New Investor in the Baltimore/Columbia area - should I purchase as individual or LLC?

Question

Hi ALL!

I've always been interested in real estate but never thought it was something that I could build wealth with. My wife and I were always on the wrong side of the deal so we shied away from it. Recently I decided I need to earn income through a non-w-2 means. Then thought, well last year I bought a condo and started house hacking before I knew there was a thing called house hacking and it substantially reduced my cost of living there, maybe buying rentals could actually work.

In my quest to learn more, a MF developer told me to immerse myself in the BP world, so I've started. The information the podcasts, books, forums, and comments provide are simply awesome! There's so much it makes my head spin sometimes.

One thing I haven't seen much about, and maybe I'm just missing it is, how should we hold these assets? My plan is to hold long term rentals. My attorney recommends each unit be its own separate LLC to protect each unit and myself individually. If I house hack, the unit is likely in my own name, not an LLC (though I guess maybe it could be? just less favorable lending terms maybe?).

I would love to hear about peoples recommendations and experiences, trials and tribulations to help guide and inform my development as I build up my empire.

Thank you!

John Mocker · Answer

Scott,

Whether or not you end up going with the LLC, discuss Umbrella Insurance with your agent.  An umbrella policy provides an additional limit of Liability if one of the underlying policies (auto, home, rental dwelling, boat, etc..) has its limits exhausted in a claim.  For example, if you cause and accident and have a covered loss.  The other driver wins a suit of $1,000,000 and you only have $300,000 limits on your auto policy.  The umbrella would kick in after the $300,000 limit on the auto was exhausted.

By having a larger pool of money to pay the claim, it is less likely that the claimants would go after your personal assets.  No guarantee.  You should still consider an Umbrella with the LLC also for the same reason.

Scott Falvey · Answer

Thanks for the responses.

Though my attorney was suggesting an LLC for each unit, I was thinking along the lines of 5 units (Condo or apartment) per LLC or an LLC for each detached single family unit thinking there is probably more liability with the detached home than a condo or apartment.

On the other hand, with still working on the cash flow, the better terms with a personal purchase is attractive.

So maybe the first few should be personal purchases but start thinking about an LLC beyond that?

Eliott Elias · Answer

My rule of thumb is one LLC per 3 properties. Record keeping and tax returns become a burden if you plan on holding a large portfolio and separate the LLC's.

Chris Kendrick · Answer

So you dont have an LLC then,

Nathan Gesner · Answer

Hold them in your personal name. You'll get varying opinions but holding in an LLC increases complexity and cost. The purpose of the LLC is to protect you from lawsuits, but that need is greatly exaggerated. Do some research and find me just one amateur investor on BiggerPockets that was sued and lost their property. I'll wait.

Oh, you're back already and didn't find anyone? No surprise. Here's my generic LLC advise:

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.