At least once a week, someone asks me whether they need to open an LLC for their rental property. It’s a common question among real estate investors, but the answer isn’t always straightforward.
Spend five minutes in any investing forum, and you’ll find opinions all over the place.
Some investors swear by LLCs as the only smart way to hold properties, while others think they’re overhyped and not worth the hassle.
My take?
For most small-scale or new investors, the need for an LLC is vastly overstated.
Sure, there are scenarios where an LLC makes sense. But for many investors, the costs and complexity outweigh the benefits.
That said, this decision isn’t one-size-fits-all.
It depends on your risk tolerance, goals, and the type of investing you’re doing.
So, let’s break it down and figure out if an LLC is the right move for you—or if you can skip it and focus on what really matters: growing your portfolio.
The Cons To Creating An LLC For Rental Property
While LLCs can seem appealing at first glance, there are several drawbacks to consider before diving in.
In this section, I’ll cover some of the biggest downsides of using an LLC for your rental properties, including unexpected costs, financing challenges, and the reality of limited legal protection.
By understanding these drawbacks, you’ll be better equipped to decide if an LLC aligns with your goals and situation.
An LLC Might Not Provide The Protection You Expect
An LLC is often marketed as this foolproof way to protect your personal assets, but that’s not entirely true.
Sure, it can provide some legal separation, but only if you do everything by the book.
That means keeping business and personal finances separate, following all the formalities, and not cutting corners. Even then, I’m not convinced that an LLC is going to fully protect you.
The reality is, if someone wants to sue you, there’s a very high likelihood that they will be able to pierce the LLC and name you personally in the lawsuit.
For those reasons, I believe LLCs are more about privacy than anything. And I’ll touch on that later in the article.
LLCs Can Be Expensive and Time-Consuming
Setting up and maintaining an LLC is pretty straightforward but it will still complicate your life.
Thinking about a master LLC structure? This complexity goes up significantly!
I’ve gone through this process myself for one of my properties, and let me tell you—it’s a pain.
There’s a ton of paperwork, new bank accounts to set up, and additional hoops to jump through, especially when closing a property under a master or series LLC structure.
You have to really consider whether this process is truly worth it.
Furthermore, setting up and maintaining an LLC isn’t free. Filing fees, annual reports, and extra tax prep add up.
If you’re dealing with multiple properties, you might need multiple LLCs, which multiplies the cost and effort.
Plus, you’ll need to manage separate bank accounts and ensure everything is in compliance. It’s a lot of work, especially if you’re just starting out.
While some people will recommend one property for each LLC, I think that’s overkill.
But again, it comes down to individual risk tolerance and your own perceived protection or benefit from an LLC structure.
Financing In An LLC Can Get Tricky
One of the biggest drawbacks of holding a property in an LLC is that it disqualifies you from obtaining conventional financing.
Conventional loans typically offer the best rates and terms, making them the go-to option for many investors.
Unfortunately, these loans are only available to individuals—not entities like LLCs.
For investors who want the benefits of an LLC while still accessing conventional loans, the workaround is to purchase the property in your name and then transfer it to an LLC using a quitclaim deed (QCD).
While this can be effective, it’s not without risks.
One major concern is that transferring a property via QCD can invalidate your title insurance policy.
Most title companies offer an enhanced policy that remains valid after such a transfer, but it’s an extra step you’ll need to check on and pay for. Skipping this could leave you exposed if title issues arise later.
Beyond title insurance, transferring a property post-closing adds layers of paperwork, time, and potential complications.
It’s not impossible, but it’s something you’ll need to manage carefully.
For many investors, this additional hassle underscores the limitations of relying on an LLC when financing properties.
When an LLC For Rental Properties Might Make Sense
While I generally believe LLCs are overhyped for most real estate investors, there are situations where they make sense.
In this section, I’ll outline scenarios where an LLC can provide real value, whether it’s protecting your anonymity, meeting specific loan requirements, or managing partnerships.
Understanding these contexts will help you decide if the extra complexity is truly worth it for your investment strategy.
Rentals In LLC’s Can Provide Anonymity
In my opinion, the real benefit of an LLC isn’t the liability protection—it’s anonymity.
By using an LLC, you can make it harder for someone to figure out that you own a property. This is particularly useful if you’re concerned about being targeted for lawsuits.
Or, perhaps you live in a small town and simply don’t want people to easily know what property you own.
The idea here is to create enough layers of ownership that someone decides it’s not worth the hassle to track you down.
For example, you might set up a Wyoming LLC (a state known for strong anonymity protections) that owns a Michigan LLC.
The Michigan entity then owns your rental property.
Add registered agents to the mix so your name isn’t publicly listed, and you’ve made yourself significantly harder to find.
However, this process can be time-consuming and cumbersome.
You’ll Need An LLC For Rental Property With DSCR Loans
If you’ve reached the limit of 10 conventional loans per person (allowing a combined total of 20 loans for you and your spouse), you’ll need to pivot to DSCR loans.
These loans require the property to be held in an LLC.
DSCR loans are also a good option if you can’t qualify for conventional financing due to income or credit issues.
I recently had to utilize a DSCR loan for a property I refinanced due to no longer having a W2 job.
While I might qualify for conventional financing in the future, my current 1099 income history isn’t extensive enough to meet their requirements.
Because DSCR was my only viable option, I had to create an LLC to hold the property as part of the refinancing process.
If You’re Risk Averse And Believe LLC’s Provide Protection
Let’s be honest—if someone is truly determined to sue you, an LLC isn’t an impenetrable shield.
Most lawyers worth their salt know how to pierce that veil.
But for some people, the perceived protection of an LLC is still worth the effort and cost.
If you’re extremely risk-averse and the idea of not having an LLC keeps you up at night, then by all means, go for it.
For many, the biggest benefit isn’t actually liability protection—it’s the peace of mind that comes with feeling like you’ve added an extra layer of defense. If that helps you sleep better, it’s absolutely worth the hassle.
Ultimately, if you’re someone who values that extra sense of security, whether real or perceived, an LLC might make sense for you.
But know what you’re getting into and weigh the trade-offs carefully.
Property In An LLC Helps Contain Audit Risk
One potential advantage of holding properties in an LLC is its ability to compartmentalize audit risk.
According to my accountant, if one property in an LLC structure gets flagged for an audit, the risk and scrutiny are typically contained within that specific entity.
This can prevent a cascading effect where one audit leads to a broader investigation into your entire portfolio or personal finances.
For those managing multiple properties, this containment can be especially appealing.
My accountant has also suggested that a series or master LLC structure can amplify this benefit.
In this setup, you might have a master LLC—possibly based in a state like Wyoming, known for its anonymity protections—that owns several subsidiary LLCs, each tied to an individual property.
If one subsidiary LLC gets audited, it doesn’t necessarily expose the others.
That said, I’m not an expert in tax law, and my understanding of this may not be 100% accurate.
But it’s an interesting strategy worth considering if LLC structures are appealing to you.
It’s also essential to weigh this potential benefit against the added complexity and costs of setting up and maintaining such a structure.
LLCs Make Sense If You’re Partnering With Others
When you’re working with partners, an LLC isn’t just a formality—it’s a necessity.
Partnerships can get complicated quickly, and having a clear, legal framework is crucial. An LLC allows you to define ownership percentages, outline responsibilities, and set expectations for profit-sharing.
This clarity isn’t just helpful—it’s essential to avoid misunderstandings and disputes down the road.
Take one of my own experiences as an example: I own a duplex in Detroit with a friend, and we’re 50/50 partners.
After completing a full-gut rehab on the property, we needed to refinance it.
To make that happen, we created an LLC to formalize our partnership and streamline the refinancing process.
We then used a DSCR loan to pull out our capital, something that would’ve been nearly impossible to navigate without the structure an LLC provides.
In partnership situations, an LLC protects not just the property but the relationship.
It creates a shared understanding of how things will operate, ensuring everyone is on the same page about responsibilities, expenses, and decision-making.
Without it, partnerships can quickly become a recipe for conflict—especially when money is involved.
If you’re thinking about partnering on a property, I strongly recommend setting up an LLC.
It’s an investment in protecting both your asset and your partnership. It’s better to take the time upfront to set things up correctly than to deal with the fallout of ambiguity later on.
LLCs Are Ultimately A Personal Decision
Do you need an LLC for your rentals? Maybe.
But, in my opinion, it’s probably not as necessary as the internet and some investors make it out to be.
For most small-scale or new investors, the perceived benefits of an LLC are often overblown compared to the actual costs, hassle, and complexity it adds.
Unless you’re in a situation where an LLC truly makes sense—like partnerships, DSCR loans, or a deep need for anonymity—you’re likely better off focusing on growing your portfolio, managing risk with great insurance, and keeping your operation as simple as possible.
After all, the best way to avoid a lawsuit is to simply obey the law.
That said, every investor’s situation is unique.
If you’re extremely risk-averse and having an LLC helps you sleep better at night, then it might be worth the extra effort and cost.
Or if you’re partnering with others, dealing with unconventional financing, or scaling to a larger operation, an LLC can be a smart move.
Ultimately, the decision comes down to your specific goals and tolerance for complexity. LLCs aren’t a magic bullet, but they do have their place.
Just don’t let the hype distract you from what matters most—building a strong, profitable portfolio.
Take the time to weigh the pros and cons carefully, and if you’re still unsure, consult with a trusted advisor who knows your market and strategy.