“I own it! It’s mine! Look at my name on the deed!”

 

Turnkey rental property ownership can be transformative. But another step is recommended beyond the actual purchase. Savvy investors protect themselves with incorporation, which creates a protective veil between the owner and the public.

 

The corporation is probably the most well-known incorporated entity The limited partnership (LP) and the trust are also popular with new business owners. While any of these entities can technically be used to hold turnkey real estate, the entity that gets the most use in terms of real estate investments is the limited liability company (LLC). Most MartelTurnkey buyers who hold their turnkey rentals in the name of a corporation choose the LLC route. To understand why, here are several pros and a short list of cons of holding your investment in the name of an LLC.

Pros of Holding Turnkey Rental Property in an LLC

Limited Liability

 

It’s right there in the name, but we can’t stress this enough. Rental property owners have to limit their liability. We live in a litigious culture. If your tenant slips and falls on the porch of their rental property, they have the right to  sue the landlord.  If the rental property is in your own name, your plaintiff tenant can go after your personal assets, which no one wants. 

 

But if the turnkey rental is in the name of an LLC, they can’t go after your stuff. After all, you don’t own the rental house … the LLC does. Yes, you own the LLC, but that’s not the same thing for legal purposes. The plaintiff can only target assets owned by the LLC;usually just the house itself, along with the debt.

 

There are several considerations to maintain the “corporate veil” and protect yourself (talk to your lawyer), but that’s the basic idea. 

Tax Advantages

 

LLCs have several tax advantages compared to either a corporation or to owning the turnkey in your name.

 

If you own the house in your name, you’ll be taxed as a “sole proprietor,” which means you’re on the hook for self-employment taxes. An LLC can shield you from this.

 

At the other end of the spectrum, corporations are notorious for “double-taxation,” wherethe corporation gets taxed on its revenue, and then the stockholders get taxed on the dividends. 

 

An LLC, on the other hand, can be set up as a “pass-through” entity, where the income passes directly to the owners without the extra taxation. Not only that, but this sets you up to get the “pass-through entity” deduction. Again, your CPA or tax attorney can fill you in on the details.

 

Want to learn more? Check out this article we wrote on the tax advantages of real estate investing. 

Easy to Use

 

Corporations must adhere to certain set structures and hierarchies. They must comply with complex reporting laws, including holding regular meetings with written minutes that must be kept on record. Ownership can only be transferred by “stock.” In short, there are a lot of strict rules associated with corporations. 

 

LLCs, by contrast, are a relatively new form of entity, with comparably fewer regulations, precedents and formalities to restrict them. The reporting burden is much easier, and ownership can be transferred easily with just a few notarized signatures.

Privacy

 

Privacy laws vary by state, but in general, an investor can use LLCs to obfuscate the public record and make it hard for an outsider to find out how much real estate is owned. If you own a turnkey property, your tenant doesn’t know who you are. Between you and them is the property management company, and your LLC.

 

For investors who want a low profile, i.e. who don’t want creditors, predators, looky-loos, and the government to know their actual net worth, this is very valuable.

Cons of Holding Rental Property in an LLC

Mortgage Due-On-Sale Clause

 

Banks don’t lend to entities — they lend to people. They want to have a person to go after in the event of a loan default. If you buy with a mortgage, you will have to personally guarantee the loan — and the lender will want the name on the deed to match the name on the note. 

 

The way that many investors handle this is to close with their own name on the title to satisfy the lender but then, at the closing table, they transfer title to the LLC. Now they have a loan in their name, but title to the real estate is in the name of the LLC; a win-win scenario. 

 

Please speak to your CPA or tax attorney regarding this.

Beware of Transfer Taxes

 

Transferring ownership of real estate is often a taxable event. Many states waive transfer taxes if there is no practical change in ownership interest. For example, if you and a partner own a rental property 50/50, there may be no transfer taxes if you transfer title to an LLC that you and the partner also own 50/50. However, some states assess the transfer taxes regardless. Check the laws in your target state so you don’t get caught off-guard.

———————————————————————————————————

 

Sound complicated? Don’t worry. MartelTurnkey helps seasoned and beginner investors alike. We’re more than happy to guide you through the nuts and bolts of your first rental property purchase. We value long, mutually profitable relationships with our customers, so we go the extra mile to set you up for success.