15% ROI, 5% down loans!”,”body”:”3.99% rate, 5% down! Access the BEST deals in the US at below market prices! 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Some of the most common questions rookie investors ask—especially in places like the BiggerPockets forums—are:
Do I need an LLC?
Do I need an LLC to collect rent?
Do I need an LLC for liability protection or tax benefits?
The short answer? It depends.
Today, I’m breaking down the key questions you should ask yourself to figure out if setting up an LLC is the right move for your real estate investing journey.
What Is an LLC?
First, let’s start with the basics: LLC stands for limited liability company. It’s one type of legal entity you can form to own and operate a business. Many real estate investors choose an LLC because it’s relatively easy and inexpensive to create but still offers important liability protection—similar to a corporation.
If someone were injured on your rental property and decided to sue, an LLC could help protect your personal assets like your home, car, or (if you’re cool like me) your motorcycle. Instead of going after your personal wealth, they’d be limited to what’s held inside the LLC.
Sounds like a no-brainer, right? Well…not always.
What Are the Costs of Starting and Maintaining an LLC?
Setting up an LLC isn’t free, and the costs vary depending on your state. Here’s an example from my experience in New York State:
$200 filing fee
Around $285 for mandatory newspaper publication
Additional costs for drafting an operating agreement (your attorney may charge for this)
All in, it cost me about $485 to form my LLC—and that’s just the start.
New York also charges an annual filing fee ($25 per year per LLC), and if you hire an accountant to file a separate tax return for your LLC, that’s another cost to consider. Even if you do your own taxes now, will you want that added complexity as you grow?
Tip: Always ask your attorney if they’llgive you a “draft” version of documents like an operating agreement, lease, or buy-sell agreement so you can fill in the blanks and save on legal fees.
How Does an LLC Affect Your Financing Options?
One of the biggest drawbacks to owning property inside an LLC? Financing can get tricky.
Most banks have two lending sides: residential and commercial. If you want those sweet residential loan perks—lower interest rates, 30-year fixed terms—you’ll usually need to buy the property in your personal name.
Properties titled in an LLC often need commercial loans, which:
Have higher interest rates
Are only fixed for five to 10 years before adjusting
Sometimes amortize over shorter terms, like 15 or 20 years, hurting cash flow
In my own experience, a residential loan offered a 30-year fixed rate at 4%, while the commercial side wanted 7.35%—no thanks!
If maximizing cash flow and locking in a long-term rate is important to you (and for most rookies, it is), buying in your personal name might make more sense—at least early on.
(Amortization means how your mortgage payments are spread out over time. A longer amortization period, like 30 years, usually means lower monthly payments.)
If you want the flexibility of putting a property in an LLC and still getting a long-term fixed-rate loan, there’s another option to know about: DSCR loans.
DSCR stands for debt service coverage ratio. Instead of approving you based on your personal income like traditional residential loans, banks that offer DSCR loans mainly look at the income the property produces. If the property’s rental income covers the mortgage (usually by at least 1.0–1.2 times), you may qualify.
Why DSCR loans are great for investors:
You can close in your personal name or your LLC’s name (many lenders allow both).
You can often lock in a 30-year fixed interest rate—avoiding the five- or 10-year resets of most commercial loans.
No tax returns or personal income documentation is needed—it’s all based on the property’s performance.
Things to watch for:
Interest rates for DSCR loans are usually a bit higher than conventional residential rates.
You’ll likely need a larger down payment (typically 20% to 30%).
Some lenders charge extra fees, so make sure you compare offers carefully.
If your main goal is protecting your personal assets with an LLC andlocking in long-term financing, a DSCR loan could be a smart solution to look into.
Do You Need an LLC for Taxes?
The answer is no.
You can still deduct all your rental-related expenses, whether the property is in your personal name or an LLC.
If you do have an LLC, it’s usually taxed as a pass-through entity—meaning profits and losses pass directly onto your personal tax return, similar to owning property personally. There’s no double taxation like there can be with corporations.
Bottom line: You don’t need an LLC to get tax benefits from owning rental property.
How to Protect Yourself Without an LLC
If you don’t set up an LLC, you can still protect yourself:
Liability insurance: Your basic rental property insurance should cover injuries and accidents on the property.
Umbrella insurance: This provides extra protection beyond your regular policy limits, covering injuries, lawsuits, and personal liability situations.
Having strong insurance coverage can deter lawsuits against your personal assets—and often gives rookies peace of mind while building their portfolios.
Final Questions to Ask Yourself Before Forming an LLC
Before you make the decision, ask yourself:
What are the costs to start and maintain an LLC in your state?
How do you want to finance your property (residential vs. commercial loan)?
Can you commit to running your LLC properly, like a real business?
What level of liability protection helps you sleep at night?
Bonus tip: If you’re buying a property with a partner, I always recommend using an LLC. Partnerships can get messy, and having an LLC protects you if something goes wrong with your partner’s actions (and vice versa).
A Few Final Thoughts
I bought my first few properties without an LLC. As my portfolio grew, I transferred them into an LLC later—but be careful if you do that. Some mortgages have a “due on sale” clause that could require you to pay off the loan immediately if you transfer ownership. Some banks enforce it, some don’t—but always talk to your attorney first and think through your worst-case scenario.
At the end of the day, there’s no one-size-fits-all answer when it comes to LLCs. The key is knowing your goals, risk tolerance, and long-term plan.
Want more rookie-friendly tips regarding asset protection?
In Episode 561, we interview an asset protection attorney, Bonnie Galam, as we go through everything to consider in depth how you can protect yourself and your assets. Follow the Real Estate Rookie Podcast on your favorite podcast platform, or subscribe to our Real Estate Rookie newsletter.
