BiggerPockets

It depends on the situation. If your properties have a lot of equity it may be wise to do separate LLCs. If there is little equity you can use one LLC for multiple properties. Attorneys and accountants may tend to recommend a new LLC for each property as a way of minimizing risk but it also increases their fees.

8)

Pardon me...

But whats a LLC?

Sorry, not familiar with this term...

There can be some serious annual costs for each LLC registered in certain states. The fees can also rise with the value of the assets.

There is a trade off between the costs and the benefit the LLC provides in terms of liability protection. Check the charges in your state. Even if you use an out of state the cost of registering a foreign LLC can be significant.

John Corey

thank you :pup:

With our scenario our cpa is also an attorney who hold multiple degrees and soon an mba so he provides competent advise based on our overall goes.

My guess is that he was angling for more fees. Unless you own the properties free and clear, or you have an LLC with substantial credit history of its own, you won't receive any liability protection benefit either. Because,

For you to transfer a property to the LLC if it holds a mortgage, the bank will 1) increase your rates when you refi to the LLC b/c it's a business asset and not a personal asset, 2) require that you sign a personal guarantee on the mortgage. This means that if the company defaults, your personal assets can be attached to the judgment.

If something happens in your property and
-the tenant (let's say) sues you,
-they have to win the suit,
-you refuse to settle,
-it's not a situation of negligence in which case you're personally liable anyhow, and
-the judgment comes in above both what your insurance will pay and the value of the home owned by the LLC...

then normally the rest of your assets would be shielded. But, if you've signed a personal guarantee on the mortgage, then they're not shielded (at least up to the value of the mortgage) even if you've set up each LLC properly and run it like a business so the courts don't " Pierce the Corporate Veil" .

Add on the $100-$500/year filing fees per LLC, separate tax fees for business filings, etc. and you're paying heaps for very, very limited liability protection. I'd recommend bumping up your liability insurance coverage on the property to $2M instead for +$200/year. It will cost you less and be much easier to maintain.

There are some benefits to using LLCs beyond liability protection--namely ownership of over a certain # of properties in certain states subject you to more restrictive landlord-tenant laws if you rent them out. I know people who bundle their properties 4-10 per LLC in order to circumvent these requirements. Again, do a cost analysis and unless you're moving 50+ properties I struggle to see how the benefits outweigh the costs in time and money.

I'm not an attorney; I've started several LLCs and run properties in several states; am also a licensed Realtor in two states. Just my humble opinion...

-Cheers,
Jeff

happylogan,

I would suggest setting up your business so that you have multiple rental units in each LLC. I limit my LLCs to 10 rental units per LLC and I separate them according to risk. I put low income apartments in one LLC; lower income SFHs in another; nicer SFHs in another; etc.

It is very cumbersome to have each rental in its own LLC. Let's say that you plan to have 50 rentals. Do you want to balance 50 check books? Pay to have 50 tax returns prepared? Receive and pay bills for 50 different companies? It's just too much. Putting several rentals in each LLC is a good compromise between practicality and protection.

I strongly believe that a multi-layered asset protection program IS necessary if you are going to build a significant rental property business. One often overlooked reason that an LLC is necessary is that there are many risks that are simply not covered by insurance. I urge you to read your insurance policy and see what it says about lead paint, mold, other environmental hazards, etc. These are issues that cause MANY expensive lawsuits, which is why the insurance companies won't cover them.

Good Luck,

Mike

Very good point MikeOH. Statistically speaking, you are dealing with a narrow set of circumstances that are significantly important above a certain number of rentals. I was under the impression this guy in particular was just starting out and only had 1-2 units.

There are lots of people on the " speaking tour" advertising LLC or Trust creation. For most small investors it's not worth the costs involved to create the structure. The game changes if/when you are a professional with many units to manage. At some scale, you can afford to start protecting against a wider range of threats.

Good point!
Jeff