Legal structure for expanding portfolio

[John Dunn]

As I expand my real estate portfolio, I have been thinking about the best structure to match my portfolio. Currently I own two single family homes owned through an LLC and am looking to expand into small multifamily (possibly with a partner). Additionally I am looking into note investing with my wife.

I don't want to put anymore properties in my current LLC. Part of the reason is one of the properties in the LLC is the home I grew up in and I want to protect if there are any problems with other properties.

My current line of thinking is to form separate entities for new properties and note investing.  Is it advantageous to form some type of holding company to help tie various entities together?

[Tyson Wade]

There are certainly different flavors of asset protection depending on your risk tolerance. Some prefer to lean more heavily on insurance in the hopes that they will pay out when it matters most, others will use insurance as an additional tool in their toolbelt, along with a good business entity structure. 

LLCs can provide statutory protections, and separating assets into separate LLCs can minimize the risk of loss should an LLC get sued and insurance not cover the specific harm that was caused.

While LLCs are typically designed to protect you personally from any liabilities that arise from activities within the business, many states' LLCs do not provide any protections for your business assets in the event you get sued personally. For that reason, it can be a good idea to set up a holding company in a state that does provide strong "outside" protections by way of charging order protections, such as WY or NV. Each LLC you set up to hold property can then be owned by that holding company, providing protection from liabilities that can arise both inside the property LLC (like a slip and fall), and outside (like you causing a car accident). Adding insurance on top of this can serve as an additional layer.

Of course, the LLC setup can get complicated quickly and will of course be more expensive to set up and maintain, so to each their own!

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.