These days, it is common for individuals to buy investment and rental propertyies under an LLC. Buying a house with an LLC can provide you with asset protection and privacy, but it also comes at a higher cost. And if you plan to make the home owned by your LLC your primary residence, you may face issues surrounding liability protections and tax implications.
1. Form Your LLC
The first step to buying a house with an LLC is to actually register and form your LLC. Depending on the state you live in, this can take as long as a week or two, so be sure to start the process early. The real estate market moves fast and the last thing you want to do is find a house you love before you've formed your LLC.
After your LLC is registered, you'll also need to get an EIN number and open a business bank account for the company. If you plan on getting a mortgage for your LLC, that will also take a bit of preparation as lenders are more stringent and require more information from buyers using an LLC.
3. Find a Suitable House and Make An Offer
Once your LLC is set up and you've prepared everything, you can start looking for homes. When you find a house you want, it's time to make an offer through your LLC. Although you own the company, you'll want to ensure the seller is clear that you'll be purchasing through your LLC. Your offer letter should include the business name and address.
4. Closing On the House
Getting to closing may take a little longer if you're getting a mortgage through the LLC, but the actual closing itself will be very straightforward. It won't be any different from closing on a house as an individual, except for the fact that everything will be in the name of your LLC. All checks and payments will be made from the LLC, and you'll sign the sales contract as the LLC's owner.
Below are several advantages associated with buying a house with an LLC:
As a business owner or public figure, you may find the privacy offered by an LLC structure quite appealing. Purchasing a house under an LLC ensures that the name of the LLC or company and not yours appear on public records and disclosures. In other words, an LLC structure protects your identity by replacing your personal name with a corporate name and identity.
2. Limited Liability
Limited liability means that you, as the owner, will not become personally liable for the company's debts or liabilities. Therefore, if you fear lawsuits as a real estate investor or landlord, the LLC structure may look very appealing to you. However, limitations exist within the limited liability structure.
One of such limitations may arise if you live in the home under your LLC. Under this type of situation, owners, shareholders, or members of a corporation or LLC can become personally liable for corporate damages, as if the LLC structure never existed.
3. Estate Planning
This is one of the most significant benefits of buying a house with an LLC. Instead of filing a new mortgage or deed of trust, you can transfer your home to your family by adding them as LLC members or increasing each individual's percentage of ownership in the LLC. You can also include clauses in the LLC operating agreement (a document outlining the business's rules and regulations) stating that your home should be passed down to your children.
4. Keep Business And Personal Lives Separate
Buying a house with an LLC can be a great way to separate your business from your personal life. However, if you choose to use the LLC for personal expenses or gains, you may risk piercing the corporate veil.
Before you decide to purchase your next home with an LLC, you must remember the significant disadvantages of buying a house with an LLC.
1. Higher Costs
Setting up an LLC can be quite expensive due to the numerous fees, especially legal fees. A significant aspect of these costs involves filing your LLC's articles of organization, which can cost anywhere from $40 to $500, depending on your state guidelines. You may also have to pay for business licensing and permit fees.
And once you have set up, you may have to deal with annual LLC taxes, yearly report fees, registered agent fees, and business license renewal fees. Make sure you account for these costs and seek the help of a legal professional when setting up your LLC.
2. Limited Mortgage Financing Options
While you can get a mortgage on an LLC-owned property, you will likely be unable to obtain a government-backed loan like a Federal Housing Administration (FHA) loan. Some lenders may also be reluctant to offer a mortgage loan to you when buying a house with an LLC because of the liability protection an LLC offers. In addition, conventional loan lenders may require you to provide a personal guarantee to act as a surety should the LLC fail to repay the mortgage loan.
If you paid for your home in full and free of any mortgage debt, you could transfer the property to an LLC created by you. However, if the house is still under mortgage, moving your property to an LLC would trigger the due-on-sale and mortgage acceleration clauses.
We mean by the term due-on-sale clause that you are required to repay the mortgage in full when you sell your home. In a nutshell, if you decide to transfer your home under mortgage to an LLC, your lender has the right to demand the entire remaining mortgage balance when you sell or transfer the property to another person. By triggering the mortgage acceleration clause, you must repay the remaining mortgage balance plus interest at once when you sell the house.
Buying a home with an LLC can be great for privacy, liability protection, and estate planning—especially if you're doing it for real estate investments or rental properties. However, you should be aware that the costs can be high, and living in the home can significantly reduce your LLC's liability protection.
More importantly, living in a house bought with an LLC may present you with more headaches than gains. It would help if you spoke to a legal advisor for more detailed advice on buying a house with an LLC or living in one while under a mortgage.