Suppose you want to diversify your portfolio and invest in real estate to gain passive income. You can own multiple rental properties and can be commercial property or residential properties.  The best part is that it’s legal. 

Nonetheless, real estate investment can bring enough income and positive cash flow, primarily if you aim to achieve financial independence. In that case, you may wonder: How many rental properties can I own? The answer is as many as you can afford.

But the first thing to consider when you’re thinking about buying rental properties is whether they’re a good fit for your goals and risk tolerance. There are some essential things to know before purchasing and owning a number of rental properties. 

In this article, you will learn how to protect and finance your rental properties, and the benefits of owning multiple real estates.

Why set up a Limited Liability Company (LLC) instead of a sole proprietorship?

Suppose you’re looking to get into the rental property business. In that case, you might wonder if setting up a business entity is worth it. Why not just keep things simple with a sole proprietorship?

There are many reasons to consider an LLC, but let’s start with the most important: liability protection. If you’re renting out your home, there’s a risk that someone could get hurt on the property and sue you for damages. 

Any damages will come directly from your pocket if you’re a sole proprietor. It’s a good idea to use LLC. Your assets are protected from lawsuits against your company.

What are the Pros and Cons of using a Limited Liability Company (LLC) for your rental properties?

Using an LLC for a rental property business is a great way to protect your liability, get tax benefits, and gain other advantages for your business. Like any other business, it also has its advantages and disadvantages.

Pros 

1. Easy Money Management – When you put your rental real estate into LLC, it is easier to manage rental income.
2. Legal Protection – Setting up an LLC for your business creates a barrier between your business and personal assets. It protects your company from creditors involving your debt and vice versa.
3. Tax Benefits – It allows you to save much money on taxes. It will enable you to deduct expenses such as depreciation and mortgage interest from your income before calculating how much property taxes you owe.

Cons 

1. Cost – Many fees to be paid vary by state with setting up and maintaining an LLC. It usually costs between $100 to $500. 
2. Documentation Hassles – Setting up LLC requires a lot of different organization and documentation.
3. Extra Tax – There will be additional tax consequences depending on the structure of the LLC.

How to Form an LLC? 

The following steps you need to follow to set up your rental company:

Step 1: Find a lawyer to help you set up your LLC.

The first step is to hire an attorney to be your registered agent or one of many companies that specialize in providing registered agents. A registered agent is the one person or entity that has legal responsibility for receiving official communications on behalf of your company, such as summonses and subpoenas. 

Step 2: Choose a business name for your LLC.

You can get a business name for free through the government website or pay a company to do it for you.

Step 3: Create an operating agreement for your LLC.

An operating agreement is a set of rules that govern how decisions are made within an organization like yours, and it’s required by law in every state. The operating agreement will outline how members distribute profits if someone leaves the company or dies unexpectedly and whether employees are allowed.

Step 4: Get the IRS’s Federal Tax ID (or Employer Identification Number).

The IRS requires all businesses, including LLCs, to have a Federal Tax ID to open a bank account or apply for credit. You can get one through the IRS’s website by filling out the EIN application form. The IRS will give you an EIN within 24 hours of filing your request.

Step 5: Open a bank account in the name of LLC.

You’ll need to open up a business bank account separate from any personal accounts you may have. Your business bank account will be used to deposit any money earned by your company into it and then use those funds for day-to-day expenses like salaries, marketing, and operating costs.

You must decide whether to set up separate LLCs if you have more than one rental property.

What are the different financing methods?

Suppose you want to buy rental properties in the United States. In that case, you must know that a few different financing options are available.

1. Owner Financing – This option will require a sizeable down payment and a higher interest rate than other options. Still, it can be an excellent choice for those without access to additional financing.

2. Seller Financing – many new investors opt to finance their purchases using seller financing instead of taking out a mortgage or another type of loan. This method allows you to take over payments from the previous owner until you sell the property yourself. You’ll pay the monthly rent until then.

3. USDA Rural Housing Program –  This is good news for people who live in rural areas or communities with less than 20,000 people. The program also helps low-income families, minorities, and veterans buy rental properties.

You can qualify for the USDA Rural Housing Program if you are:

-a first-time homebuyer

-a veteran or active-duty military person (veterans must have served for 90 days or more)

-a member of a minority group that has historically faced discrimination when trying to buy homes

You may be eligible for additional benefits if you are disabled and have children under 18 years old living with you.

4. FHA Loan – FHA loans are available for first-time homebuyers and people who have previously owned homes. Still, they require a home in an area with low property values. You can buy a rental property and use its rent to pay off your mortgage payments.

5. VA Loan – This financing method is for veterans and their surviving spouses. It can be used for purchasing a home or refinancing an existing loan. These loans are guaranteed by the U.S. Department of Veterans Affairs (VA), so they have low-interest rates and no down payment requirements. 

The VA also offers unique benefits for disabled veterans who want to buy a home. For example, if you’re disabled and want to buy a home with your spouse or children. In that case, you may be able to use your disability as an income source for qualifying for the loan.

6. Freddie Mac Loan – If you don’t have enough cash for the down payment and reserve requirements, Freddie Mac offers a similar program with more straightforward guidelines. 

However, this loan program is only available for up to six homes. If you’re financing a seventh, eighth, ninth, or tenth property, you’ll need to use the Fannie Mae loan program.

7. Fannie Mae Loan  – Fannie Mae offers mortgage options that support the real estate market and current home buyers and homeowners looking to refinance. 

Fannie Mae is a mortgage investor, but they have programs that are intended to help everyone, from home buyers to current homeowners and even renters.

8. Private Lender – It is more flexible and willing to lend to you because the investment property is the collateral. You have a little more control over the process and can often negotiate better terms for your financial situation. The approval process is way faster and more efficient than a conventional loan.

Take note that private lenders do look at your financial status. They want to know your debt, how much cash you have in reserve, and your credit score. They are not taking a risk on a bad loan.

9. Home Equity Loan – A home equity line of credit known as HELOC allows you to borrow against your home’s equity without taking all the money at once. It works much like a credit card because you’ll have a line of credit. You have to pay the interest monthly.

What are the benefits of Owning Many Rental Properties?

Owning many rental properties is a great way to diversify your income and build wealth. The benefits of owning many rental properties include:

1. Diversification of income –  If real estate investment is not doing so well, you can always rely on another to generate income. You can create enough money through passive income streams by owning multiple rental properties.

2. Creates passive income – If you have multiple properties, they will continue to generate passive income even when you are not actively involved in managing them. It gives you a steady monthly cash flow. You may need to save up for a down payment on your first rental property. 

Once the property is paid off, you will receive monthly payments from tenants who are paying off the mortgage. You can use the cash return to purchase more real estate and create more passive income streams that increase your net worth. 

3. Less Stress –  When you own just one property, there is more responsibility and stress involved with managing it all by yourself. When you own multiple properties, this responsibility is shared among others, including your property manager.  

Recommended Video: The Secrets of Real Estate Tycoon with 15,000+ Apartments

Related: Multifamily Real Estate: Easy Guide to New Investors

Conclusion

If you wish to have many rental properties, you can own as many as you can, as long as you can finance and protect them, and of course, the property value or purchase price is a good deal.

Recommended Video:  How to Get into Multifamily Investment: Tips for New Investors

To learn more about real estate investments, Wellthy Capital is committed to help and guide you!