Why Using an LLC for Investing in Residential Real Estate May Not Be the Best Idea

Before we dive into the world of LLCs and owning residential real estate, let me give you a very short background.

I am not an attorney, not a CPA, not here to sell you anything. There is no “buy” or “register” link at the end of this post. However, I have been investing in residential real estate for 20 years, have done it on a large scale, and that’s what I do day in and day out. This is not a what you should do or should not do when it comes to investing kind of a post.

My professional career in real estate investing started in 2004. Back then, I probably attended at least two to three lectures every year where an attorney came and spoke about LLCs and investing. As usual the tone was: let’s put fear into people, then come in and sell them my brother for services. The oldest drill in the sales book.

At first, this tactic makes perfect sense. After all, who would not want to buy a property in their LLC, right?

The more I advanced as a real estate investor and the more experience I accumulated, I started questioning and doubting the notion “you must have an LLC.”

Spoiler alert: the LLC is not a sacred tool that should be put on a pedestal as if that would save our lives. It is just a tool. A tool that needs to be used when it fits to use that tool (my apologies to all the attorneys who are selling their services setting up LLCs and selling products around LLCs as this post maybe not contributing to your pockets).

Well, I didn’t know to properly form the questions about the real usage of LLCs. Something kept bugging me about it.

To this day, 20 plus years after I started professionally investing in real estate, the number one asked question in any lecture or webinar is LLC related.

Also, you should know that over the past 20 years I have started, open, maintain, closed and so on many LLCs in multiple states – so I have definitely used this tool when it was a good fit.

So let’s break down this question of LLC and at least suggest things you should be considering when it comes to using LLCs.

So if an LLC is an answer, why not use it? After all, it’s not that complicated.

Issue # one – mortgages

We always aim to obtain the best terms mortgage. Conventional conforming residential mortgages typically provide the best terms for residential property. So challenge number one is buying the house as an LLC and getting a mortgage for that property. Most lenders would not give such a desirable mortgage to an entity, only to a real person. So in this case if we want to get a mortgage to our LLC, we would have to go with a commercial loan in which terms are not as attractive.

Possible solution – some say after closing you can quit claim title from the individual to the LLC., which is not that complicated to do. However, typically a mortgage agreement will include a clause known as the “due on sale clause,” which means the lender is allowed to call the loan completely if any changes are made to the title.

In reality, to date, I have only seen two or three times an actual letter being sent by a lender requesting an individual a full payment of the mortgage within 30 days due to changing title. So historically speaking, the chances of this happening are small, unless regulation or bank in regulation changes overnight – and it could.

About 4 or 5 years ago, I came across a video that actually states that although the mortgage agreement has the “due on sale clause” it is actually allowed by federal banks under certain conditions to transfer title from an individual to an entity. Unfortunately, I was not able to find the video that was speaking about it. I have no way to know if this was allowed or not.

Issue # two – protection

Many investors believe that the LLC will provide them protection from lawsuits or shield them from tenants. It probably will. But is it really needed? Will it always provide that protection?

I always start by asking what is the risk in the transaction. What is it that I’m trying to protect as the first guideline to help me determine whether or not I need an entity.

For example, if you’re buying a flip property or if you buying a lower end property or a property that is positioned in a higher risk situation due to condition, location, age, type of tenants, or type of activity in the property such as short-term rentals – considering an LLC is more likely.

But, if you’re just buying a long-term rental in a middle class type of area that attracts good tenants and take care of the property (ie fix it up when needed and not neglect it), then possibly an LLC is not needed. I would just make sure that I have good insurance on the property and possibly umbrella as well.

I want to share with you a real life experience. For the past 20 years, I have probably given well over 350 lectures, more than 750 webinars, guest on podcasts many times, spoke on panels, etc. In every event that I hold a question about using LLC comes up, I always ask the audience what is their ACTUAL experience about using or not using LLCs, always asking, more like begging, for a real story from any participant about a situation were the LLC had protected him or the LLC could have protected it. I always make it a point that I want a real story, not ‘I heard of a friend of a friend who heard some attorney talk’ about something so distant I don’t even think it’s true.

After 20 years and hundreds of such events, I would even say with some obsession about looking for the stories. While I’m sure they exist, I found only one. A couple who attended my event who I actually know personally purchased a property in Colorado. One day, a person, not their tenants, walked across their front lawn, fell and broke his leg. He sued them for $50,000. They did not have an LLC for this property. When I asked him what happened, if they lost their house, and all their life because of this situation, they laughed at me. “We did have insurance and we settled with him on $25,000.”

The point I’m trying to make is that I find it very strange that someone that has my opportunity to explore this topic of LLC cannot really find good and many stories. And again while I’m sure there are more stories, the point I’m trying to make is that maybe there is more to the LLC than just what the attorneys are telling us.

The last point I want to leave you with is that you should know the LLC may not always protect you. If your LLC is owning a piece of real estate and as the manager, you are neglecting the property or neglecting to take care of problems with the property, you may find yourself exposed. The LLC may not protect you as you may think.


I want to leave you with this. Don’t just take what attorneys or experts tell you at face value because they are on the stage lecturing about something. Not even me, if you come to my events. It is always better to question and challenge the status quo in order to find if a tool or solution is the right way or the right one for you.

Whatever you decide to do real estate wise, I wish you nothing but great success in your endeavors.