Using an LLC for Real Estate Investments

By Lane V. Erickson, Idaho Business Attorney

For more than 20 years I have represented both individuals and entities that have invested in real estate. These could be individuals who own real estate and rent it out to others, it could be a property management company, or it could be other entities that develop and sell real estate. In representing these individuals and entities it didn’t take me long to see the advantages of investing in real estate. For this reason, I invested in real estate myself more than a decade ago. From representing real estate investors to becoming one myself, I’ve gained a good deal of experience when it comes to legal issues arising from owning real estate investments.

In particular, when it comes to investing in real estate, I often get questions from individuals about what the best way is to do it. In other words, the investors want to know whether it would be wise to own the real estate individually, or to own it through an entity such as an LLC.

While there is no perfect answer for every person or every situation, I will say that typically using an LLC is often the smartest ways for an investor to own real estate. The purpose of this article is to discuss the reasons why this is true.

Keep in mind, that no article can be exhaustive on all the reasons that using an LLC provides advantages to a real estate investor. Additionally, every person and every situation is different. It’s possible that because of some of the other options available to you through estate-planning such as using a trust or multiple trusts could provide you with additional advantages.

I will also say that at the Racine law office, we use a team approach when it comes to assisting our business clients in meeting all of their legal needs including deciding which entity is best for their business and then setting up that business entity. Our team of Idaho business lawyers have earned the highest ratings possible from all legal ranking services including Martindale Hubbell, Justia, and AVVO. Our attorneys are experienced and knowledgeable when it comes to helping real estate investing clients. We are confident that we can help you decide what decision would be best for you when it comes to real estate investing.

To discuss the advantages of using an LLC as a entity for a real estate investor, we will start by talking about whether liability insurance alone is enough. We will then discuss how an LLC can protect both the entity and the individual investor. Finally, we will also talk about additional advantages of using an LLC for Real Estate Investments.

One of the major goals of being a real estate investor is to protect those investments. There are a couple of different ways that this can be done. First, a person who owns real estate, particularly real estate that is rented out to others such as residential real estate, or commercial real estate, should protect both themselves and their property through liability insurance.

What we are really talking about here is protecting you against bad things that can happen on your property. For example, suppose that you own a duplex that you rent out to individuals who live there. Now suppose that someone is coming to visit their family member who is renting the duplex. It’s wintertime, and either this person slips on the ice on the sidewalk and gets hurt, but work suppose an icicle falls off the roof and hits and injures them. In either of these situations, it’s more than likely that the owner of the property will be responsible for the injury that happened.

Insurance is the first line of defense against this type of liability. The problem is, Insurance, particularly liability insurance, can be expensive, and it’s difficult to know how much coverage a person should have. If a person slips on the ice and Falls, they could break an arm which would require some medical treatment and will result in several medical bills. However, those bills will be much smaller than a person who slips on the ice, hits their head and is in a coma requiring 24-hour care for an undetermined amount of time.

Depending on the size of the building, the number of units that are within the building, and so forth, we recommend that a person obtain as much liability insurance coverages they are comfortable paying for. As I mentioned above, liability insurance is the first line of defense.

After liability insurance using an entity such as an LLC provides additional protection for both the entity and for you individually. Let’s suppose that you own five duplexes. Let’s also suppose that you placed each duplex in its own separate LLC. Now let’s use the example from above where a person slips on the ice and is injured. Finally, let’s make this injury the worst one we can think of which is permanent brain damage or the person is in a coma. In either of these situations, the damage will continue on for some time and the liability simply continues to grow as medical bills add up.

If the person owns the property where the injury occurred individually, and the liability insurance is not enough to cover the damage that has occurred, the injured person or their family would have the right to sue the owner of the property add to recover a judgment for the full amount of damages. This could result in the loss of additional investment properties that are owned individually by that investor.

However, if as we stated in the example above, the real estate investment properties are each owned individually in different LLCs, the liability for the injury that occurred will stay with the LLC that owns the investment. In other words, the worst thing that can happen is the property that’s within that LLC can be taken away, but no other liabilities would expand beyond that individual LLC. The individual would be protected, and the other LLCs would also be protected.

There are some other advantages of using an LLC as the entity to own real estate Investments. These include management and control options for the investment, tax advantages, gifting advantages to other family members who you may decide you want to bring into the LLC or transfer the ownership of the investment to, and estate planning options.

So, if you are looking to be a real estate investor, we encourage you to talk with a qualified Idaho business Saturday. You should ask them questions about whether using an LLC would be a good idea in your specific situation. If you do have questions, we have helped numerous business clients with these kinds of decisions, and we are confident that we can help you too.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877-232-6101 or 208-232-6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.