Is it really worth setting up an LLC?

[Michael Pazirandeh]

I understand why many people set up an LLC for their investment properties, but my question is simple: "Is it worth it?" I've asked several investors and they always say I MUST set up an LLC to protect myself from getting sued and losing the property. And I get that. However, I always ask the following question and get the following response:

Me: "Have you or someone you know ever been sued?"

Them: "No, but it's just for your protection"

That's like me saying, "Hey, why aren't you wearing a hard helmet when you walk outside. Didn't you hear about the guy who died when a tree fell on him?" Yes, it's safer for me to walk around with a hard helmet at all times, but I'm NEVER going to actually do it since it's inconvenient. I see the LLC like wearing a hard helmet. Yes, it'll protect me, but the likelihood of a tenant suing and winning is very unlikely (as long as you treat them with respect and dignity) like the tree following on your head.

I would love to hear stories about Bigger Pocket members getting sued and losing your property as well as why you got sued. Thanks!

[Carl Fischer]

@Michael Pazirandeh

You don't need an LLC. However If you get sued it is to late to get one. Yes I have seen people get sued first hand. I also agree that @Thomas S. makes some good points and he lives in Canada. The USA is the most litigious country in the world. 

If you use an LLC or not it has more to do with your asset protection plan for everything. Investment properties, autos, personal possessions, home, boat, etc. identify the risks you want to protect against and thevassets you want to protect and that will lead you in the right direction. It will also most likely have to be modified as laws, taxation, and technology changes in your lifetime.

Florida has an excellent homestead property protection plan so I would not put my Florida personal residence in an LLC.

Here are the 2 examples attorneys gave me when I was developing my asset protection plan. 

1. If you get drunk and hit a school bus and are found liable for killing a couple of kids, paralyzing a few others and hospitalizing others you can have a problem and lose everything, even if you have every valuable in a seperate single member LLC. Multi member LLC may be a bit better but most likely not. Most car policies in this situation are lacking in coverage.

2. If your LLC is sued by a tenant and found liable for more than the insurance awards and your property has equity you would have to sell the property and pay or at least end up with a lien on the property --but none of your other "personal" property would be involved in settling unless you personally were brought into the suit. Same thing if your other real estate holdings were in seperate LLCs they would be protected.

Some people make the mistake of putting all their properties in one LLC thus exposing all if a law suit prevails against the LLC. The attorney sees $$$$ in this situation and I think makes you a better target for a law suit.

Also consider management and repair work because that can draw you in personally. This is another mistake RE owners make. If you repair an electrical outlet and a fire occurs your insurance company doesn't cover you and you may be found liable personally. If you hired a licensed insured electrician I think you are in a much safer position. Another approach people use as protection is to limit what they own personally in their name. Lawyers that sue like to see assets that can be recovered easily so maybe keep properties heavily mortgaged as another deterrent. 

There are many ways to protect without LLCs but they may be helpful dependent on your situation. Checkout insurance, trusts, C corps, limited partnerships, over leveraging properties,  off shore holdings to name a few options to add to an asset protection plan. 

Hopefully this helps give you ideas but talk to an attorney or two. I am not an attorney but did stay at holiday inn last night. LOL