Do I need an LLC for each rental house?

Question

Jeff Ausdemore · Answer

Fellow BP'ers,

Thanks to the quality of this site, the Bigger Pockets "meet up" that we've formed locally (Mid Cities), and meeting/networking with some great people, my wife and I are closing on our 3rd single family home here in Tarrant County in a few short weeks. Everything is going well, and we're excited to continue learning/growing in our REI venture.

Here's where I would love some advice, from those of you that have taken the step of Incorporating (LLC's, Series LLC, etc.)

My brother and his family have recently moved here from California, and we're ready to invest together moving forward. Our investing strategy will focus on single family homes in excellent school districts (thus far, we have 2 SFH in Keller ISD, and 1 in Northwest ISD- Byron Nelson HS), as well as multi family properties that make sense from a cash flow perspective (We've looked at 2 four plexes, and we're currently evaluating an 8 unit apartment complex).

Here are some questions we have for the well informed masses at Bigger Pockets:

#1 Do [you] recommend that we set up an LLC for all properties, or a series LLC, delineating each property into separate LLC's "underneath" the main LLC? Any other strategies we should be aware of other than an LLC?

#2 Do [you] recommend that we use an attorney to set up this LLC, or have [you] found success through RocketLawyer, LegalZoom, etc.? We understand that the online legal "do it yourself" route is much cheaper, but we'd like to be 100% certain we've covered our bases, and we're fully protected.

#3 What tax strategies should we be aware of going into this LLC? Do [you] recommend that we seek out a dedicated real estate CPA as well? Are there real estate attorneys our there that specifically work with real estate CPA's that can "see the whole picture" with regard to our legal protection and tax liability?

#4 Can anyone recommend an excellent real estate attorney and/or CPA to help guide us through the process of setting up the LLC, and planning for tax season in the years to come?

As always, thanks in advance for any help you can offer!

JA

AusProperties

Daniel Klebba · Answer

Being that this will be my first property outside of my primary residence I just wanted to make sure I set it up correctly and I'd like to mitigate any risk back to my personal family home.

I like the idea of the managing LLC, but I am no lawyer. I'm looking for the best way to start my business with the intention to grow over the course of the next 10 years.

As far as my loan/first investment property goes it will be financed with a conventional loan.  Let me know what you think And I sincerely appreciate all of your advice.

Evan Wiesner · Answer

@Zach Ward I totally understand. Credit unions are great but regardless of your financial backing most banks just won't sell to you if you have more than three layers of LLC's. Even if your cash as we are. It's shocking I know, but once you cross that barrier a lot of banks actually have it as an auto-reject criteria.

Zach Ward · Answer

@Evan Wiesner

I can definitely see what you are saying and I agree, I'm still growing and am pretty conservative so hoping to turn to straight cash buys down the road. Having the option to leverage when a great deal comes along though is awesome too. Fortunately for me we have several credit unions that are hungry for business in my area and only about 90k people in my parish/county. I guess every bank will be different so best to ask those questions. Always learning something.

Zach Ward · Answer

I also am currently reviewing my options for LLC protection. I currently have one for 3 of my properties, not counting my traditional, owner occupied, first house. I've heard a lot of people say to buy properties in one LLC and then open another as the "Managing" LLC. If the "management" screws up then you can hopefully mitigate the damage to just that LLC.Thus, only two LLC's to organize and you have multiple layers of protection.

One very experienced investor basically told me that it all depends on your comfort level with how many assets you want in one basket. If you have 5, 10k properties you may feel fine with one. If you have multiple, million dollar property you may feel better having one for each. There's no one right way to skin this cat.

Mike Sattem · Answer

Hi @Daniel Klebba,

Be aware that the biggest issue here will be in how you buy. I.E. Fannie Mae/Freddie Mac lenders won't lend to an LLC, so if you are using conventional financing, or even are buying for cash and looking to use the BRRR formula, you will have to hold the properties in your name.

Also, in my experience 1 LLC is more than sufficient to get started if you are going to hold the homes in this manner. Multiple LLC's can be a pain to manage financially to truly keep them separated; so until you get to the BIG Dog level that someone may want to come after all of your money I wouldn't worry about it.

Do I need an LLC for each rental house?

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