A different kind of LLCs protection for Rental Properties

[Calvin L]

Going into retirement soon, I am considering rental income as supplement to limited social security benefits. There will be no mortgage since the net cash is needed monthly. At the same time, I am too old not to worry about the risk of losing my life-time savings in lawsuits.

Many people implement the solution using one LLC holding the property ownership and another separate LLC to handle the riskier management operations. It seems isolated the problems caused by management. However some lawsuits (like environmental issues) still can target the owners (for deeper pocket). The additional insurances (general and umbrella) are also costly to cover both two LLCs separately.

There are also strategies of reducing the property equity (Equity Stripping) to make the properties little value to go after. To that aspect, what about a different two-LLCs approach? A main LLC owns both Titles and all management with proper insurance coverage. The second financing LLC has all the capital to fund the mortgage to the properties of main LLC. The only relation is the mortgage lending that is not subject to any lawsuit.

The positive sides of this approach are . . .
1) Lawsuit risk is only on main LLC with limited equities exposed.
2) Majority of the asset value are very safe with the 2nd LLC.
3) No management contract and checks needed between two LLCs.
2) Little or no insurance is needed for the 2nd LLC.
4) Terms of Mortgages can be arranged in favor to our cash-flow.
5) Accounting and Tax to file for the 2nd LLC is very simple to DIY.

I appreciate any opinions and comments of all aspects, especially the negative sides.

[Bill Gulley]

I think you have the right idea. I used multiple LLCs (still have) and and non-profit corporatations. The non-profit really has the best built in liability protections.

Owning properties holds different risks than being a lender, but if you actually lend, you have almost as many issues (and much more compliance) than owning properties.

You need to assess what you will be doing and identify the types of risk exposures you will assume, avoid and insure against. You should also be aware of how the LLC protection is lost by poor management and accounting functions. If it looks like a corporation, sounds like a corporation, acts like a corporation and does business like a corporation it has a much better chance of being treated like a corporation!