Should I form an LLC or wait?

[Adam Williams]

We converted our previous home into a rental property a few years ago. I'm refinancing the home and am wondering if I should setup an LLC and put the loan and everything into the LLC versus just having it all in my name. We also want to buy our second (and possibly more) rental property this year. So I'm looking for recommendations from experienced investors on what I should do. Thank you!

[Scott Smith]

Originally posted by @Adam Williams:

We converted our previous home into a rental property a few years ago. I'm refinancing the home and am wondering if I should setup an LLC and put the loan and everything into the LLC versus just having it all in my name. We also want to buy our second (and possibly more) rental property this year. So I'm looking for recommendations from experienced investors on what I should do. Thank you!

This is a questions that appears all the time. It all depends on what your current investment portfolio looks like, how much exposure you are facing and what you plan to grow into. I often break it down into the "four pillars" of protecting your assets. The first pillar is a good insurance policy as that cover the majority of your exposure. However, it only protects you from one type of liability: accidents.

After that you want to compartmentalize your assets, which is often accomplished through the use of LLCs or corporations. I personally find the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely - check out this article to learn more. The third pillar is somewhat similar - you want to separate your operations from your assets. That means you establish a Traditional LLC to carry out the operations of your investments, in order to separate the liability from your assets, including: paying property management, paying contractors, collecting rent, marketing, etc. Finally, with the use of Trusts while establishing these structures you can add a level of anonymity by removing your name from public record.

I would say that it's important to find an experienced attorney who can look at your assets and show you what your exposure is, and from there you choose what you are comfortable with regarding your risk and assets. Having everything in your name is dangerous because that means everything you own is in a single "pot," so if there is a lawsuit that you lose and a judgment issued they can walk into a bank and pick through your assets. This would involve lawsuits for you personally as well as lawsuits from your properties. The LLC functions as a stop-gap, when established correctly, between you and the assets within the LLC. Once you know your exposure, then make decisions on what level of protection you would want.

This isn't legal advice, just my opinion as an experienced investor.