LLCs and Real Estate Investing: Pros and Cons You Should Know in 2023

Whether you are new to real estate investing or a seasoned professional, chances are good you have considered forming an LLC at one time or another. This type of business structure has many different pros and cons when it comes to making money on your investment. Weighing these can help you make a more informed decision on whether this approach is right for your investment strategy.

READ: 4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them

What’s an LLC?

A limited liability company (LLC) is a type of business organization that protects its sole proprietors or partners from any personal liability. A single person can form an LLC (sole proprietor), or multiple people can form a group of members. 

Who can form an LLC?

Anyone can form an LLC, but many states have different requirements or restrictions. It’s also important to note that not all LLCs are recognized in all states. So if you form an LLC in Maryland and are looking to buy property in California, make sure you’ll have all the same protections for yourself and your investment on the other side of the country.

Is an LLC required to invest in real estate?

Definitely not. Some people mistakenly believe that investors need to form an LLC to invest in certain kinds of real estate (e.g., wholesaling real estate or purchasing an apartment), but that’s not true. As with most kinds of investments, all you need is money to spend. 

READ: Start Investing in Real Estate — 6 Tips for Millennials

Pros of investing in real estate with an LLC

There are many reasons why investing through an LLC makes good sense. 

1. Protection from personal liability

LLCs provide a legal separation between personal and business assets. This shields members from personal liability in case of: 

• Debts
• Lawsuits
• Financial obligations related to real estate investment

Investing is inherently risky, but LLCs help minimize personal financial damage.

2. Tax flexibility

An LLC allows for pass-through taxation, meaning that profits and losses flow through to the individual members and are reported on their personal tax returns. This avoids double taxation, as corporate taxes don’t apply to an LLC.

If you’re investing on a budget and trying to save money on fees and costs, an LLC can keep more money in your pocket at tax time.

3. Flexible business structure

LLCs offer flexibility in management structures, which can be beneficial for real estate investors. Members can choose to manage the company themselves or appoint a manager to handle the daily operations.

READ: 8 Questions to Ask a Potential Real Estate Investing Partner

4. Ease of ownership transfer

Transferring ownership of real estate held in an LLC can be simpler than transferring personal property. Instead of executing a complicated property deed transfer in a personal real estate transaction, an LLC simply adjusts membership interests.

An LLC is another real estate tool that makes it easier to organize, transfer and manage your investments.

5. Privacy

Depending on the state in which the LLC is formed, public records may not display the names of individual members. For some investors, this privacy is one of the main reasons an LLC makes sense.

Cons of investing in real estate with an LLC

Not everything is sunny when it comes to LLCs and real estate investing. There are a few drawbacks to consider.

1. Cost and complexity

Setting up and maintaining an LLC requires time, effort and money. Depending on your state, you may need to pay filing fees, annual fees and potentially consult with legal or tax professionals to ensure compliance with regulations.

That money you saved on lower realtor commissions or other cost-saving measures may be spent on annual fees and more complicated tax preparation. 

2. Limited liability isn’t absolute

While an LLC provides some protection against personal liability, it may not be absolute. In certain situations, such as fraud or personal guarantees on loans, members can still be held personally liable.

3. Mortgage challenges

Obtaining financing for an LLC-held property may be more difficult than for an individually-held property. Some lenders perceive the investment as higher risk. Interest rates may be higher and larger down payments may be required.

For investors looking at different strategies to purchase real estate (e.g., rent-to-own or alternative types of financing) forming an LLC may not provide any advantages. 

4. Tax implications

While pass-through taxation can be advantageous, it can also complicate personal tax returns for individual members. Each member must report the LLC’s income, deductions and credits on their personal tax returns.

5. State-specific rules and regulations

LLC regulations vary by state. The process of setting up and maintaining an LLC can be more complicated if you’re investing in properties across multiple states.

Is an LLC right for your real estate investments?

Investing in real estate through an LLC offers both benefits and drawbacks. Before making a decision, it’s essential to consider your individual financial situation, investment goals and risk tolerance. Consult with legal and tax professionals to see if it’s right for you.

Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.