The best way to protect yourself when you buy Phoenix investment property is by owning it through a Limited Liability Company, or an LLC. Even if you have the property in a family trust, you want to have it in an LLC before you but it into the trust.
Today, we’re explaining how that helps you as a landlord and an investor.
Protect Yourself from Lawsuits and Claims
The primary reason to buy and hold your investment in an LLC is that it protects you from liability and lawsuits. Imagine the worst case scenario: a child drowns in a pool at your rental property or a tenant’s dog attacks a neighbor who happens to walk by the house. As the property owner, you will be the target of any lawsuits or insurance claims.
When you own the property personally, you and all of your assets are fair game in those lawsuits. But, when an LLC owns your property, your personal liability is limited. Claimants and plaintiffs cannot come after your personal finances or assets in a lawsuit. They’d be suing the LLC, not you.
Separating Business and Personal Interests
It’s easy to become emotionally attached to properties. However, when you decide to rent out a property that you own, you’re essentially opening and running a business. You need to think about that rental property as a business which produces income.
When you’re making decisions and plans, you’re doing so from a business perspective, not a personal or emotional perspective. It’s important to keep these interests separate. That’s why establishing an LLC makes sense. Your business interests and assets are separate from your personal interests and assets. If there’s a lawsuit, no one can come after you and the home you’re living in. Only the LLC owns the rental property.
Many owners wonder if each property they own should be in a separate LLC. This is a good question and an excellent way to provide additional protection to your portfolio of assets. But, the answer really depends on your own unique financial and investment situation, and the amount of equity you have in each property. You also need to consider your own personal tolerance for risk.
Depending on the size of your portfolio and your investment goals, you can also form Corporations or Limited Partnerships, which are different from an LLC. Talk to your tax and accounting professionals as well as a lawyer if you have a lot of assets and you’re wondering how to best protect them.
Forming an LLC in Arizona
You’ll need to take a few specific steps to create an LLC in Arizona. First, there will be a name check and you’ll have to file for your business entity on the Arizona Corporation Commission website. The creation of your LLC will need to be published in a local journal. Then you’ll need to apply for an EIN number.
Once you have those things, you can open a bank account with your new EIN. You put the property into the LLC with a quit claim deed, and then have it notarized and recorded. It’s not terribly complicated.
We can work with you throughout this process. If you’re interested in putting your Phoenix rental property into an LLC, contact us at Service Star Realty.