LLC formed for each property?

Question

Hello;

I received come advice from an accountant saying for each real estate investment I do , form a new LLC for each.  toughts? :pup:

Jeff Takle · Answer

My guess is that he was angling for more fees. Unless you own the properties free and clear, or you have an LLC with substantial credit history of its own, you won't receive any liability protection benefit either. Because,

For you to transfer a property to the LLC if it holds a mortgage, the bank will 1) increase your rates when you refi to the LLC b/c it's a business asset and not a personal asset, 2) require that you sign a personal guarantee on the mortgage. This means that if the company defaults, your personal assets can be attached to the judgment.

If something happens in your property and 
  -the tenant (let's say) sues you, 
  -they have to win the suit, 
-you refuse to settle, 
-it's not a situation of negligence in which case you're personally liable anyhow, and 
-the judgment comes in above both what your insurance will pay and the value of the home owned by the LLC...

then normally the rest of your assets would be shielded. But, if you've signed a personal guarantee on the mortgage, then they're not shielded (at least up to the value of the mortgage) even if you've set up each LLC properly and run it like a business so the courts don't "Pierce the Corporate Veil".

Add on the $100-$500/year filing fees per LLC, separate tax fees for business filings, etc. and you're paying heaps for very, very limited liability protection. I'd recommend bumping up your liability insurance coverage on the property to $2M instead for +$200/year. It will cost you less and be much easier to maintain.

There are some benefits to using LLCs beyond liability protection--namely ownership of over a certain # of properties in certain states subject you to more restrictive landlord-tenant laws if you rent them out. I know people who bundle their properties 4-10 per LLC in order to circumvent these requirements. Again, do a cost analysis and unless you're moving 50+ properties I struggle to see how the benefits outweigh the costs in time and money.

I'm not an attorney; I've started several LLCs and run properties in several states; am also a licensed Realtor in two states. Just my humble opinion...

-Cheers,
Jeff

Michael Rossi · Answer

happylogan,

I would suggest setting up your business so that you have multiple rental units in each LLC.  I limit my LLCs to 10 rental units per LLC and I separate them according to risk.  I put low income apartments in one LLC; lower income SFHs in another; nicer SFHs in another; etc.

It is very cumbersome to have each rental in its own LLC.  Let's say that you plan to have 50 rentals.  Do you want to balance 50 check books?  Pay to have 50 tax returns prepared?  Receive and pay bills for 50 different companies?  It's just too much.  Putting several rentals in each LLC is a good compromise between practicality and protection.

I strongly believe that a multi-layered asset protection program IS necessary if you are going to build a significant rental property business.  One often overlooked reason that an LLC is necessary is that there are many risks that are simply not covered by insurance.  I urge you to read your insurance policy and see what it says about lead paint, mold, other environmental hazards, etc.  These are issues that cause MANY expensive lawsuits, which is why the insurance companies won't cover them.

Good Luck,

Mike

Account Closed · Answer

Mike has touched on two great points.

1. There has to be a balance between asset protection and the costs. If you spend all your time and money protecting your assets you likely will have a lot less money and time. At some level you are producing an income so you can have a life. You do not want to make it so complex that you can not enjoy it.

In addition if you make the structure too complex you will likely make more mistakes. Mistakes that can be used to show that the structure was just a bunch of paper and not really a business operating correctly. Hence you lose some or all of the asset protection.

2. Even more important in my mind is Mike's second point. There are liabilities that are not covered by insurance or which you can not anticipate. Rules changes, judges make new rulings, jury's feel like they should reward someone or a insurance policy has one too many exclusions.

The British call it belt and braces. Have overlapping protection. Do not get carried away as you want a balance between layers of protection and ease of operation.

John Corey

E L · Answer

It will get expensive but what you are doing is isolating the liability to only one property per LLC. For example if you have multiple properties in a llc and one under performs and you have financial issue and that property gets foreclosed on then that liability will carry into the other producing properties. If you need to file for bankruptcy for that llc you will have more legal issues because you have now tainted the waters and is now sticky to un do.

Its a personal choice that you will have to make once you start building assests. As you buy more then i would consider into using an llc for each property but the cost of running an llc yearly per property can get expesive but if the income can support it then why not.

Just remember that  the expense will multiply times the ammount of llc's you have per property each year.

In the beggining don't worry about it to much but as you grow do invest in yourself and explore better opportunities with your cpa. Every scenario is different but you get the ideal. You might just do it out the bat to shield liability from your other projects.

Good luck its a great place to be in real estate. Try your local library and enrich your mind on these things that can aid in you becoming a bigger pro in this game.

We all are learning everyday to be better players in the game of business and i learn so much everyday thats sometimes i have to take a break because my head hurts from all the knowledge i consume all day long.

No matter what you do always use a corporation or llc to play the game of business and never ever do business as a DBA unless you want to take the pain home when something goes wrong and you are 100% liable for.

Account Closed · Answer

There can be some serious annual costs for each LLC registered in certain states. The fees can also rise with the value of the assets.

There is a trade off between the costs and the benefit the LLC provides in terms of liability protection. Check the charges in your state. Even if you use an out of state the cost of registering a foreign LLC can be significant.

John Corey

Susan Leading Fox · Answer

If you form an LLC in the state where your propertie(s) are located, which is not your home state,  can and should you serve as your own RA? If not, and you don't know anyone in the state where the property is located,  should you look for a RA service?

Jeff Takle · Answer

Very good point MikeOH.  Statistically speaking, you are dealing with a narrow set of circumstances that are significantly important above a certain number of rentals. I was under the impression this guy in particular was just starting out and only had 1-2 units.

There are lots of people on the "speaking tour" advertising LLC or Trust creation. For most small investors it's not worth the costs involved to create the structure. The game changes if/when you are a professional with many units to manage. At some scale, you can afford to start protecting against a wider range of threats.

Good point!
Jeff

N/A N/A · Answer

hmmm... that's some good knowledge to digest...

MATT WARDEN · Answer

This is not always the case. In some areas, once an individual or entity owns more than x properties, they are classified differently.

Account Closed · Answer

I was re-reading this and something popped into my head.

The accountant is in effect offering legal advice concerning liability. There really is no tax advantage to having multiple LLCs. Did your accountant knwo that they were offering legal advice?

An attorney is much better qualitied to discuss the legal aspects. Almost any accountant can run the numbers and fill in the forms if they understand real estate. The LLC structure changes little for the tax preparations.

John Corey

LLC formed for each property?

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