Investment properties have taken a big bite out of the housing market in the past few years, with investors snatching up three out of four vacant homes. If you've been thinking about buying property as an investment, you can take out a personal mortgage to do so. However, forming an LLC or using an existing LLC to finance the home can give you a level of protection you wouldn't have otherwise. You may also want to buy a house to operate as your business's office; in that case, you'll need to be able to demonstrate that the home is primarily for business use. One way to make this work is to pay rent to the LLC for the part of your home you use as personal accommodation.
Why an LLC?
This type of business is called a Limited Liability Corporation for a reason. It limits your own liability, whether you're running a retail store or renting property to tenants. If someone is injured at a property you personally own, you may be held legally liable. If that property is a rental home, your own personal assets could be at risk if you're sued. However, if you run an LLC, a judge would have to "pierce the veil" that protects you for you to be liable. "Piercing" usually only happens in cases where someone is using the LLC as protection while committing fraud.
How to Set Up an LLC
If you don't already have an LLC, the process is fairly simple. You'll need to choose a name and file formal paperwork with the appropriate state agency. The filing fee varies from one state to another, but it is generally a few hundred dollars. In some states, you may be required to publish your intent to form an LLC to allow other business owners to contest it. Your state will also require that you form "articles of organization" and file them with the state. This document simply states contact information for you and anyone else managing your LLC, the nature of your business, the name and address of your business and a registered agent who will accept legal documents on your behalf.
How to Use an LLC to Buy a House
The biggest obstacle to buying property as an LLC will come when you visit your local lender. You'll need to show that the home's use is business-related, which is important for LLC protection anyway. If you try to run personal assets like your primary home through your LLC, the court would likely disregard it in the event of a lawsuit. If you choose to live in a back room in the home you're buying for business, and pay rent, your LLC will need to pay taxes on the rent money, so crunch the numbers before making that decision. Unless you plan to pay in cash, you should also seek out a mortgage lender that specializes in commercial lending, because they are familiar with the process.