Should I open an LLC for each property?

Question

Hey all,

I recently closed on a 3 unit property which I am going to house hack which brings my portfolio to a total of 5 doors (including the one im living in) and am curious if it would be wise to have an LLC for each property and setting them up as individual companies? The portfolio consists of 1-3 unit and 2-single family houses. Thanks!

Benjamin Aaker · Answer

Hey guys, I look at the benefit of the LLC as keeping a loss from one from spilling over into other LLCs or your personal finances. This will work for ordinary losses, but not from negligence or unlawful activity. Depending on your area, it can be a pain to set up multiple LLCs and keep them running. My rule of thumb has been to have a new LLC whenever the ownership structure is different, when I have > 10 doors, or when the total LLC's ownership is > $1,000,000. I'm considering increasing that last one as property values go up.

You could set up one LLC to own your 4 rental properties and quit-claim deed them over and that would be the maximum I'd do with respect to LLC formation. More importantly, make sure you have good insurance coverage and an umbrella policy.

Ashish Acharya · Answer

@Keith Richardson Creating an LLC for each property can isolate risks, protecting other properties in your portfolio from liability. However, it increases costs and administrative work, like filing fees and bookkeeping.

Tax-wise, LLCs are pass-through entities or disregarded entities, so profits and losses flow to your personal return, but managing multiple LLCs complicates filings. There are no tax saving because of the LLCs. For house hacking, ensure rental and personal use are properly allocated for deductions. Alternatively, umbrella insurance may offer cost-effective protection. LLC will not have tax savings for now.This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Dennis Bragg · Answer

Hey Keith..

Congrats on your recent house hack-bringing your portfolio to five doors is a big step! Your question about LLCs is something many investors wrestle with, and the answer really depends on your long-term goals and how much risk you're comfortable taking on.

For smaller portfolios like yours, setting up separate LLCs for each property can provide additional liability protection, but it also comes with added complexity and costs. Think about filing fees, separate bank accounts, and maintaining compliance for multiple entities. In Vermont, LLC formation fees and annual report costs can add up.

A good friend of mine, Jason, started with five doors and used a single LLC for his properties initially. He liked the simplicity but later switched to multiple LLCs once he expanded to 15 doors. One hiccup he faced was forgetting to update his umbrella insurance policy, which left one property exposed for a short time. It’s things like that which make this decision more than just a legal one-it’s about how organized you can be.

Something else to consider: lenders often want you to personally guarantee loans, even if the property is in an LLC. This means the liability protection might not fully shield you from risks. Speaking of loans, refinancing or selling properties inside an LLC can sometimes complicate things.

Since you’re house hacking, also think about your tax strategy. LLCs can help streamline bookkeeping, but they don’t offer tax advantags unless structured as an S-Corp. Have you talked to a CPA about this? That’d be my next move-they can tailor advice based on your portfolio and Vermont's specific laws.

By the way, if anyone here has experience juggling multiple LLCs at the 5-10 door stage, how have you handled the balance between liability protection and administrative overhead?

Let’s hear what others think.

Marcus Auerbach · Answer

LLC's have their place, but they are overhyped and new investors tend to overestimate their importance and underestimate the administrative effort.

I have been a landlord for 15 years and well connected, yet I don't know anyone who was very saved by an LLC, so I asked BP nation:

https://www.biggerpockets.com/forums/926/topics/1151922-than...

Nathan Gesner · Answer

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.

Jake Baker · Answer

@Keith Richardson

It depends on your risk tolerance and ability to stay organized. It comes down to having good insurance for protection.

I keep around five rentals per LLC, and I am in Jacksonville, FL, where my homes are worth around $250-350k.

Having more than ten bank accounts is excessive. Umbrella insurance policies can add an extra layer of protection across your portfolio. Combining these strategies often gives investors the best balance of cost, simplicity, and security.

Jonathan Bock · Answer

@Keith Richardson

Make sure the accountant explains your total compliance costs for the varying setups as well.

Keith Richardson · Answer

Thank you all for great responses. My two single family houses typically get rented out as mid term rentals under airbnb which offers good coverage and we have been happy with. The latest purchase of the 3 family is a little different in that we will be living in one unit and there are two long term tenants already in place. Based on what you all have said I think my best option for now is to put the multi fam under my LLC and keep renting the others as I have been. We talked to our accountant and she was recommending individual LLC's as well as individual checking accounts/credit cards etc.. Im sure it would make life a lot easier for us and for her but it sounds like a lot of expense to get there.

Dominic Mazzarella · Answer

Congrats on the house hack, Keith! Whether or not to set up an LLC for each property really depends on your goals and how much liability protection you want. Some investors like having each property in its own LLC to limit risk, like if something happens with one property, it doesn’t affect the others.

That said, managing multiple LLCs can be a hassle and add costs, especially with only a few doors. An alternative could be putting all your properties under one LLC to start, then reassessing as your portfolio grows. Some states allow series LLCs as well. I have used LLCs individually for the properties that I've owned and I'm glad I did.

Might be worth chatting with a CPA or attorney who specializes in real estate to figure out what works best for your situation.