Series LLC: Pros / Cons and where to do it?

Question

We currently own 3 investment properties, 2 in TX and 1 in KY.  We live in KY, but are TX residents (I'm on Active Duty for the Army) and will be remaining in KY after I retire in a few years, in which we will become KY residents.  We are expanding our portfolio this year and will likely be outside of KY.

We are considering establishing a series LLC in either TX, NV, or DE, but trying to figure out the pros and cons of it.  Any insight would be greatly appreciated.  So, where would be the best place to establish a LLC?

Sean Morrison · Answer

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

As a general rule, real estate holding LLCs should be created in the same state as the property. While some states have better protections for LLCs than others, when it comes to real estate courts only want to recognize local protections.

As it happens, you own two properties in TX and they allow series LLCs. Great! TX properties held in TX series LLCs are protected if everything is set up properly. The key thing to remember about series LLCs is that they are not really recognized as a series outside of their states. And any company operating outside its registered state must register in the state they are operating. In other words, if there is a property in KY owned by a TX company, the TX company must register in KY as a foreign LLC.

This gets tricky with series LLCs. I keep seeing companies register the parent LLC in the state (for example, a TX Series LLC registers in KY), but the child series do not separately register. Since KY doesn't have series LLCs, then the child series probably will not be recognized, and the entire parent LLC is exposed, including all the properties in TX. Which defeats the purpose of the series LLC.

Right now, the good money is on registering each child in the series as a foreign LLC when operating outside the series state.

Greg Scott · Answer

The biggest challenge with SF rentals and LLCs is that if you want to get the best interest and terms of a conventional mortgage, you have to finance it in your name.   You can move it into an LLC later but it technically violates the term of your loan and creates complications for you if you want to do a cash-out refi into another conventional loan later.

Most people I know in the SF space keep the properties in their name until they have more than 10 (or 20 if married) so they can no longer qualify for a conventional loan. Then they will take one or more properties, put them in an LLC and get a bank loan to free up more spaces for conventional mortgages. Banks actually prefer the property be in an LLC rather than your name, but they usually have higher interest rates and a 5 or 10 year balloon payment.

I had 14 SF rentals at one point and none were in an LLC.  They were all in very good condition, I had professional property management, great insurance on each individual property and a $2M liability umbrella.   I slept pretty well at night.  In my mind, there just isn't that much that can happen in a SF rental that would result in a lawsuit greater than $2.5M.  And, is a lawyer really want to try to get a judge to force more cash out of you if they get the $2.5M from the insurance companies?   The insurance money is the low hanging fruit.  The effort to reward is much harder for a lawyer to try to get it out of your hide.

Tom Thomson · Answer

Single owner LLC's don't offer as much protection as you would think.  Also financing becomes a challenge and tax times gets more expensive.  I have decided to up my umbrella policy and our attorney has agreed this is the best move for us anyway.

Tom Thomson · Answer

About $1800 per year for our $2,000,000 umbrella coverage.

Brian Oberg · Answer

@Tom Thomson Thanks for the reply.  If you don't mind me asking, how many properties do you have and what the amount of your policy?  Just trying to gauge if ours in the right ball park.

Brian Oberg · Answer

@Sean Morrison  Thanks for the advice, I appreciate it.  One question to clarify, and I am hoping the answer isn't "it depends on each state,"  But do you have to register both the parent and the child LLC in the other state or just the child in the state.  So if I create the TX Series LLC an three child LLCs, the 2 in TX are good since that is the state the are created in, but for the KY one, I would have to register the child LLC in KY as well to be protected.  That makes sense, but would the parent need to be registered too.

James Wilcox · Answer

@Sean Morrison well said! Thank you. You made one of the best explanations I have ever seen for this scenario on the BP forums.

James Wilcox · Answer

@Brian Oberg I get what you are saying and it makes sense to be on paper. However, I would find it difficult to hold up in court if push came to shove. Like I said though, yet to be tested and that is the only way to really have a straight answer. To me, the tax filing would be complicated. I would loop my CPA in on that one and I would wager they would be against it. When it comes to liability, I was told long ago, do whatever helps you sleep at night. I only recently formed an LLC after many years and many rentals under the belt. I slept just fine before and after that change. I agree with @Greg Scott that ultimately your best defenses are good PM and insurance.

Brian Oberg · Answer

@James Wilcox From the research I have done, all the sub-series LLCs are opened in the same state as the parent and then registered in the state the property is as a foreign entity.  You are absolutely right about the legal advice, which I have pending right now.

@Greg Scott My biggest concern is when our portfolio grows.  And I am not always going to be active duty (actually retiring in the next 2-3 years).  We do have the umbrella policy, so that's a start.  Just feel that as we grow, we need more.

Appreciate the feedback from both of you gentlemen.

James Wilcox · Answer

Series LLCs are great but I think are only recognized in those states that do so. I.E. you would not have any protection for setting up the series LLC for your property in KY since KY doesn't use series LLCs. As far as IK though that has yet to be tested.

*seek true legal advice on this matter.

Series LLC: Pros / Cons and where to do it?

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