Establish LLC for Each Property Purchase?

Question

My wife and I personally purchased a duplex in the Chambersburg, Pennsylvania area last year. We house-hacked while doing an almost complete home renovation in 6 months, moved out, found wonderful tenants to move-in right away, continue to manage the property ourselves, and started up our business as Crystal Clear Properties LLC. We still own the duplex personally, as we have not yet moved it under our LLC; and, we are currently looking at a 7-unit to purchase. Our lawyer recommends creating a new LLC for each property purchase... We like our business name, and so our lawyer suggests that Crystal Clear Properties LLC could act as the property management company since we plan to manage all of our own properties for the time being. My wife and I are asking for others advice on how everyone else structures their business when managing multiple LLC's because we are seeing how things can get complicated very quickly (e.g. separate bank accounts, breaking down expenses, taxes, tracking mileage, etc.). Thank you in advance for taking the time to share your own strategies.

Johnny Gonzalez · Answer

David,

I would be cautious about using Crystal Clear Properties LLC as the property management company. I read an article by Amanda Han (CPA, real estate investor, and very active member on BiggerPockets) where she gave an example of a lawyer who recommended the same structure of using one of their LLC's as the property management company for their client without realizing the huge tax implications of doing so (if I recall correctly, it had something to do with self-employment tax). My advice would be to run this idea by your CPA and get their feedback as well.

Also, be wary about the series LLC approach. As someone already mentioned on this post, not all states allow this structure. Furthermore, and more concerning to me, is that some states may not recognize series LLC in the courts even if you set up the series LLC in a state that allows it. That would be a bummer to find out after the fact.

If you still have a loan on your duplex and pay a mortgage, most banks will have a "due on sale" clause if you transfer the title of the property from your personal name to the LLC, forcing you to pay the remaining loan amount immediately. Yikes. Check with your lender to see if this is the case. If so, maybe hold that property under your personal name until you own it free and clear prior to transferring title to your LLC.

Disclaimer: I am no CPA or attorney, but I have done a lot of research in this area because I had/have a lot of the same questions as you. I am new to investing, and I am working on closing my first deal on a single family home right now and plan to purchase all cash via an LLC. My current plan is to open a separate LLC for each property I purchase. Maybe once I own about 10 rentals, I will start looking into forming a "holding" LLC with individual LLC's beneath it (this may be a tad different than a series LLC. To be determined). But for now, separate LLC's are very manageable and seem to be the safest route for me.

Best of luck!

-Johnny

Robert Gilstrap · Answer

Doing an LLC for each property is too expensive and too cumbersome in most states but is just fine until you start to accumulate lots of properties. Personally I hold my 40+ properties in individual land trusts (1 for each property) and then one of my 12 LLC's  owns beneficial interest in each land trust but thats spread around (i.e. 1 LLC owns beneficial interest in 4 land trusts, 1 LLC owns 2 land trusts, etc.)  but its based on risk, value and exposure. Trusts are free to create and regardless of how many LLCs you have owning in trusts has LOTS of advantages (privacy, circumvents probate, etc.)  You still want the LLC in there to "own" (beneficial interest) the trust for legal protection but it works really good and I've been sued multiple times over the years and nobody ever touched anything I owned. It would take an hour to explain why you want things done in a certain way using trusts and LLC's but for sure in my opinion it's a great way to go. Everything is about your risk tolerance and your exposure and your assets. If you only have one property then don't get tripped up on complex asset protection schemes just buy property! The more you own, then the more you have to lose so its a gradual thing where you add in layers of protection as you grow.

Nate Sanow · Answer

This varies state by state, and I'm no CPA / attorney etc so please take with a grain of salt.  That said, I've been learning about not just LLC's in volume but the differences between them and LLP's etc etc.  That framework distinction interests me personally and then allowed me to explore what I hope to set up, which is a "mother" LLC that can then be a member of other LLC's, VS you being the member.  In Oklahoma that language is actually a "series LLC" and my understanding is that isn't available everywhere, however I am not sure about if you can still have 1 LLC inside others everywhere.

Then, there is one type of LLC for holding, and another for operations, and possibly another for marketing.

To boil that down, in theory one could still pass all frequent revenue through the primary mother LLC and consolidate some amount of the bookkeeping, but still have the protection of assets divided amongst different LLC's in the event of a lawsuit.

Admittedly, I am sharing my initial research and consultation (including a long lunch meeting with an attorney recently) but not my actual practice, YET.

Dylan Thomas · Answer

@David Beltz

I’m in Harrisburg. I don’t personally create multiple LLCs. I have 1 llc for my marketing/branding company. Then 1 for all my rental properties. That’s what I do personally. It’s easier in my opinion, and llcs don’t protect you as much as you want them to. Good insurance does in my opinion. I carry a lot of it haha

David M. · Answer

@David Beltz

@Dan Bass I didn't think that Pennsylvania allowed series LLC's.  I thought about only 8 States allowed them, and PA wasn't one of them.

Dan Bass · Answer

@David Beltz I’m not a CPA nor a lawyer but do have a series LLC. I was turned onto it by a RE layer and have since placed 7 properties into them. I like it for the ease of filing and having one LLC and separate LLC’s under the main as you point out. One small issue was finding a local bank that would bank with this structure, but that was quickly overcome.

A drawback is that anyone can see how many properties you have as they have to be numbered from 1- however many are under that entity.

A pro is it’s easy banking and you file one LLC while they are all separate LLC’s as long as you can prove that the monies are earned by different properties. Such as...you have 7 properties that share a bank account and your manager deposits a lump sum into said account. They should send you a monthly statement per property saying incomes and expenses that add up to the lump sum.

As long as you can prove what each house earns, then they are separate LLC’s per my lawyer and accountant.

A drawback is how new this entity is and how little caselaw there may be.

Good luck!

David M. · Answer

@David Beltz

Looking at your post again.. sorry . Let me try to answer your question.

As your properties get larger, sure it can be advantageous to use a LLC.  A commercial property may warrant it, eg you own a gas station...  properties with over 4 families are considered commercial so you will need commercial loans anyway...  so, the LLC is not more costly.

Since you are looking at 7unit property, your liability is going up.

Many people will create a LLC using the street address as the name.  It makes it much easier to keep track of which bank account is which.  Trying to remember “personalized” goes with which property gets hard generally after a few properties.

Talk with a few qualified professionals about the self-management issue.  It’s pretty specific so maybe there is a way to handle your situation since you’ve already created a property mgt company.

Since you have the separate property mgt activity, I should think that the bank account of the LLC’s holding Title will be “dormant.”  So, it shouldn’t be much of an administrative burden since those checkbooks will basically stay in a drawer.  I’ve heard some say lawyers have recommended not bothering having a bank account for Title holding llc — I don’t know...

I wouldn’t think having the Property Mgt company hold Title be the answer...  usually the whole point of the mgt LLC is to separate your liability further.  Otherwise just let the LLC holding Title to the property manage itself.  Leases would be with the LLC and rents made out to it.  Maybe you could dba a name similar to your mgt LLC so you could keep your branding...  talk to some professionals (accounting and legal).

Remember, you need to manage both the tax/accounting issues and the legal issues.  This is why cpa/jd is such a powerful combination.  Otherise, you need to keep going back and forth between the two.

Good luck.

David M. · Answer

@David Beltz

This is asked and posted about many times. I’ve posted about it constantly if you want to look through my posts...

It’s really up to you and your risk tolerance whether you want a LLC to hold Title your properties.  Trying to maintain and protect your corporate veil is the most difficult and unclear part.  Also, most people fet tripped up with having to pay for commercial lending since legal entities are not eligible for conforming residential loans.  Also, you want the mortgage and title to both be held by the LLC.  So, getting the property personally and quit claiming the Title usually causes a problem because you shouldn’t get the full limited liability protection since the mortgage is still in your personal name.  If you do it as a matter of course, then in my layman’s opinion you are using the LLC as your alter-ego.  Think of it as an arms length transaction (or between two strangers).  For example, would you really quit claim your property to me while you still hold the mortgage and expect me to let your manage it and get the rental proceeds?  Oh, whose bank account makes the mortgage payments (yes, it’s sort of a trick question...)?

Then there is the Due on Sale clause... oh, there is also the your insurnace...  then there is also your Title Insurance maybe become invalided by the quit claim deed...

The other issue raised by the other poster here is the self-management catch by the irs.  If you have two companies that you are owner of both (in short) where one does the mgt and the other holds Title, the irs considers the income to be active while your deductions are passive.  So, if you collect $100 in rent for the year, you pay tax at your ordinary rate and I think also self-employment tax.  Meanwhile, let’s say you have $50 in expenses from the property.  It is still passive.  But, since you can’t normally cross deduct passive and active income, you are basically screwed.

As one accountant here on bp has said, you can have 100properties in one LLC, 100 properties in your name, or anywhere in between.  It’s up to you

Either way, you should have landlord insurance and an umbrella policy.  Having a LLC doesn’t eliminate the need for the insurnace — you need their lawyers anyway to defend against the lawsuit otherwise you’ll go broke protecting the assets in the LLC...

So, while the LLC is there to provide a legal limited liability separation, it comes at a cost (in many ways significant) and it may not be worth it.  That’s the really short of it.

Alyssa Dyer · Answer

I'm not a CPA or attorney, but I can outline how ours in structured.All my properties are in Oklahoma.

When I first started our portfolio we had all our properties in one LLC and that was held in the trust. We were both working full time jobs so given the amount of time we had and protection we needed at the time it was enough.

As we've grown we've created a framework similar to what Nate Sanow outlined. We have a primary LLC that acts as an "umbrella" for the others. Then we have the holdings company (series LLC) to hold the properties, the management company is an S-Corp, the rehabs take place in an LLC and we handle our own acquisitions through an S-Corp. Each have operational management contracts with one another, each pays rent to the holdings company, etc.  to delineate them from one another.

Happy to break this down more, if you'd like. My CPA and attorney did most of the work, happy to pass their info along as well!

Steve Kochurov · Answer

@David Beltz

This is exactly my line of thinking as well and I am hoping someone else chimes in with some experience and/or advice in this area. I know it is and can be state specific but am curious as to the general thoughts on this.

Establish LLC for Each Property Purchase?

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