Should You Put Rental Properties in an LLC? What Landlords Need to Know
Every landlord forum, podcast, and Facebook group eventually gets to the same question: “Should I put my rental properties in an LLC?” The answer is almost always “it depends” — which is frustrating but accurate. Here’s what actually matters when making this decision.
What an LLC Does for You
A Limited Liability Company creates a legal separation between your personal assets and your rental property business. In theory, if a tenant sues the LLC that owns your rental property and wins a $200,000 judgment, they can only go after assets owned by the LLC — not your personal bank account, your primary residence, or your retirement savings.
This is the primary reason landlords consider an LLC: asset protection. If something goes catastrophically wrong at one of your properties — a serious injury, a major lawsuit, an environmental issue — the LLC acts as a firewall between that liability and everything else you own.
What an LLC Doesn’t Do
An LLC is not a magic shield. There are important limitations that the internet gurus often skip over.
Personal guarantees override the LLC. Most mortgage lenders require you to personally guarantee the loan, even if the property is in an LLC. If the LLC defaults, the lender comes after you personally. The LLC doesn’t protect you from your own debt obligations.
Piercing the corporate veil is real. If you don’t treat the LLC as a separate entity — meaning you mix personal and business funds, don’t maintain separate bank accounts, skip annual filings, or don’t carry adequate insurance — a court can “pierce the veil” and treat the LLC as if it doesn’t exist. An LLC only protects you if you operate it properly.
It doesn’t replace insurance. Insurance is your first line of defense. A good landlord policy with adequate liability coverage handles 99% of claims. The LLC is the backup for the catastrophic 1% scenario that exceeds your insurance limits. Running properties without insurance but inside an LLC is backwards.
The Tax Situation
A single-member LLC is a “disregarded entity” for tax purposes — it files on your personal tax return on Schedule E, exactly like a rental property you own personally. There’s no separate tax return required and no change in how rental income or deductions are reported.
A multi-member LLC (partnerships, for example) files its own tax return (Form 1065) and issues K-1s to each member. This adds accounting complexity and cost but is necessary when multiple people own the property together.
An LLC can also elect to be taxed as an S-Corp, which can provide self-employment tax savings in certain situations — but this is advanced territory that requires an accountant’s guidance based on your specific numbers.
The key point: for most single landlords, an LLC doesn’t change your tax situation. It’s purely about liability protection.
The Financing Complication
Here’s where it gets practical. Most conventional mortgages (Fannie Mae/Freddie Mac) have a due-on-sale clause that technically allows the lender to call the loan if you transfer the property to an LLC. In practice, lenders rarely enforce this as long as you keep making payments — but “rarely” isn’t “never,” and the risk exists.
Options for dealing with this include buying the property in the LLC from the start using a commercial or DSCR loan (higher rates), transferring to the LLC after purchase and accepting the low risk of the due-on-sale clause being triggered, or keeping the property in your personal name and relying on insurance plus an umbrella policy for protection.
Many landlords with one to three properties choose the insurance-plus-umbrella approach. It provides strong liability protection without the financing complications, annual LLC fees, or additional accounting. As the portfolio grows and net worth increases, the LLC structure becomes more worthwhile because there’s more to protect.
When an LLC Makes Clear Sense
You have significant personal assets beyond the rental properties — savings, other real estate, retirement accounts. The more you have to lose, the more valuable the LLC’s protection becomes.
You own four or more properties. At this scale, the risk surface is larger, and the annual cost of maintaining an LLC ($100-$800/year depending on the state) is negligible relative to the portfolio value.
You have partners or investors. If anyone else has a financial stake in your properties, an LLC provides a clear legal structure for ownership, profit distribution, and liability allocation.
You’re in a litigious market or tenant-friendly state. In states where tenant lawsuits are common and judgments can be large, the LLC adds a meaningful extra layer of protection.
When It Might Not Be Worth It Yet
You own one or two properties and have limited personal assets. The cost and complexity of an LLC may not be justified when a good insurance policy provides adequate protection.
You’re relying on conventional financing and don’t want to risk the due-on-sale clause or refinance into a commercial loan at a higher rate.
Your state has high LLC annual fees. California charges an $800/year minimum franchise tax per LLC, for example. That’s $800/year per property if you use separate LLCs — a meaningful expense for a property cash flowing $200/month.
The Bottom Line
An LLC is one tool in a landlord’s asset protection toolkit. It’s not the only tool, and it’s not always the right tool. The decision should be based on your specific situation — number of properties, net worth, state laws, financing structure, and risk tolerance.
Start with good insurance. Add an umbrella policy. Maintain your properties well. Screen your tenants thoroughly using tools like Underground Landlord’s screening platform. These steps prevent far more problems than any legal structure can protect you from after the fact.
When the portfolio and your personal net worth grow to the point where the LLC’s protection is worth the cost and complexity — and you’ll know when that point is — consult a real estate attorney in your state to set it up properly. Not a YouTube video. Not a $49 online filing service. A local attorney who understands your state’s laws and your specific situation.
If you need help finding a real estate attorney or other professionals who work with landlords, the business directory on Underground Landlord is a good starting point for connecting with service providers in your area.