Yikes—entity fees potentially killing my cash flow, help!

[Elaine Hester]

Yep—another newbie here, wondering what I'm missing ... I have only recently learned that owning my properties free and clear puts me in a more vulnerable position for liability and know now that I need legal asset protection. As I'm beginning to educate myself in this area, I'm frustrated in discovering the costs that are involved. 

From setup, to maintenance, to tax return filing fees—the costs incurred are threatening to put a huge dent in my cashflow. Yet, when doing property evaluations and analysis, I've yet to see these fees being called out in the various formulas I've been shown (including the BP calculators). Is having an entity a necessary element of investing—or only in certain situations such as owning free and clear properties?

I understand that entity set up in NV or WY is more cost effective than in CA where I live, but the costs involved still appear to be significant. I would love to hear how other investors are managing this, and if there are any inside secrets you can share. Thanks in advance!

[Christopher Smith]

I can't assess your individual situation, but I own a number of CA rental properties and a few out of state. I don't utilize legal entities of any kind and at least for me there is no reason to utilize them. 

My regular day job is very low risk (i.e., I'm not manufacturing dynamite in my garage), so my overall liability risks are low. As such, standard landlord insurance on each rental property with an overall umbrella policy is far more than adequate coverage.

In my opinion, people have gone absolutely overboard in setting up legal entities like LLCs, and I think they have done this primarily out of fear, ignorance and vanity. I save probably 10k a year (and a whole lot of paperwork headaches) by NOT using legal entities, and all with NO meaningful level of additional risk.