Can You House Hack Within an LLC?
Yes, you can house hack with an LLC but it is not always recommended as it often hurts profits and your ability to get the best financing terms.
What is an LLC?
LLC stands for limited liability company and is a business structure that protects the owner from personal liability in many cases. An LLC, just like an individual, can own assets, pay taxes, and be liable for any debt that it takes on.
Each state has its own requirements for maintaining an LLC, so make sure you follow them carefully if you create one. Failure to follow all requirements may cause the LLC to expire or otherwise limit its ability to protect you.
Can I Put My Personal Home in an LLC?
Yes, you can put a personal home in an LLC but there are certain risks and potential expenses involved in doing so. It also prevents you from taking advantage of owner-occupied financing and certain tax breaks.
Some people buy properties in their personal names to get the best financing terms and then transfer those properties into LLCs after closing. This can raise a few issues, in particular the “due-on-sale” clause risk.
A ‘Due-on-Sale’ clause is a provision in a mortgage contract that requires you to pay the full balance of the loan upon the sale or transfer of ownership of a property.
That is, when you transfer your property from your name to an LLC, you risk having to pay your mortgage in full under most mortgage loan terms.
If you want to move a property from your personal name to an LLC, the best way to avoid triggering this clause is to get your lender’s permission in advance in the form of a written waiver.
Although it is rather unlikely that a lender will enforce this clause, it is a possibility, and it’s risky to transfer the property without written consent from your lender.
Transfer Tax Issues
Some states tax the transfer of ownership when you put a personal home into an LLC. Other states might not enforce the transfer tax as long as ownership interests remain the same once under the LLC.
If you’re intent on using an LLC to house hack, be sure to research the tax laws where your property will be located.
One of the best features of house hacking is the ability of the owner to take advantage of owner-occupied financing.
If you are purchasing a primary residence under your personal name, you may be able to take advantage of down payments as low as 5% or 3.5% for an FHA loan, and even 0% for a VA loan.
Unfortunately, you cannot take out a Fannie Mae or FHA-backed mortgage under an LLC.
On the other hand, purchasing a property under an LLC may leave you looking at down payments of at least 20% (or more) and higher interest rates than those associated with owner-occupied mortgages.
Using an LLC may prevent you from taking advantage of certain tax breaks that are available to house hackers using their personal names.
House hackers using their personal names may benefit from homeowners deductions related to local property taxes since they live in and own the property. These will directly lower your property tax bill, often very significantly.
What’s more, if you occupy the home as your primary residence for at least two years and the property appreciates, you can typically sell it without having to pay capital gains tax under the IRS Section 121 exclusion.
When Does Using an LLC Make Sense For Real Estate Investing?
LLCs are the most common types of business entities and can be very useful for certain types of real estate investments that come with substantial risk and financial liability.
Before you register an LLC, carefully consider your long-term investment goals. It’s probably not a good idea to register if you’re just looking to purchase a single property to live in.
However, if you’re looking to build a hefty portfolio with dozens of tenants and huge potential legal exposure, then an LLC may be ideal for your investment strategy.
An attorney can assist you with the process of setting up an LLC and creating the right operating agreement for your goals.
But, in general, here’s why an LLC might make sense for an investor:
It’s in the name: limited liability company.
The main benefit of holding real estate within an LLC is that it generally protects you from personal liability in the event of a lawsuit. That’s because it separates the business’s liabilities from the personal assets of the owner.
For example, if someone is injured at your property and seeks damages, your personal assets will be protected. Only the LLC’s assets would be vulnerable.
However, an LLC owner has to be careful not to commingle personal funds with the LLC’s funds. Otherwise, a court may “pierce the veil” and negate the LLC’s protections. You would still be personally liable if a court “pierces the veil.”
That said, simply buying additional liability insurance in your personal name can serve a similar purpose to using an LLC.
Definitely speak with an attorney so you can weigh the risks and decide what’s best for your specific situation.
Another benefit to investing within an LLC is that you can sell shares and even the entire entity if you want to without actually selling the real estate itself.
So the real estate is owned by the LLC and the LLC is owned by multiple people.
Since LLCs allow multiple people to own them, this is beneficial if you want to have business partners or multiple owners of the property.
That said, be careful before trying to sell shares of your LLC to others, as securities law can get quite complicated.
But realize that having multiple owners in an LLC is an option, and it can be a great way to limit your exposure to someone else’s liabilities.
Number of Properties
LLCs can be beneficial for real estate investing if you are planning to build a large portfolio of properties. If you own multiple pieces of real estate, it might make sense to use separate LLCs for each property to separate liability.
If you are house hacking one or two properties, or you’re just undertaking investing as a small side hustle, it is probably not worth the financial cost and the other drawbacks noted above to use an LLC, but it does depend on your personal situation.
Even a small portfolio can benefit greatly from using an LLC or other business entity. That’s why you should talk with an attorney about setting up the ideal structure given your goals.
Using an LLC for house hacking isn’t the most practical route as it can prevent you from taking advantage of certain benefits available to house hackers buying in their own names.
Thankfully, many of the benefits of using an LLC may still be available even if you’re purchasing under your own name.
However, using an LLC is advantageous for real estate investing if you plan to make a full-time business out of your ventures and create a large portfolio. And it still might make sense with a small portfolio, too.
If you’re considering using an LLC, consult with a licensed attorney to figure out the best strategy for you and your business.
Can I use an LLC to house hack?
You can, but it’s usually not the most practical route. An LLC can prevent you from taking advantage of certain benefits available to house hackers buying in their own name.
Is it worth setting up an LLC for real estate investing?
It depends on your investment goals. If you’re looking to build a large portfolio, using an LLC can be especially advantageous. It can also make sense with a small portfolio if you want to limit your exposure to legal liability.
How do I set up an LLC for my real estate investments?
You’ll need to file articles of organization with the state you’re forming the LLC in and create an operating agreement. You may also need to obtain a business license. After that, you’ll probably have to pay an annual fee and file a report to keep it active. It’s best to consult with an attorney to make sure you’re taking all the necessary steps.
How much does it cost to set up an LLC?
The filing fee for articles of organization vary from state to state, but they’re rarely more than a couple hundred dollars. You may also need to pay an annual fee to keep the LLC in good standing. Most state’s secretary of state’s websites will have more information on fees.
Can I use an LLC to invest in other types of property besides real estate?
Yes, you can generally use an LLC to invest in any type of property, including stocks, bonds, and private businesses. However, each type of property has its own set of rules and regulations. Make sure you consult with a qualified professional before making any investments to avoid any compliance issues.
This website, and any communication stemming from it, should not be taken as financial or legal advice for your specific situation. Consult directly with a licensed financial professional should you need investment advice and consult directly with a licensed attorney directly should you need legal advice. Assume all links are affiliate links. I am an Amazon affiliate.