use of LLCs for holding rental properties

[Mike M.]

I read a business plan for multi-family properties and I had a question on use of LLCs. It recommends you have one LLC for the PM and then a separate LLC for each property.

If so, I'm wondering to you handle that practically. Sounds like a lot of cost associated with such an arrangement.

I have 5 properties (4 duplexes and a single). I own everything individually now. I have an LLC but it doesn't own the RE. I was thinking about biting the bullet and paying the transfer tax but I'm trying to think through the structure as well as the cost/benefit analysis.

[Chris Martin]

Regarding "...I usually advise my clients that they can pretty much use equity stripping and insurance to address the above issues without having to create multiple LLC's. Right now, the lawyer I work with in MD charges $450 to put a lien on a property and it can be the same lien put on multiple properties."

Yikes! It's always interesting seeing legal advice from non-lawyers. I'm just going to throw this out there... that liens created without consideration may be classified as something other than a benefit to the "borrower". See this Bigger Pockets topic and the District Court case brief on what other players in the legal system think about "friendly liens" (they call them "fraudulent liens" in the case). You may want to show your attorney this recent court action. You may also want to point out bullet #34, since the preparer of the lien only charged $250 and your attorney charges $450.

Also these follow up injunctions may be of interest... where they prohibit (via permanent injunction) the defendant from filing "fraudulent liens".

The bottom line is people will do what they are comfortable doing, price-wise and asset protection-wise. If it were me, I'd need to know if this is a multi-member LLC or not to know what I'd do. If you have the properties "moved" into an LLC, without monetary consideration since it is an LLC contribution, from what I can tell this is an untaxed event in PA. Correct me if I am wrong. Keep good LLC records, maintain your company records, have a written and well defined operating agreement, carry hazard insurance, etc. If the properties have a mortgage, I'd let them know what's going on via attorney's letterhead, and get the insurance company on board with the ownership changes. I'm not an attorney. Just my 2 cents.