Building Your Real Estate Portfolio: Understanding the Requirements for Buying a House Under an LLC

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

Buying a house is a significant milestone for many. But for some, purchasing real estate isn't just about finding a place to call home; it's also a strategic investment opportunity.

One popular strategy real estate investors use when buying properties is holding them under a limited liability company (LLC). This method has several advantages, such as asset protection and tax benefits.

However, the requirements for buying a house under an LLC are complicated. So, to make the process less stressful and confusing, we've enumerated each prerequisite you must fulfill in this comprehensive guide.

Understanding How Limited Liability Companies (LLCs) Work

Before we discuss the requirements for buying a house with an LLC, we must first understand what they are and how they work.

An LLC business entity combines a corporation's limited liability with a sole proprietorship's flexible management structure. They're considered pass-through entities, meaning they don't have to pay income taxes to the IRS.

Advantages of Buying a House with an LLC

Buying a house with an LLC comes with several benefits, such as:

Liability protections

Liability protection is one of the reasons why LLCs have become so popular among real estate investors.

As the LLC owner, you will not be personally liable for any debts or similar obligations the company incurs. This setup is ideal if you have multiple high-risk investment properties.

By placing your high-risk properties in an LLC, you can rest easy knowing the rest of your personal assets are protected.

Tax benefits

By default, LLCs have a pass-through tax structure that allows them to avoid double taxation. Double taxation is when companies are taxed at the corporate and individual levels.

However, since LLCs are pass-through entities, everything they earn and lose goes straight to their owners or the LLC members. The members then report their portion of the company's profit on their personal tax returns and they're taxed based on their tax rates.

Privacy

Real estate investors who want to keep their personal information private use LLCs to purchase multiple properties. This way, only the LLC's name will be included in the public records.

Disadvantages of Buying a House with an LLC

Like any other entity, there are significant disadvantages to purchasing properties with an LLC:

Cost

Setting up an LLC can cost a lot of money. Depending on your location, the formation fees for LLCs will range from as low as $40 to as high as $500. You must also pay annual report fees to maintain your LLC.

Difficulty obtaining mortgages

Getting a mortgage loan under your LLC's name will also be difficult. Most lenders are reluctant to give mortgage loans to LLCs because they know they can't hold LLC members personally liable for the company's debts.

They will only allow them to get loans if the LLC owner volunteers to provide them with a personal guarantee.

In the rare chance that an LLC gets a mortgage loan, the interest rates will likely be higher. Purchasing properties through LLCs gives banks the idea that your home is a real estate investment, not a primary residence.

Limited financing

Your LLC will also have difficulty getting different types of residential loans. For example, it won't be able to get loans from the Federal Housing Administration (FHA) since they can only be used for primary residences.

What are the Requirements for Buying a House Under an LLC?

The primary requirement for buying a house under an LLC is an established LLC. Although each state has its own regulations for incorporation, the process for forming an LLC is straightforward.

You need only submit your articles of organization to your Secretary of State, pay the formation fees for LLCs, and get your Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

Once your LLC is formed, you must maintain it by filing annual reports and paying its yearly filing costs. Each state has its own fees for annual reports, so we suggest you check your Secretary of State's website for an accurate amount.

It's worth noting that once you establish an LLC, you must fulfill your state's compliance requirements. Failure to do so could result in penalties or administrative dissolution. If your LLC fails to file its annual reports on time, it will lose its good standing with the state.

Legal & Financial Implications of Buying a House with an LLC

There are legal and financial implications to buying properties under an LLC. For instance, you can't live in the house your LLC bought, or you'll risk "piercing the corporate veil."

The term "piercing the corporate veil" refers to the legal concept where courts disregard the distinction between an LLC and its owners. These scenarios typically happen when the line between personal and business use is blurred.

The same thing can happen when you mix your business affairs with your personal finances.

Secondly, purchasing rental properties through LLCs can be expensive. Since your company has limited financing options, you'll have to finance the purchase yourself or look for a lender who specifically works with real estate LLCs.

Ultimately, purchasing a house with an LLC is no joke. It's a major financial decision that requires careful consideration.

How to Buy a House Using an LLC

Choose a Property

Find a residential property suitable to your investment goals. If you're having trouble finding the perfect home, we recommend you work with a real estate agent.

Real estate agents have a deep understanding of the local real estate market. They will help you find an investment property based on factors such as growth potential and the long-term outlook of the neighborhood.

Conduct due diligence

Make sure you thoroughly inspect the homes you're viewing. If possible, ask the seller to let you visit the property itself. Look for potential issues like structural damages or outstanding liens.

You can also hire a professional inspector to assess the home's condition thoroughly.

Make an offer

Once you find a suitable property you like, make an offer to the seller using your LLC's name as the buyer. You can ask your real estate agent for advice on negotiating with the seller.

Close the transaction

If the seller accepts your offer, ask your real estate agent to help finalize the transaction. Ensure your LLC is listed as the property owner on all legal documents, including the deed.

The same rule applies to mortgage agreements. If you could get a mortgage for your real estate investment, list the LLC as the property owner.

Register your property

After you close the transaction, register your property with your local county. In addition, update your LLC's records to reflect the purchase.

Create a management structure

Create a management structure to oversee the property. Establish clear roles and responsibilities among your members to ensure effective management.

Consider hiring a property manager if you have multiple rental properties in your portfolio.

Setup a separate bank account

If you haven't already, create a separate bank account for your LLC. It's important you keep your personal finances separate from your business affairs to preserve your liability protections.

Here, we've answered some of the most commonly asked questions about buying properties with an LLC:

Got a Question? Start Here

01

Can I buy a house in my name and transfer it to my LLC later?

You can buy a home under your name and transfer it to your LLC. However, if your home is mortgaged, the transfer could trigger your contract's due-on-sale clause and the mortgage acceleration clause.

A due-on-sale or alienation clause allows mortgage lenders to demand payment on your remaining balance before you transfer the property. On the other hand, the mortgage acceleration clause requires you to pay your entire mortgage loan back, including any interest it accrued.

02

What are asset-based lenders?

Real estate investors with multiple properties typically work with asset-based lenders. These financial institutions offer loans based on the value of the asset's collateral.

However, to get an asset-based loan, you must have a successful track record as a real estate investor and multiple properties. It's also worth noting that asset-based loads cost more than residential mortgages.

03

Who should consider buying houses with an LLC?

Experienced real estate investors will greatly benefit from purchasing properties through an established LLC. It will allow them to protect their personal assets from their portfolio's liability.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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