4 Reasons to Create an LLC for Rental Property

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You already have a lot on your plate as a property owner, especially if you own several rentals. From maintenance to tenant applications, these properties can take a lot of time and energy. On top of that, tenant disputes regarding rental property can and do happen. This is one of the biggest reasons that property owners decide to create a limited liability company (LLC) for their rental property – so that they have extra protection in the event of a lawsuit.

Why should you create an LLC for a rental property? What are the benefits and drawbacks? This guide will walk you through what an LLC is and the pros and cons of taking that next step.

What Is an LLC?

An LLC is a business structure that allows owners or partners to separate their business from their personal liability. This means that the owner is not responsible for the company’s debts or liabilities, which can be beneficial to many types of businesses, including rental properties. A few facts to keep in mind:

  • Each state has its own process for creating an LLC, but it generally involves selecting a business name and filing the articles of organization with your state. 
  • There is a fee involved with forming an LLC that varies widely. 
  • Your business will also obtain an employer identification number (EIN) and create an operating agreement.

An LLC is different from other business structures, such as a sole proprietorship, partnership, or C corporation. Many landlords and property owners decide to create an LLC because they’re easy to form and manage, and the additional liability protections are a big plus. The owner of a sole proprietorship would not have any separation between personal and business assets, for example. Is an LLC right for you? We will look at the top reasons to take the leap.

4 Reasons to Create an LLC for Rental Property

Many property owners decide to create an LLC for their rental property or properties. Consider the pros and cons so you make the right decision for your situation, including how much time and money you can dedicate to managing the LLC. Here are the top four benefits.

1. Separate Personal Liability

One of the most important reasons to consider an LLC is to limit your personal liability for your rental property. What does this mean, exactly? Say a tenant was to file a lawsuit against you for sustaining an injury on the property. With an LLC, your personal assets and finances wouldn’t be involved in the dispute, just those of the business. This is a high level of extra protection for property owners.

2. Pass-Through Taxation

LLC owners also enjoy pass-through taxation. Pass-through entities are not taxed directly, and all profits made are taxed like a sole proprietorship or partnership. The LLC owner or owners only report the taxes on their personal tax returns. This helps you save time on filing a business tax return.

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3. Create an LLC for Each Property

You also may want to consider setting up separate LLCs for each of your rental properties. This step further protects your investments because when a lawsuit is initiated against one LLC for one property, the others won’t be impacted at all. For example, you can still own and maintain your other properties even if you lose a property in a dispute.

4. Partnership Opportunities

An LLC also gives you more options for partnerships and investments than other corporations. LLCs can have foreign owners or investors. They also have no restrictions on the number or type of owners they can have. Having an operating agreement in place for your LLC will help you manage these relationships.

Creating an LLC for your rental property or properties limits your personal liability and helps you avoid filing a business tax return each year. They are easy to set up and maintain, so they are a popular option for property owners.

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4 Reasons Not to Create an LLC for a Rental Property

There are many reasons that starting an LLC might help a property owner grow their rental business, but the structure doesn’t work for everyone. Here are the top four drawbacks.

1. Costs of Creating an LLC

Remember that there are fees associated with LLC creation, which will vary based on your state but are generally between $50 to $250. There are also annual reporting fees that may be required to keep adequate LLC records and stay compliant, in addition to other costs that may arise.

2. Separating Your Finances

Another potential downside of LLCs is that you need to create a separate bank account for the rental property as well as a separate bookkeeping system, apart from your own personal financial processes. It needs to be clear that the LLC is a separate entity from you and other owners. This could create additional work and can become time-consuming.

3. The Rental Housing Act

Properties located in the District of Columbia will be subject to the Rental Housing Act of 1985 if an entity owns the property instead of an individual. This means you could have to follow certain rent-control regulations and other restrictions.

4. Mortgage and Financing

Sometimes it can be more challenging to qualify for a mortgage if you create an LLC, and your interest rate could be higher. Keep in mind that if you already have a mortgage before creating an LLC, the transfer of property to the LLC could impact your financing.

These are all substantial reasons to consider not creating an LLC, but make sure you figure out if the benefits outweigh these drawbacks. Many landlords find the extra legwork to be worth it, in the end, to have their personal assets protected.

Working with Property Experts

Talk to the experts at Nomadic Real Estate if you have questions about creating the right business structure for your rental property. We are dedicated to helping landlords in the District of Columbia, Maryland, and Northern Virginia regions.

Contact us for more information about your Greater D.C. property management needs.

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Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

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Unit Comparison Report:

  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

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Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

You'll also find a month-over-month operating statement:

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Responses will show up in the conversation ticket:

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You can reply in-line using the comment box:

Each conversation will be logged in its entirety:

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

View a snapshot of income and expenses on your dashboard:

See every transaction in real-time on your ledger:

Statements and forms will be posted to your documents library:

View a suite of real-time financial reports:

See a running list of all bills, and drill down for more detail:

Under Bill Details, you'll find dates/descriptions/amounts and more:

You can also communicate with your Account Manager through the portal:

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.