Creating a LLC for out of state rental investment

[Lalit K.]

I am fairly new to RE investing and was thinking about pros and cons of setting up a LLC for out of state purchases. Firstly does setting up LLC really make sense or having a liability insurance serves fairly the same purpose? Secondly, can you create a single umbrella LLC for purchasing rental RE in 2 or more states or you need to have separate LLC for each state?

[Mike Day]

This is a topic that gets debated a lot at BiggerPockets and I'm sure you'll get many replies on both sides of the issue. My first question is why you only want to set up an LLC for out of state purchases. The liability to you is basically the same regardless of the property's location. You can hold rental real estate in any state in an LLC from any state. The states that are used most often because they are perceived to have better asset protection are Wyoming and Nevada. You're in an unfortunate situation as a California resident because California's own LLCs offer poor protection, and California slaps heavy taxes on LLCs from other states. A few years ago I think the taxes were around $800 annually per LLC. Many people recommend holding each rental property in a separate LLC, but in your case it's probably not worth it to do that due to the tax burden in California. You can put a few properties in each LLC or just rely on insurance. Some people shun LLCs completely because they are expensive, complicated, and haven't been thoroughly tested in court. I'm sure you'll receive many opinions about this. I think, if you have significant assets to protect, you should spend a couple hundred bucks and get advice from a good real estate attorney. If you're just starting and don't have extensive assets to protect, I'd get enough insurance to cover what you do have and revisit this down the road.