Should I keep my properties in my name or use LLCs?

[Keilon Morton]

I am a real estate agent and have begun working with investors. I have a client that has purchased 4 properties and we are working on a deal for his 5th. Should he create an LLC at this point to protect his personal assets and separate them from the rental/flip properties? If so, are there any suggestions on how to do so?

[Luis Alvarez]

@Keilon Morton To Eliott's point, your client should confer with a CPA highly versed in real estate investing...ideally, the CPA is also a REI, that's the way that we've seen ensures they are vested in knowing all the nuanced caveats from the tax code (and keep up with tax case law) that will directly affect an investor's decision making.

While I have a JD, this is not intended to be specific legal advice, just my opinion from an estate planning, asset protection, trust/estate administration background.

That being said, I would always put a rental property into an LLC and would never have a rental property (of any kind) or a flip in my personal name.  Yes it is true, that an LLC will only limit your liability, but keyword there is limit. There is nothing that exists that will completely insulate your rental property from complete liability, because the minute it is rented, or in the case of a flip, you sell it, you are exposing yourself to liability.  And there's more exposure than a loose handrail.  From building code violations leading to extreme damages, or injury, or death, and mold, asbestos, hazardous chemicals/substances found on site, etc.   The list goes on, I'm not a tort attorney, but they would know what all they see connected to real estate investors.

Assuming your client transfers the property(ies) into an LLC and they are then the sole member/manager. If some cause of action were to arise, the exposed party to litigation would be the legal title owner (in this case the LLC) and, yes, attorneys would also name the principal or managing members in the lawsuit.  So then a person might think: "WHY EVEN DO THIS?"  This happens because all litigation attorneys understand that they must name any and all potential defendants in a lawsuit from the beginning otherwise after some period of time (varies by state), they may lose the ability to add defendants to the suit, and then they cannot seek recourse from the truly liable party. This is typically the civil procedure you'll see, but it can vary state to state.  And they do this because during the discovery process of litigation, it may be uncovered that the individual, and not the LLC, is actually liable.  So if they don't name anyone and everyone, they may lose out.  If an LLC is properly maintained, which really isn't all that difficult and any "business owner" should be more than capable of doing so, the liability remains within that LLC only, and does not affect other assets (whether owned in separate LLCs, or in a person's personal name).  An LLC provides protection from exterior liability and interior liability.

The presumption is that legal entities are excellent tools, as long as you follow the corporate maintenance and corporate formalities. This means having separate bank account, not commingling funds, have an Operating Agreement, have simple occasional "minutes" reflecting actions of the entity, etc. etc.  As mentioned, this is not a crazy amount of maintenance and the costs really are negligible and I see it as a cost of doing business and having peace of mind.