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Updated 4 months ago, 08/19/2024
LLC or not? If so, which LLC option is best?
Hi BP,
I own 2 rental properties in Baltimore MD and i am first having trouble deciding on whether to place them in an LLC or not (I plan to slowly scale and house hack a new property once a year). If so, I am having trouble deciding on whether to create an LLC in Maryland (where the properties are) or Wyoming (cause of the know benefits). The last note was that i learned what a series liability is and was curious if i may be better off doing one of those because i have 2 properties and plan to slowly add more (Maryland does not offer series llc but wyoming does). Any information or suggestions help. thank you!
@Kyle Weinapple this is a personal choice regard a cost/risk ratio. There are those who legitimatly say (@Chris Seveney for example) that there is little benefit to an LLC for a small landlord. Good insurance will cover most risks. Also if an LLC is not properly run it can be pierced as if yoy have no LLC. This is especially true when you are a single meber LLC.
That said I own all my properties and do all my business through multiple LLCs. I know of no attonrey that owns property in their own name. That says soemthing. Keep in mind if you have a Wyoming LLC, or any other state, you still have to register it in Maryland. So many of the benefits of a Nevada or Wyoming LLC Etc. are gone anyway.
If you want an LLC especialy out of state for "Privacy" don't kid yourself. If privacy is that important to you, you probaly shouldn't be in business.
Quote from @Ned Carey:
@Kyle Weinapple this is a personal choice regard a cost/risk ratio. There are those who legitimatly say (@Chris Seveney for example) that there is little benefit to an LLC for a small landlord. Good insurance will cover most risks. Also if an LLC is not properly run it can be pierced as if yoy have no LLC. This is especially true when you are a single meber LLC.
That said I own all my properties and do all my business through multiple LLCs. I know of no attonrey that owns property in their own name. That says soemthing. Keep in mind if you have a Wyoming LLC, or any other state, you still have to register it in Maryland. So many of the benefits of a Nevada or Wyoming LLC Etc. are gone anyway.
If you want an LLC especialy out of state for "Privacy" don't kid yourself. If privacy is that important to you, you probaly shouldn't be in business.
I just want to confirm, I am not opposed to LLC's and have them, but 99% of people set them up wrong by first buying a proeprty, having a loan on it, then just transferring it to the LLC. If its done right from the beginning yes it adds a great layer of protection, but again - most do not do it the right way so its not providing any benefit.
- Chris Seveney
Quote from @Chris Seveney:
Agreed Chris, That is a stupid high risk move, often recomended by people who never point out the obvous downsides. The fact that some lender brokers recomend it, I think is highly unethical.
Quote from @Ned Carey:
@Kyle Weinapple this is a personal choice regard a cost/risk ratio. There are those who legitimatly say (@Chris Seveney for example) that there is little benefit to an LLC for a small landlord. Good insurance will cover most risks. Also if an LLC is not properly run it can be pierced as if yoy have no LLC. This is especially true when you are a single meber LLC.
That said I own all my properties and do all my business through multiple LLCs. I know of no attonrey that owns property in their own name. That says soemthing. Keep in mind if you have a Wyoming LLC, or any other state, you still have to register it in Maryland. So many of the benefits of a Nevada or Wyoming LLC Etc. are gone anyway.
If you want an LLC especialy out of state for "Privacy" don't kid yourself. If privacy is that important to you, you probaly shouldn't be in business.
Id still recommend the LLC for the smaller landlord, even if you have good insurance. Making an insurance claim on something after the fact is a nightmare. If you can have the proper protection in place, it can help you sleep better at night
- Real Estate Broker
- Cody, WY
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An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.
Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.
ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.
LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.
Additional thoughts:
1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.
2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.
3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.
4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.
5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.
If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.
- Nathan Gesner
I would like to add one more important point
Go back and reread @Nathan Gesner's post
Quote from @Chris Seveney:
Quote from @Ned Carey:
@Kyle Weinapple this is a personal choice regard a cost/risk ratio. There are those who legitimatly say (@Chris Seveney for example) that there is little benefit to an LLC for a small landlord. Good insurance will cover most risks. Also if an LLC is not properly run it can be pierced as if yoy have no LLC. This is especially true when you are a single meber LLC.
That said I own all my properties and do all my business through multiple LLCs. I know of no attonrey that owns property in their own name. That says soemthing. Keep in mind if you have a Wyoming LLC, or any other state, you still have to register it in Maryland. So many of the benefits of a Nevada or Wyoming LLC Etc. are gone anyway.
If you want an LLC especialy out of state for "Privacy" don't kid yourself. If privacy is that important to you, you probaly shouldn't be in business.
I just want to confirm, I am not opposed to LLC's and have them, but 99% of people set them up wrong by first buying a proeprty, having a loan on it, then just transferring it to the LLC. If its done right from the beginning yes it adds a great layer of protection, but again - most do not do it the right way so its not providing any benefit.
What is the proper way to do it? And assuming that loan does not have a "due at sale" clause on there that would give you a massive balloon payment.
@Jonathan Bui virtually all mortage loans today have a "due on sale" clause" But that is only one issue. Another issue is that your title insurance is no longer any good becasue of the new owner. Having a loan in your name for a property owned by an LLC has potential to allow a creditor to pierce yoiur LLC. (by itself probably not enough but combined with other factors it could happen)
Arguably you have commited bank fraud. You have gotten one type of loan but used it in a way that was not intended and not allowed.
People who cut corners like this are likely to cut corners in other ways that may cause the LLC to be "Pierced". In other words a court can say "you are not running this like a real business so the court detemines that yiou dont actually have an LLC and you own all of this in your own name"
The proper way to do it is buy the property in the LLC and the LLC gets a loan in it;s name.
Most new investors do not pay near enough attention to the law. NOLO Press and others have books on LLC and how to run then. NOLO books are intended to be self help. I dont recomend do it yorself law but I ido recomend people learn the basics of bussiness law.
Quote from @Ned Carey:
@Jonathan Bui virtually all mortage loans today have a "due on sale" clause" But that is only one issue. Another issue is that your title insurance is no longer any good becasue of the new owner. Having a loan in your name for a property owned by an LLC has potential to allow a creditor to pierce yoiur LLC. (by itself probably not enough but combined with other factors it could happen)
Arguably you have commited bank fraud. You have gotten one type of loan but used it in a way that was not intended and not allowed.
People who cut corners like this are likely to cut corners in other ways that may cause the LLC to be "Pierced". In other words a court can say "you are not running this like a real business so the court detemines that yiou dont actually have an LLC and you own all of this in your own name"
The proper way to do it is buy the property in the LLC and the LLC gets a loan in it;s name.
Most new investors do not pay near enough attention to the law. NOLO Press and others have books on LLC and how to run then. NOLO books are intended to be self help. I dont recomend do it yorself law but I ido recomend people learn the basics of bussiness law.
Good points Ned. Did you go with an LLC right when starting out or was there a more appropriate transition point say one or two years later?
@Jonathan Bui I went with an LLC from the begining. The reason is I assumed I would grow to a size where it would benefit me. I am in Baltimore and lead paint lawsuits are a big issue. One probem with transfering a property to an LLC is the liabilty of anythig that happens before the transfer, you are still personally responsible for.
I now have close to 20 LLCs It is a nightmare, expensive, complex, and an accounting disaster. there is a lot to be said for keeping it simple.
Another factor is will you be a sole member of the LLC? I believe in some states a singe meber LLC amy not protect you at all. (FL is where I think I read about it here on BP).
An LLC is never perrfect protection. You are always responsible for your own actions. If while driving to a property an behalf of your LLC, you run over a little odl lady, both YOU and the LLC are responsible.
I chose an LLC for the extra protection but there is a cost.
Quote from @Ned Carey:
@Jonathan Bui I went with an LLC from the begining. The reason is I assumed I would grow to a size where it would benefit me. I am in Baltimore and lead paint lawsuits are a big issue. One probem with transfering a property to an LLC is the liabilty of anythig that happens before the transfer, you are still personally responsible for.
I now have close to 20 LLCs It is a nightmare, expensive, complex, and an accounting disaster. there is a lot to be said for keeping it simple.
Another factor is will you be a sole member of the LLC? I believe in some states a singe meber LLC amy not protect you at all. (FL is where I think I read about it here on BP).
An LLC is never perrfect protection. You are always responsible for your own actions. If while driving to a property an behalf of your LLC, you run over a little odl lady, both YOU and the LLC are responsible.
I chose an LLC for the extra protection but there is a cost.
@Jonathan Bui I am not excited about them. I see no need for an LLC fo every property. Since they are new, case law has yet to determine how they will be handled. If they aren't run as seaparete companies with all formalities then I can see them being pierced. The only benefit I see is a smal cost savings from one state fee instead of a fee for each LLC. Series LLC created in one state that allows them may not be usefull in another state where the properties are owned.
If you run them separately you still have the complexity, a large number of bank accounts, accountiing costs and the rest. If each LLC has it's own bank account then you have many separate piles of cash. You may need to transfer money from one to another. While this can be done legally, the accounting and documenting of these transfers can take a lot of time and or expense.
Go back and read @Nathan Gesner post.
An LLC is your LAST resort to asset protection. FIrst is comply with the law, next treat people with respoect and act responsibllly when things go wrong, Third is insurance. The LLC is your last resort for protection.
@Kyle Weinapple always consulting a local lawyer, I would recommend Jacob Rappaport for the Baltimore area. I have my rental properties in a couple LLC's up to a certain equity amount and then start using a new LLC. I also did a video interview with Jacob Rappaport that is about 36 minutes on YouTube that is phenomenal and he talks about the pros and cons of different set ups. it changed the way I structured my rental business and I have watched it several times since doing the interview with him. Hope that helps, Dave