnerable during a lawsuit. Despite the additional work and costs of creating an LLC, this added protection is often worth it for landlords.

Next Steps 

Creating an LLC for your rental property is a smart choice as a property owner. It reduces your liability risk, effectively separates your assets, and has the tax benefit of pass-through taxation.

If you decide to create an LLC for your rental property, make sure you update your rental leases. You’ll list the LLC as the property owner. And be sure to separate personal money from rental property money. For example, all rent payments should be stored in your LLC’s bank account. If you use Rentalutions to collect rent, we make this step incredibly easy. You can add unique bank accounts for each rental property. Learn more about collecting rent online.

We also allow you to easily create and customize an online rental lease. Check out our extensive Guide to Rental Leases to learn more about the benefits of online leases, how to customize rules in your lease, and more.


Also published on Medium.

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  • spadlo

    Best “bird’s eye” description of this process I’ve read. It’s concise and broad but thorough.
    Next step – checking the rules in the states where we have property.

    • Kasia Manolas

      Hi,
      I’m so glad you enjoyed the article. That sounds like the perfect next step to take. Let us know if you have questions!
      Best,
      Kasia

  • Kasia Manolas

    Hi Nelson,
    That’s a great question. I believe it would be better to wait until that deed has transferred to the LLC’s ownership. That way your lease will accurately reflects you owns it.
    Best,
    Kasia