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Should you start an LLC to hold your investment property’s title?

| Apr 29, 2021 | business formation & planning |

There is always some degree of risk when you purchase real estate. There are many ways for an individual to reduce those risks, especially if the property is an investment and not their primary residence. 

Those planning to invest in real estate frequently consider forming a business for the purpose of holding and selling their properties. An LLC or limited liability corporation can be an excellent tool for someone looking to branch into a new area of business while still protecting themselves from financial and legal risks that their company might create. 

Is starting an LLC the best solution for those who want to purchase investment properties? 

What is the nature of your investment plan?

To determine the best solution for your needs, you first have to look at what you plan to do. If you want to purchase properties, fix them up and start renting them out, your needs will be substantially different from those of someone who wants to live in the property, repair it and then resell it. 

For those who intend to inhabit a property while working on it, an LLC might reduce the benefits they receive from this situation. You won’t be able to receive the lower property tax rate that people can claim on a primary residence because the owner is a business. You also incur the cost of starting the company, which could reduce the overall profit you make from your efforts, especially if you don’t intend to do the same thing more than once. 

On the other hand, if the goal is to generate passive income by renting the property out to tenants, an LLC formed now could serve an important role in protecting you while you work on the property and while you manage it for your tenants.

There is no one-size solution for every business or real estate need

The needs of entrepreneurs and investors are unique. Your assets, other sources of income and long-term plans in real estate may all influence if starting a business is the best option and whether an LLC is the ideal structure for that business. 

Careful exploration of your circumstances can give you a better idea about how to minimize risk. Taking the steps necessary to protect yourself before you start working on a property can go a long way toward maximizing the amount of protection you receive from those efforts.