7 Mistakes Real Estate Investors Make When Buying Properties Through an LLC

Most real estate investors know they should buy rental properties through an LLC. It protects your personal assets if a tenant sues you. It separates your business and personal finances. It looks more professional.

But knowing you should use an LLC and actually doing it correctly are two different things.

The process of buying property through an LLC involves different rules, different lenders, and different financing options than buying in your personal name. Get it wrong and you'll either waste months trying to close a deal, lose money on unfavorable loan terms, or worse, accidentally void the liability protection you set up the LLC for in the first place.

This guide covers the seven most common mistakes investors make when buying properties through an LLC, and how to avoid them.

1. Trying to Use a Conventional Mortgage

This is the biggest mistake and the one that stops most new investors before they even start.

You cannot use a conventional mortgage to buy property in an LLC's name. Fannie Mae and Freddie Mac don't allow it. If you walk into a bank and ask for a conventional loan to purchase property under your LLC, they'll tell you no immediately.

Here's why this matters. Conventional mortgages offer the best interest rates, often 6% to 7% depending on market conditions. They have the longest terms, usually 30 years. And they require the smallest down payments, sometimes as low as 15% for investment properties.

But none of that matters because you can't use them for LLC purchases.

Instead, you need specialized financing designed for business entities. The most common option is a DSCR loan, which qualifies you based on the property's rental income rather than your personal income. Portfolio loans from local banks are another option. Hard money loans work for short-term financing.

These loans come with higher interest rates, usually 1% to 3% higher than conventional mortgages. They require larger down payments, typically 20% to 25%. But they're the only way to buy property through your LLC while keeping the liability protection intact.

Some investors try to get around this by taking a conventional mortgage in their personal name, then transferring the property to their LLC after closing. This violates the due-on-sale clause in most mortgages, which technically allows the lender to demand immediate full repayment. While lenders rarely enforce this if you're making payments on time, it creates legal risk and defeats the purpose of LLC protection.

The solution is simple: plan to use LLC-specific financing from the start. Don't waste time applying for conventional mortgages. Research LLC mortgage lenders who specialize in investor financing before you start shopping for properties.

2. Setting Up the LLC Incorrectly

Not all LLCs are created equal. The way you structure your LLC affects everything from taxes to financing options to liability protection.

Single-member LLCs are the simplest structure. You're the only owner. In most states, you can set these up online in under an hour. But single-member LLCs offer less liability protection than multi-member LLCs in some jurisdictions. Courts have occasionally ruled that single-member LLCs are easier to pierce in lawsuits.

Multi-member LLCs require at least two owners. This could be you and your spouse, you and a business partner, or you and another entity you control. Multi-member LLCs generally provide stronger liability protection, but they're more complex to manage and require detailed operating agreements.

Then there's the question of where to form your LLC. Most investors form their LLC in the state where they're buying property. This makes sense for most people. But some investors use Delaware or Wyoming LLCs for additional privacy or tax benefits. If you go this route, you'll still need to register as a foreign LLC in the state where your property is located, which means double the filing fees and double the annual reports.

Your LLC also needs an operating agreement even if your state doesn't require one. This document spells out ownership percentages, how decisions get made, what happens if someone wants to sell their share, and how profits get distributed. Without an operating agreement, you're operating under your state's default LLC rules, which might not match what you actually want.

Get an attorney to help set up your LLC correctly the first time. Yes, it costs money upfront. But fixing LLC mistakes later costs more, and operating with a poorly structured LLC can be worse than having no LLC at all.

3. Not Understanding DSCR Requirements

DSCR stands for Debt Service Coverage Ratio. It's the most important number when you're financing property through an LLC.

The calculation is simple. Take the property's monthly rental income and divide it by the monthly debt obligations (mortgage payment, property taxes, insurance, HOA fees). If a property generates $2,000 in rent and has $1,600 in total monthly obligations, that's a DSCR of 1.25.

Most lenders want to see a DSCR of at least 1.0, meaning the property generates enough income to cover its own expenses. Some lenders go as low as 0.75, but they'll require a larger down payment or charge higher interest rates to compensate for the risk.

Here's where investors mess up. They find a property, run the numbers, and calculate a DSCR of 1.1. Looks good on paper. Then they talk to a lender and get rejected.

Why? Because the lender uses different numbers than you did.

Lenders don't use your estimated rental income. They use market rents based on comparable properties in the area. If you think you can rent a property for $2,500 because you're going to renovate it and add a bedroom, but comparable properties only rent for $2,100, the lender uses $2,100.

Lenders also include expenses you might have forgotten. Property taxes get reassessed after sale in some areas. Insurance costs more than you expect. HOA fees increase annually. If you calculated your DSCR using incomplete expense numbers, you'll be surprised when the lender's numbers come back different.

Before you make an offer on a property, know what DSCR the lender will calculate. Call lenders and ask them to run preliminary numbers. Use conservative rental estimates based on actual comparables, not optimistic projections. Include all expenses, not just the mortgage payment.

Getting the DSCR calculation right before you commit to a purchase is crucial, especially when you're investing in Boston's rental market where competition is fierce and margins matter.

4. Working with Mortgage Brokers Instead of Direct Lenders

Mortgage brokers and direct lenders are not the same thing.

A mortgage broker is a middleman. They don't lend you money. They connect you with a lender who does. Brokers shop your application around to multiple lenders, looking for someone willing to fund your deal.

A direct lender uses their own capital to fund your loan. They make the lending decision themselves. There's no third party involved.

For LLC purchases, direct lenders are almost always the better choice.

Here's why. When you work with a broker, you don't know if you actually qualify until the final lender completes their underwriting. The broker might tell you that you're approved, but that's based on their assessment, not the actual lender's decision. If the lender finds something the broker missed during final underwriting, your loan can fall through days before closing.

This happens more often than you'd think. The broker overlooks that your LLC was only formed two months ago, but the lender requires six months of business history. Or the broker doesn't catch that the property is in a flood zone requiring additional insurance, which kills your DSCR. Or the lender's underwriter interprets a rule differently than the broker expected.

With direct lenders, you know immediately if you qualify because they're the ones making the decision. They review your application with their own guidelines. If they say you're approved, you're approved. No surprises a week before closing.

Direct lenders also close faster. Brokers add time to the process because they need to pass information back and forth between you and the lender. Direct lenders eliminate that middle step. Some can close in 10 to 14 days instead of the typical 30 to 45 days.

The tradeoff is that brokers sometimes find better rates by shopping around. But for LLC purchases where speed and reliability matter more than saving 0.25% on your interest rate, direct lenders win.

5. Overlooking Property Management Early

This seems unrelated to buying property through an LLC, but it's not.

Your LLC is a business entity. It needs to operate like a business. That means proper bookkeeping, separate bank accounts, and professional property management. If you treat your LLC like a personal hobby, you risk piercing the corporate veil, which eliminates your liability protection.

Courts look at whether you respected the LLC as a separate entity. If you're mixing personal and business funds, making decisions without documenting them, or generally treating the LLC as an extension of yourself, a judge can decide the LLC is a sham and hold you personally liable.

Professional property management helps establish that your LLC is a legitimate business operation. Property managers collect rent, handle maintenance, coordinate repairs, and document everything. This creates a paper trail showing your LLC operates professionally.

Property managers also save you from becoming the landlord who takes 3 AM emergency calls about broken water heaters. If you're building a portfolio of multiple properties, you physically cannot manage everything yourself while maintaining the documentation and separation required to keep your LLC protection intact.

According to Realtor.com's property management guide, professional property managers handle everything from tenant screening to maintenance coordination, which is essential for maintaining proper business records and liability separation.

Yes, property management costs money, typically 8% to 12% of monthly rent. But this cost is built into your investment analysis from day one. If a property can't cash flow after accounting for professional management, it's not a good investment property.

Decide on your property management strategy before you buy. Some investors start by self-managing to save money, planning to hire a manager later. This works if you're treating it like a business and keeping detailed records. But if you're serious about building a portfolio through your LLC, professional management should be part of your plan from property one.

6. Ignoring State-Specific LLC Requirements

Every state has different rules for LLCs. What works in Texas doesn't work in California. What's required in Florida might not be required in Ohio.

Some states require annual reports. Miss the deadline and your LLC can be administratively dissolved, which means you lose your liability protection even though you still own the property.

Some states charge annual fees or franchise taxes based on your LLC's revenue or asset value. California charges a minimum $800 annual franchise tax regardless of whether your LLC makes any money. Delaware charges franchise taxes based on the number of membership units. Nevada has annual fees and requires you to maintain a registered agent.

Some states require specific language in your operating agreement. Some require you to publish a notice in local newspapers when you form your LLC. Some require different levels of insurance.

If you're buying property in a state where you don't live, you need to research that state's LLC requirements specifically. Forming a Delaware LLC to buy property in Texas means you need to register as a foreign LLC in Texas, which doubles your compliance work and costs.

You also need to understand that state's landlord-tenant laws since your LLC will be operating under those rules. Security deposit limits, eviction procedures, required disclosures, and maintenance obligations vary by state. For example, if you're buying rental properties in Massachusetts, you need to understand the state's tenant-friendly laws and specific regulations around security deposits and lead paint disclosure. Violating these laws as an LLC owner can lead to lawsuits that test your liability protection.

Before buying property in a new state, spend time understanding that state's LLC requirements and landlord regulations. Consult with a local attorney who specializes in real estate. The few hundred dollars you spend on legal advice upfront can save you thousands in penalties or lost liability protection later.

7. Choosing the Wrong Lender for Your Timeline

Not all lenders close at the same speed. Some can close in 7 to 14 days. Others take 45 to 60 days. If you're competing with cash buyers on a good deal, closing speed matters as much as your interest rate.

Here's how to predict a lender's actual closing timeline.

First, see how quickly they give you a quote. If it takes more than 24 hours to get a quote, term sheet, and pre-approval letter, they're not going to close in two weeks. Fast lenders have automated systems that generate quotes instantly. Slow lenders require multiple days for a loan officer to manually review your application and get back to you.

Second, ask about their underwriting process. Direct lenders do their own underwriting, which means faster turnaround. Lenders who outsource underwriting to third parties add time to the process.

Third, check if they use an automated document portal. You should be able to upload all your documents at once through a secure online system. If they're asking you to email documents back and forth, or worse, mail physical copies, expect delays.

Fourth, ask about their appraisal process. Lenders who have relationships with local appraisers can schedule and complete appraisals quickly. Lenders who need to find appraisers for every deal add days or weeks to closing.

The National Association of Realtors reports that cash sales made up nearly 28% of transactions in recent years because sellers value certainty and speed. The only way to compete as a financed buyer is to work with lenders who close as fast as cash buyers.

When you're evaluating lenders, ask them directly: what's your average time from application to closing? What's your fastest closing time? Can you provide references from recent borrowers who can confirm your timeline?

Don't just accept their marketing claims. Any lender can say they close fast. Few actually do it consistently. Get proof before you commit.

 

Published 10/14/25