Forming an LLC for Rental Properties

If you own a rental property or rent on sites like Airbnb, you should consider forming an LLC and transferring ownership of the property into the LLC’s name. Doing so shields you from personal liability if something happens on the premises while a tenant or short-term renter is occupying the space. For example, if the renter trips over a crack in the sidewalk leading up to your porch, the renter can only go after the LLC for liability, and your personal assets would be spared. Here are five steps to form an LLC for rental properties:

1. Contact Your Mortgage Lender

You will still be responsible for making timely mortgage payments on the property, even though you intend to transfer legal ownership to the LLC. Speak to your mortgage lender before you do anything else- depending on your financial situation, there may be additional steps. You may have to refinance the mortgage into the LLC’s name, which can take a few months. If your LLC does not have an established credit history (which, if it is newly formed, it would not), you will likely have to sign the refinanced mortgage as a personal guarantor.

2. Form the LLC

You will need to go through the standard filing process (check out our article regarding LLC formation here). If you own multiple rental properties (or think you might in the future), you may want to establish a series LLC. A series LLC shields each property from liability from the others, giving even more liability protection than a traditional LLC.

3. Open a Business Bank Account

You will want to open a separate bank account under the LLC’s name. This keeps the LLC’s funds separate from your own and simplifies rent collection and security deposits. You may need a tax ID or a Federal Employment Identification Number (FEIN) to open a bank account. You can obtain a tax ID by filling out a form through the Internal Revenue Service’s website. Unless there are multiple owners or you plan to hire employees, opening a bank account should be the only reason for you to obtain a tax ID.

4. Transfer Ownership of Property to LLC

This step has multiple parts. First, you will need to prepare a deed to transfer ownership from yourself to the LLC. There are two types of deeds: quitclaim and warranty deeds. Warranty deeds are more complex and guarantee more assurances than quitclaim deeds. You likely received one when you purchased the property. They are generally used to transfer ownership between unrelated parties. A quitclaim deed simply transfers ownership of the property; it does not guarantee that the title is good. Because you are not transferring the title to an unrelated or third party, a quitclaim deed is fine for this purpose. You can find form deeds online, but they require specific statutory references and other property information, so it is best to have an attorney review the deed before recording it to ensure accuracy.

Then, once the deed is prepared, you will need to record it with your county’s Recorder of Deeds. This comes with a nominal fee and can usually be done online.

5. Edit Leases and Rental Agreements

Finally, you will need to edit your existing leases to state that the landlord is now the LLC. Ensure that all rental funds are deposited into your new business bank account. If you rent a property using Airbnb or a similar site, check with the service to determine whether you need to do anything with them to reflect the change of status.

Do you own a rental property or use Airbnb to rent your house? Are you looking to transfer ownership of the property to an LLC? G & G Law can help! Contact us.