Developer · Atlanta, GA · Member since 2017 · 72 posts · 31 votes
I'm wondering how people with multiple rental properties structure things like insurance, LLCs, bank accounts, etc. I currently have each individual property under a separate LLC, with its own bank account, and its own rental property insurance policy. I could see this getting unwieldy as my portfolio grows though.
Anyone have any suggestions for other systems that may be more efficient, cheaper, or with less liability?
Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
7y
The best way to do it depends on your financial situation and what you need to protect. You should also sit down with a lawyer, independent insurance agent and a CPA on the best way to structure things. As you grow, you must concern yourself with the liability and risk on any property. You do not want to build a business that with one accident it knocks out your entire company. Placing everything under one LLC and one insurance policy is the quickest way to bankruptcy; corporately and personally.
I will give you some tips that have worked for 30+ years, and I have a lot of properties. For one, I have an LLC as the main C-corp. A CPA will be able to tell you how that helps your business in real estate. Most larger companies do use C-Corps as it has a lot of tax advantages on the corporate side. I use a tree structure. I have my main company, ABC, LLC. Under that, each of my buildings have their own LLC, their own EIN, their own bank account, their own insurance policy. The parent company also has it's own umbrella policy. Finally, I have an additional personal umbrella policy just in case. It's also important to use an insurance company that actually pays out. This is why I recommend an independent insurance broker so they can farm out quotes to many companies.
Aside from that, a good defense is an amazing offense. Do not cut corners on maintenance, if necessary, you can add cameras too. Cameras help with determining issues in terms of who's at fault. HTH
From the liability and structure standpoint it can get pretty messy as you scale up, if you don't lay a good foundation. One entity that was created for investors who scale is the Series LLC, which only requires one primary filing and then established "child" series under it. Each "child" series is a private filing, so you can literally create it from your computer, but when used correctly will offer the same liability of individual LLCs - you can check this article for more information.
There are many different strategies you can implement with the SLLC, so if you give me an example of what type portfolio you are concerned with I can probably just give you a ballpark idea of what it can look like. If you have 5+ properties it would be smart to have an asset holding SLLC along with a Operations LLC (just a regular LLC that carries out all the operations, hence holding most of your liability away from your assets.) If you give me some random details to give an example I can write out a what a structure might look like, just be sure to give me an example of how many current assets might be involved and potential future goals to keep in mind.
Also, being that you are from California, there is a $800 annual franchise tax that is applied to each [series] LLC - so anyone looking to scale would benefit quite a bit from establish a Delaware Statutory Trust instead of LLCs. The DST operates much in the same way as a SLLC, but does not incur the same annual franchise tax.
This is not legal advice, just my opinion as a real estate investor.
Developer · Atlanta, GA · Member since 2017 · 72 posts · 31 votes
7y
Hi Scott,
Thank you for the response.
A rough idea of my setup - currently 4 properties (10 units), 3 in Georgia and one in Tennessee. I expect this to scale up to at least 50 units in the next 5 years. Definitely would be interested in hearing your thoughts about how a SLLC would work in this arrangement, and also about state filing since assets are across multiple states.
Currently each property is held in a separate LLC filed in the state of the property.
California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don't buy CA property. It's a little concerning that you have formed several LLCs in various states and sounds as though you may not have registered any of them in California? You may want to talk to a CPA or attorney if that is the case.
*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
7y
@Sam Mitchell The way that the franchise tax rules are stated in California they could tax every LLC and every Series of the LLC as a separate entity at $800 per year, each. There is some disparity among the professional Asset Protection community about how aggressively they pursue the franchise taxes, but there is only one way to ensure you won't get dinged with it, and that's using a non-LLC structure that provides Asset Protection such as the Delaware Statutory Trust ("DST").
Since the DST is a trust, and not an LLC, and we hold assets and run it just like a trust for Federal Tax purposes, then it avoids the franchise tax question completely. It functions like the Series LLC, so you would just need to establish the DST once and then be able to establish "child series" for your separate assets.
You would be able to place properties from separate states into this entity. The issue arises regarding foreign filing fees, but those can also be worked around with the correct strategy.
This isn't legal advice, just my opinion as a real estate investor.
Series LLCs are not recognized in CA. Each LLC is subject to the $800.
*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
Rental Property Investor · California, CA · Member since 2019 · 8 posts · 2 votes
7y
@Sam Mitchell
This is my current situation, as well. I am definitely considering a DST. Im not certain when it would make sense to set up. Basically, Im trying to establish when it would financially make sense to set it up (i.e. current tax obligations vs. Set up cost for a DST).
I hope you find the information you're looking for.
Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
7y
The best way to do it depends on your financial situation and what you need to protect. You should also sit down with a lawyer, independent insurance agent and a CPA on the best way to structure things. As you grow, you must concern yourself with the liability and risk on any property. You do not want to build a business that with one accident it knocks out your entire company. Placing everything under one LLC and one insurance policy is the quickest way to bankruptcy; corporately and personally.
I will give you some tips that have worked for 30+ years, and I have a lot of properties. For one, I have an LLC as the main C-corp. A CPA will be able to tell you how that helps your business in real estate. Most larger companies do use C-Corps as it has a lot of tax advantages on the corporate side. I use a tree structure. I have my main company, ABC, LLC. Under that, each of my buildings have their own LLC, their own EIN, their own bank account, their own insurance policy. The parent company also has it's own umbrella policy. Finally, I have an additional personal umbrella policy just in case. It's also important to use an insurance company that actually pays out. This is why I recommend an independent insurance broker so they can farm out quotes to many companies.
Aside from that, a good defense is an amazing offense. Do not cut corners on maintenance, if necessary, you can add cameras too. Cameras help with determining issues in terms of who's at fault. HTH
Developer · Atlanta, GA · Member since 2017 · 72 posts · 31 votes
7y
Thanks for the advice, Calvin. How exactly do you nestle the individual LLCs under the single top-level entity? This is the bit I'm confused about and what I'm missing currently from my structure.
Also, do you find it difficult managing that many bank accounts, insurance policies, and annual registrations? I imagine at a certain point you may be paying someone else to manage that for you?