With any investment property, liabilities come with the territory—faulty electrical wiring, broken stairway railings, black mold, and other possible flaws are all inherent threats. It’s no wonder savvy real estate investors decide to form LLCs (Limited Liability Companies) to protect themselves. The LLC legal business structure shields investors’ personal assets from liability associated with their investment properties. So with an LLC, your personal assets won’t be vulnerable if a tenant or visitor to your property sues you.
While forming an LLC can be done rather quickly and without any great degree of complexity, I’ve seen otherwise smart real estate investors make some serious mistakes that could put their benefits of being an LLC at risk.
Common Errors Real Estate Investors Should Avoid
1. Not transferring the property deed to your LLC: Although this may seem like I’m stating the obvious, some real estate investors have forgotten this step! After you’ve formed an LLC, you need to sign a deed transferring the property to your LLC. You also need to record the deed with the county where your property is located. If you don’t take care of this, you personally will still be considered the owner of the property—and would therefore be the defendant in any lawsuit associated with it. Note that if your LLC purchases the property directly, you won’t have to worry about transferring the property deed.
2. Not creating a separate LLC for each of your properties: Do you have multiple investment properties? If yes, then you should establish an individual LLC for each property. That’s the way to get the optimal liability protection for each investment. For example, if someone sues Property 1, the only assets at risk are those belonging to LLC 1. Along with your personal assets being protected, so will be the assets from Property 2 (which is set up under LLC 2), and Property 3 (which is set up under LLC 3).
3. Not insuring the property under your LLC: To protect your property from liability and damage, you should buy a comprehensive landlord’s property insurance policy. Be sure to maintain written proof showing your LLC’s name is the one insured, so your insurance company won’t have a reason to deny coverage if you make a claim. If you have multiple properties/LLCs, obtain separate coverage for each one.
4. Not keeping your LLC in compliance: If you don’t maintain your LLC as legally required and a plaintiff proves that, your personal assets will be at risk in a lawsuit. Noncompliance pokes a hole through your LLC’s protective shield and makes your personal assets vulnerable. Different states have different requirements, so make sure you’re aware of them. Regardless of where your LLC is located, keep your personal funds separate from those of your LLC. Never commingle finances (i.e. keep separate bank accounts and credit cards for your personal self and your LLC).
5. Squandering money on an expensive lawyer to form your LLC: If you have a straightforward investment situation, you may not need a lawyer at all to form your LLC. A reputable legal document filing service can represent you and take care of all the paperwork and filings. That will save you money—money you can use toward your next real estate investment!
Forming an LLC is a powerful way to protect your assets and minimize your liability when purchasing investment properties. By avoiding the five mistakes I mentioned, you’ll have a much better chance of getting full benefit from the protection the LLC structure offers small business owners.
Do you need to form an LLC for your real estate investment properties? Call CorpNet anytime for a free business consultation at 888.449.2638. We would love to help you incorporate a business, form an LLC, file a DBA and more across all 50 United States!