LLC for one or LLC for all

[Marisa Voelkel]

Just recently I had a notice from our insurance carrier underwriting that they were canceling or insurance for our rental properties. They apparently have strict rules about what the owner company can be involved with. Currently, we have one LLC that is engaged in several real estate aspects: BRRRRs, Flips, rentals, my agent commissions go through it, and contracts for general contracting. After speaking with our banker, a title company, my accountant, legal, and others, it was determined that the insurance companies are not fond of rental owning companies doing more than just owning and managing rental properties due to liability risks. So, we are opening another LLC specifically for owning and managing rentals. That means I have to move my properties from one LLC to another, open a separate bank account, change bank accounts for rental income and expenses, etc. My understanding is this significantly limits liability if were were to be sued by a tenant (could only go after rental company, not everything else we do).

Now, I believe the right legal CYA move is to have one LLC for each individual property, but personally, I don't want to keep up with the bookkeeping on that! So, we are segregating off our rental endeavors to a single LLC to protect our other operations. Redoing the titles and warranty deeds for our properties is costing us money I could have avoided if I had known better. Thought I would share in case others can learn from this. There is SO MUCH advise that is thrown at us when we first get into real estate investing, it's hard to filter through it. And I realize this is not a new topic... but sometimes hearing it a different way helps.

My advise to those planning on having more than one business venture in real estate is to set up a separate LLC from everything else just for rentals. It will help keep insurance down and limit the risk to the other operations. Just my 2 cents. Always open to other suggestions.

[Andrew Syrios]

I generally agree that you should have a separate LLC for each separate business. That being said, the idea of putting each property in a separate LLC is arduous and I think (in my non-lawyer opinion) unnecessary. (The exception being large apartments and commercial properties, of course.) I haven't seen it proven but I sincerely doubt that having each property in a separate LLC is going to stop any legal action from being limited to that property.

[Benjamin Aaker]

I think the fact that your insurance company cancelled your insurance is telling. The insurer determined it was too much risk for you to have everything in one LLC. Their business is to do their diligence on this. Each new property or business increases their (and your) risk exposure.

The LLC helps a catastrophic loss from bleeding over into your other properties. If you are not acting in a negligent way, you do have a layer of protection (though not total protection by any means). So, you have to determine the value in forming a new LLC when you do a new purchase.

My personal strategy is to form a new LLC for 10 properties or $1 million in assets or different ownership structure. I live in a state where this is easy and inexpensive to do. Your locality may change the math for you.

[Jake Baker]

@Marisa Voelkel

I think having properties in their own LLC is not necessary for the reasons that @Andrew Syrios and @Benjamin Aaker mentioned.

It depends on your risk tolerance and ability to keep organized. Really it comes down to having good insurance. I keep around 5 rentals per LLC and I am in Jacksonville FL where my homes are worth around $300k.

I believe that most CPAs will tell you to create a new LLC for every property because that means more tax returns for them :) Having to go to the bank to open up new business accounts for every rental is ridiculous.

[Marisa Voelkel]

Thanks everyone for the confirmation.  @Jake Baker, believe it or not, my accountant said to only make 1 to hold the three properties we have.  He likes to keep accounting simple. 

Turns out, my title guy and banker can make this all happen fairly inexpensively.  I greatly appreciate good relationships when things like this happen!  

[Markus Shobe]

Deciding whether to use one LLC for all your real estate properties or separate LLCs for each comes down to balancing simplicity and cost against liability protection and flexibility. Using a single LLC is simpler and cheaper but puts all properties at risk if one faces legal issues. On the other hand, separate LLCs for each property provide better protection but are more complex and costly to manage. Some investors use a hybrid approach, grouping properties by type or value into different LLCs. Considering state laws, fees, insurance, and tax implications can help you choose the best structure for your situation. Given your background in bookkeeping and real estate, you likely have a good sense of your capacity and risk tolerance, but consulting a legal professional might still be a good idea.

[Andrew Syrios]

Quote from @Jake Baker:

@Marisa Voelkel

I think having properties in their own LLC is not necessary for the reasons that @Andrew Syrios and @Benjamin Aaker mentioned.

It depends on your risk tolerance and ability to keep organized. Really it comes down to having good insurance. I keep around 5 rentals per LLC and I am in Jacksonville FL where my homes are worth around $300k.

I believe that most CPAs will tell you to create a new LLC for every property because that means more tax returns for them :) Having to go to the bank to open up new business accounts for every rental is ridiculous.

 Tax accountants (and lawyers) also tend to be extremely risk adverse so they tell you to do one thing after another to lower liability even if it doesn't always make sense from a cost/benefit way of looking at things given that, as we all know, time = money. 

[George Willey]

@Marisa Voelkel, Do you anticipate any issues acquiring loans for a new property under the new LLC structure? I have 2 rentals (1 already in an llc and 1 being put in now), I am at the point of starting to look at getting a 3rd rental and have always wondered what loan approval will look like with my assets now segmented and if I would apply for the loan as the LLC. Any experience you can share would be greatly appreciated.

[Marisa Voelkel]

Hi @George Willey, no I haven't had any issues. I have seen recommendations to only keep a few in one LLC so that is my plan, likely no more than 10. I have three. The goal was 10 by the end of the year. I might have 6, but I keep plugging along!