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Updated about 3 years ago, 10/16/2021
LLC advice needed - one per property?? That seems crazy!
I met with an attorney (I am in California, but investing out of state) about starting an LLC that we can use to purchase properties. I was shocked when my (California) attorney STRONGLY suggested that we need to have a separate LLC for each property we have. Plus he thinks we should have a corporation that is the umbrella over the smaller LLC's. In Calif there is a minimum of $800.00 taxes per year, per LLC .... so that would be $8,000 per year just in taxes for 10 corporations (for 10 out-of-state properties). That just doesn't make any sense. So, to all of you that operate and purchase under an LLC - what are your thoughts?
Sounds about right
What is the average value/cost of each of the properties?
@Michael Plante purchase price was somewhere between 100,000 and 300,000 each
You know what they say, you gotta spend money to make money!
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Unfortunately, yes. Otherwise, an accident on one property will open them all to scrutiny and liability. It is recommended to start a 'Holding Company' which will in turn own the LLC's, which own separate properties. Cumbersome it is, but the only other option is to have a huge umbrella policy to CYA. And that idea is only as good as the policy, many have exceptions hidden in them....
@Lesley Whitley - look for podcasts with Garett Sutton. He is well regarded. He’ll give you a different opinion.
His website: https://www.sutlaw.com
The ideal situation is to have an LLC for each state you have properties. From there, the number of houses with the LLC can vary. It's not about house, it's about equity (cap at $400k of equity per LLC). In time, that should build so things may need to change.
You pay the LLC cost within each state. Not California's cost. So, NV at $350, WY at $39… (I'm not sure about exact costs).
Regardless of the LLC set up, you also want to get an umbrella policy. That's even more critical.
@Lesley Whitley
I took my property out of an LLC, I had to hire a lawyer anytime I went to court with a tenant. I haven't had the same experience with my other properties. Just thought I would bring that up, if you weren't aware.
But I guess at 10 properties you would probably prefer not going to court on your own.
@Jennifer Marie Shanks thank you for your advice. Do you mean that every time you went to court, you had to find a lawyer to hire, whereas when the property was in an LLC, you just used the attorney that had helped you? I am trying to make sure I understand.
@Bruce Woodruff thank you for responding to my question. I appreciate your input. It just seems like such a lot of work for properties that have so little equity in them. But I think you are right.
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Originally posted by @Lesley Whitley:
@Bruce Woodruff thank you for responding to my question. I appreciate your input. It just seems like such a lot of work for properties that have so little equity in them. But I think you are right.
You're welcome. And yes it is a lot of work, but it's not about the equity, it's about the overall value that you could lose.....
@Ryan Olsen Thank you for sharing all of this great knowledge. First, it was great to hear that not all states charge $800 per year like California does. That make it a little easier to swallow. And I had seriously not even considered evaluating the amount of equity in the property, versus evaluating the ARV value. That makes a lot of sense, and I could probably lump together a couple of my less expensive properties into an LLC until they start building up equity, then move them out and into their own LLC. Definiitely a lot of food for thought.
I also really appreciated your recommendation to look into Garett Sutton. I have never heard of him but I will be checking out his podcasts this afternoon. I need to learn more about this process. His website appears that he doesn't work in the states I invest in (other than Calif) but I will definitely check him out.
Everytime I had to take a tenant to court, no matter what the issue.
Newbie question. Why do you need a LLC? Why not just buy extra insurance and a umbrella policy? Thanks
@Paul Barber. It is a great question. For me personally, in addition to the extra protection the LLC provides, there is a law that prevents us from having more than 10 conventional mortgages under our personal names. So by buying them under an LLC, that limit goes away. Additionally, some lenders that I would like to work with only do commercial loans, so I could work with them if purchasing under an LLC, rather than conventionally in my own name. I certainly am not an expert at all, and still have sooo much to learn. But these are the reasons that are prompting me to now consider using the LLC for my properties. Hope that helps!
@Paul Barber ecactly. Then if you want to refinance there will be a isssue for a heloc
@Lesley Whitley look into a series LLC. I met with Royal Legal Solutions and learned a lot about how a series LLC allows for the separation wanted with an LLC for every property but in a series LLC the process is simplified vs. creating an entire LLC for every investment property.
Think of each LLC as a basket. When sued, the person may be able to get everything in the basket if they win. So the more baskets you have you are making what the person gets worth less.
First, insurance is really your first line of defense. For most people, spend your money on insurance before LLC's. Keep in mind you can always transfer a property to a LLC later. The problem with insurance is the companies put in loopholes to exclude coverage. Usually fraud or negligence types of behavior. If you're small, then this is usually not an issue because most of the time it is an employee and not the owner.
As one person already pointed out, an LLC is a company. While you can always represent yourself in court, you cannot represent your company unless you're a lawyer.
Now if you are sued personally the person can go after all your baskets. So what do you do? You have the LLC's held by some kind of Trust with creditor protections.
There is also the philosophy of piercing the corporate veil. This means that the company (LLC or other type) will only be given company type protections which is why you set it up if it acts like a separate company. When you have multiple companies this could even be a problem between the separate companies. How do lawyers try to address this issue? A parent company.
The two factors to keep in mind are the valuations of the properties and the risk of the properties. Should you have a separate LLC for each $125,000 rent house? Probably not in most cases. Should you have a separate LLC for the two 250+ unit apartment complexes you own? Yes. If you are renting a building as a restaurant or bar or daycare then the risk is higher for that type of property so you may want a separate LLC.
This is obviously just a quick overview and not state specific.
@Robbie Young Firstly, thank you for taking the time to respond back with such a comprehensive answer. You brought up some excellent points and presented this info in an easy to understand way. Now I understand what was meant by a previous person about representing if you have to go to court. I love your illustration of the "baskets" , such a simple way to explain in a visual way. And I am starting to think that we could lump a couple smaller properties unti one LLC (especially as they don't have much equity in them now) and then move to separate LLCs if they get to where there is a lot of value or equity. Excellent advice and I sincerely send you thanks.
@Lesley Whitleyi would disagree, especially if you are using leverage to buy the properties. A good insurance policy goes a long way, and in my opinion protects you better than an LLC. For my risk level I would say 2-3 properties per LLC.
Does California also require that $800 on disregarded LLCs?
I’m not an accountant (or even close to one), but that would be a question I’d ask. If not, then that’s likely why they told you to use this strategy, because you’d have disregarded LLCs to protect you from liability, AND you’d file taxes only once on that parent entity and it would cover all the individual LLCs.
Again, I’m not an accountant. I just know we use a similar strategy, and I believe my only costs on the individual LLCs are formation and dissolution.
We have the holding company that manages a Texas series LLC, one house per cell.
Quick question. Say you have an LLC that is not a series and own multiple properties in it. Then the state you own that in passes a law that allows series LLC.
Can you turn this into a series LLC? If so, can you also divide the properties into the different series? Even if many doors are financed on the same note?
Ok, that was 3 questions.
