When does it make sense to form an REI LLC?

[Sean Smyth]

So obviously this answer will be different for everybody, but just wanted some different opinions on here regarding at what point in your real estate investing journey it makes sense to form an LLC (in Wyoming). Here is my situation: I am ready to execute my first deal on a duplex and am targeting between $150k-200k sale price for a unit with very little to no repair needed. I rent, and do not own any other properties. I own my car outright, but that's my only asset other than liquid. So some of the benefits of the LLC I'm considering are that my personal assets won't be able to be seized if my LLC gets sued by a tenant or if the bank comes to seize the property for some reason. I know the LLC will make sense down the road when I have lots of properties and want to protect them from one another, so I'll have them each in their own LLC. However, for now an LLC means probably higher interest rates, tougher time securing financing (from what I understand) because banks like me to have liability, and increased annual fees associated with the LLC. But if were to wait and form and LLC later when I have more assets I want to protect from one another, I'm likely not going to be able to transfer my existing investment properties into the LLC because it will affect the mortgage terms and I may have to pay the full amount of the mortgage off at that point, which is not ideal. So I'm struggling; do I form the LLC now and just accept the fees and higher interest rate and more difficulty securing the loan (if this last part is really even an issue), or do I wait until later when I have more assets I want to protect. And if I do the latter, how can I transfer properties into this Limited Liability Corp without mortgage terms changing or selling and having to pay capital gains taxes on them? Trying to not have analysis paralysis because I just want to get this process started, but I want to make sure I'm doing it the correct way. Anyways, any opinions are appreciated!

[Nathan Gesner]

Quote from @Sean Smyth:

You can worry about protecting assets when you have assets worth protecting. I wouldn't even think about an LLC until you have at least $1 million in equity.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appears on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your basic insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 12 years experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is likely to be higher, then you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require additional, on-going effort to maintain.