It may make sense to buy real estate with an LLC depending on the situation and the purpose for the real estate ownership. For example, are you purchasing the property to use as your personal residence? Are you purchasing the property to fix up, flip and put on the market? Are you developing real estate to build future projects? Are you trying to protect your personal assets from creditors? Depending on the situation and other options available to you may or may not want to buy real estate with an LLC. I had the chance to talk about whether you should buy real estate with an LLC on 1150 KKNW and you can listen to that show here:
Before discussing whether buying real estate with an LLC is a good idea, understanding how to buy real estate with an LLC needs to be discussed.
How do I Buy Real Estate with an LLC?
If you do plan to buy real estate with an LLC it is important that the business is set up prior to an offer to purchase being countersigned. If you use the name of a business that has not been formed on your purchase and sale agreement, it may invalidate the contract to purchase the property.
Step 1: Form LLC with your state. In Washington state you can form a business with the Washington Secretary of state by filing articles or organization.
Step 2: Get preapproved for financing if needed. Lenders will want all of your information on your business and possibly you personally. If you have the real estate in mind that you are going to purchase this can make the lending process move faster and ultimately your ability to close on a transaction move faster. This can be useful so that you are not missing out on an opportunity if you need the funds in short order.
Step: 3: Prepare Purchase and sale agreement and make sure the Buyer is listed as the LLC. An individual may say the purchase and sale agreements and any addendums as an officer of the business. You may want to work with an attorney or experienced real estate agent familiar with assisting businesses or investors acquire real estate such as Richard Symmes who has a managing real estate brokers license and is an attorney.
Step 4: Wait for purchase and sale agreement to be signed by seller or make any updates necessary in the agreement after negotiations with the seller.
Step 5: Send all docs to Title and Escrow who will check to make sure all liens are paid and title is clear prior to closing on the transaction.
Step 6: Conduct Inspection if necessary to make sure there are no surprises. If you have a property inspection contingency and discover defects or are unable to obtain financing and had a financing contingency you can rescind your offer to purchase the real estate.
Step 7: If everything looks good with your real estate transaction you can sign the closing docs which consist of signing deeds, financing agreements and other disclosures and agreements. You will likely get a copy of these forms prior to signing them and can review and bring up any issues with your real estate agent, attorney, escrow or the seller and their representatives.
What are the Benefits of Buying Real Estate with an LLC?
The main benefit to buying real estate with an LLC is that if you are renting the property out you may not be personally liable to a tenant should something happen inside the rental property such as an injury or damage that your insurance company will not cover. With that said most homeowners will have insurance to cover most things and you never know if a tenant could file a claim against you (or your business if the real estate is owned by the business), keeping your personal assets safe.
Another benefit to owning property with an LLC is that public records will list the LLC as the owner, so your name will not show up as the owner of the property, so it can help with privacy concerns, however with that said, it is fairly easy to figure out who the owner of a business is by looking it up with the secretary of state or whomever registers businesses in your state. A way around this is to set up a trust as we discuss below. Then the trust can be listed as the owner of the business.
What are the Drawbacks of Buying Real Estate with an LLC?
There are of course drawbacks to purchasing real estate with an LLC that you may not be thinking about. The first is that that you may not qualify for as good of an interest rate if you need financing if the property is in an LLC rather under your individual name. To get around this you could purchase in your personal name and transfer the property to an LLC which could invoke the due on sale clause and the bank to call the note due, although that is unlikely. It can be a hassle to transfer the property back into a personal name if you need to refinance down the road to try to get a better interest rate.
There are also fees for maintaining an LLC with the state and may cause your accountant to charge more if you have a business. Additionally, you need to maintain business records and keep all funds from the business separate from your personal affairs. If you are purchasing real estate with a partner, it may also be a good idea to have an operating agreement or real estate co-owner agreement outlining how the business or purchase will be managed so there are no disputes between parties in the future. At least that is the goal.
Is it a Good Idea to buy Real Estate with an LLC?
If a buyer is in the business of renting or fixing and flipping properties it makes a lot of sense to form an LLC prior to purchasing real estate and using it for the transaction as all agreements and insurance will be run the LLC. If there are any workers or tenants on site at the property, they would have claims against only the LLC and not you personally if you manage your business properly. On the flip side, if the property is your personal residence, setting up an LLC may not make sense unless you are worried about privacy concerns, although with enough research, an LLC may not help you with the aspect of privacy, but it does provide an additional layer of research that somebody would have to do to figure out who owns your business.
What Other Options do I have to Purchase Real Estate if I don’t Want it in My Name?
If you have determined that perhaps an LLC is not a good fit for your goals and you don’t want to own the real estate personally, you could look into setting up a trust to own the real estate or a trust can own the LLC itself. This helps keep the owners of the real estate private, will allow the home to pass outside probate if something happens to the owners, and may not require as detailed record keeping. The issue is, if the asset is placed in a revokable trust, that means you can still have control of the asset and creditors may still be able to make claims against the trust. A non-revokable trust on the other hand is not something you can control if you are not the trustee, but of course it cannot be taken out of the trust because it is non revocable.