5 Reasons I Do NOT Invest in Real Estate Using An LLC

by | BiggerPockets.com

I cringe when I hear the following question from newer investors:

“Should I invest in real estate through an LLC?”

Often, this question is quickly greeted by intimidating big shot investors and lawyers saying things like, “Yes, you MUST use an LLC. There’s no debate about it.”

In my limited experience, I’ve found that there are most often three types of people in the real estate world using ultimatums:

  • The very thoughtless
  • The very wrong
  • The guy who’s selling me something

I’d suggest that you never listen to people who use this type of language. (See what I did there?)

I don’t know whether or not you should use an LLC. The answer differs from person to person. I can tell you that I personally do NOT use an LLC or other business entity to protect myself. As a young, first-time investor, I believe that I have an intelligent rationale for investing this way. I hope that as I explain my rationale for investing under my name, other young, first-time investors will benefit from my reasoning and make an intelligent decision for themselves. At the very least, I hope to be a thoughtful counter to those who dogmatically proclaim that an LLC is a must.

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My Investment

To give you a little background, I used virtually the entirety of my savings to purchase and repair my first little duplex back in November of 2014. Having put in work to make it livable, I now rent out one unit to some wonderful tenants and live in the other half with a roommate. I purchased the property with 5% down using FHA financing, own the property under my own name, and manage the tenants myself.

And I think I’d be a fool to operate it under an LLC.

I had (and continue to benefit from) several immense advantages in owning this property under my name. These advantages would have been forfeited should I have moved the property into an LLC or other business entity. It’s my belief that these advantages vastly outweigh the benefits of operating the property out of an LLC. Further, in my case, I believe that the protections of an LLC are minimal, easily lost, and expensive at best for investors in similar situations to my own.

5 Advantages to Investing in Real Estate Under My Own Name

1) Access to Financing

In my case, I used an FHA loan insured by the Federal Government to finance my property. This type of loan allows first time home buyers to put down as little as 3.5% on their properties. This type of loan is available to people purchasing primary residences only, not companies. Under their rules, the property that I bought was a exactly that — a primary residence. It just happened to also be a duplex with a very rentable second unit. The same bank that allowed me to purchase this property for just 5% down would have required 20% at least for “The TrenchPire, LLC” to buy the property.

Related: Should You Get an LLC For Your Real Estate Business?

My duplex cost $240,000. Putting down 5%, or $12,000, is a very different proposition than putting down 20%, or $48,000. My entry into real estate investing would have been delayed by years if I had elected to invest through an LLC and purchase the property with $48,000 in savings.

2) Lower Interest Rates

My 30-year interest rate for my home mortgage is 3.475%. Try getting that through an LLC.

3) Special Tax Breaks

Interest on a mortgage for a primary residence is tax deductible on your personal income. Furthermore, I pay mortgage insurance on my FHA loan, which is also tax deductible.

I might not be able to claim either of these tax breaks on my personal tax return were I to move the property into an LLC. These tax breaks are especially important to highly leveraged owner-occupiers like me who pay lots of interest and mortgage insurance each month in the first few years of ownership.  Even in pass-through entities like single-member LLCs, these tax breaks are minimized because investors can’t leverage as much.  Putting down 5% or less through an LLC is a rare feat I have yet to hear of done through an LLC upfront.

4) Tax-Free Capital Gains

Assuming that I live in the property for at least two years and assuming that the property appreciates over that timeframe, I have the option to sell my investment for a tax-free capital gain. This gain caps at $250,000 for a single person and is limited to primary residences only. Unlike a 1031 exchange, the money is truly tax-free and can be spent on my next vacation, manicure, or other non-real estate assets.

Assuming that my property appreciates 10% over the next two years, I’m looking at a cool $20,000, instead of perhaps $13,000 after taxes. That’s a meaningful difference to me.

5) Flexibility in Mixing Business With Personal

I try to run my property as professionally as I can, using separate email addresses, bank accounts and credit cards for property-related expenses. But because this is my house, at the end of the day, I have the option to cheat when necessary by mixing personal and business assets. I have no corporate veil to defend, and thus have more flexibility in moving assets around, managing tenants, doing work on the property, etc.

2 Disadvantages to Owning the Property Under My Name (& Why They’re Minimally Relevant to Me)

Disadvantage #1: Potentially Unlimited Liability

Let me start this off by saying that millions of investors, some of whom have high net worth, invest in real estate without using LLCs. They protect themselves from liability through umbrella insurance policies, which have worked for decades, and that I trust to work for me. That said, there are two reasons why this advantage to the LLC was not something that I felt was of paramount importance to me.

First, I have an umbrella insurance policy that covers me for up to $1M. In the event that someone successfully sues me for more than that, then yes, my personal assets are at risk. In that event, I lose everything I own. So what? As a 24-year-old kid, and I have virtually nothing to my name besides a few small retirement accounts (relatively hard to lose in a judgement), the property, and some savings I hope to invest in the next property.

Oh well. I’ll just start over and be right back here in a year or two. Not a big difference between waiting two more years to save up enough to put down 20% in an LLC.

Oh, and, by the way, something would have to go very wrong for that to happen. I like to think that I am a respectful and attentive landlord and that I do my best to make sure to respond to any questions or concerns from my tenants. Bad things happen, but I believe that a $1M+ mistake on this little rental would be an extraordinarily unlikely event.

Secondly, LLCs and other businesses only protect their owners from unlimited liabilities if they are run correctly, preventing the opposition from piercing the corporate veil. I see running my business this professionally as something that would be very difficult to do correctly, given that I live in the property and could be considered a customer.

I believe that I am unlikely never to conduct personal business in the property that I live in in a manner that a savvy lawyer could not use against me. I also believe that I am perhaps not legally savvy enough to be perfect in my accounting for which improvements to the duplex are luxuries for my personal happiness, as opposed to improvements for the business. I’m 24 and am running my first ever business out of my home. That corporate veil might have been as easily swept away as the blinds in my living room. (Are they my blinds? Or the LLC’s?)

Disadvantage #2: I Cannot Remain Anonymous Behind the LLC

Many real estate investors prefer to distance themselves from their properties to make it difficult to sue them and to put a barrier between themselves and their tenants. An LLC can be a great way to do that. In my case, and for many first-time investors who are owner-occupiers or owner-managers, this advantage is likely forfeited from day one. I live right next door to the tenants. They see me mowing the lawn, painting, installing shutters, making repairs, and painting walls.

It’s kind of obvious.

Related: #AskBP 013: Should I Have Several LLCS For My Real Estate Business?


Should I use an LLC? You tell me. At the very least, I think that a reasonable person can make the case that I have strong reasons for investing in real estate under my own name.

I’m investing in real estate, and I’m willing to take action. It would have been a lame excuse to hide and continue building wealth at a painfully slow rate merely to kid myself that an LLC would offer me meaningful protection. Assuming I had allowed the weak protections of an LLC to delay my decision to start investing in real estate, I’d still be a renter and wouldn’t have anything to protect in the first place!

As an afterthought, I’ll mention that aside from the massive expenses and disadvantages to operating property under an LLC that I outlined earlier, there are sometimes expensive costs directly related to operating LLCs. These costs, like setup fees, accounting time/expense, and legal expenses in drafting operating agreements, vary from state to state and can be either immaterial or cost thousands and thousands of dollars.

I plan on using LLCs and protecting my assets when and if I build net worth into the hundreds of thousands or millions of dollars. But for now, the risk/reward ratio for owning the property under my own name is so far slanted in my favor that I think I’d be silly to use an LLC. I’m a healthy 24-year-old with no family, and I have almost no wealth. If I were 50 with three kids to put through college and a few million in assets to lose, then that would be a different story, and I’d probably use an LLC. I wouldn’t want legal liability from my rentals to touch me or my family with a ten-foot pole.

But for now, an LLC sounds about as useful as a colonoscopy.

And probably a lot more unpleasant.

Do you invest in real estate using an LLC? Why or why not?

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I am not a lawyer, and the opinions in this article are my own.  Please make sure that you consult with an attorney before making any decisions regarding legal structure or business decisions that might have legal repercussions.

Weigh in, and let’s have a discussion!

About Author

Scott Trench

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


  1. Logan Allec

    I just spoke with a real estate attorney about this last week, and he expressed similar sentiments that forming an LLC would be useless in my situation, which is nearly identical to yours. I am in my mid-20s with modest 12-month investing goals consisting of buying an owner-occupied 2-4 unit property here in Los Angeles using FHA financing, flipping a few houses, and perhaps picking up two or three rental properties out-of-state using conventional financing if the market continues to improve.

    Why did this attorney think an LLC would be useless in my situation? Because, as you’ve pointed out, the “corporate veil” would be quite thin in my case and therefore easily pierced. Although this is not codified anywhere, and this number is based only on this attorney’s experience in the jurisdictions in which he practices, his opinion was that once an investor acquires four or more properties, a single-member LLC would potentially make sense because at that point the LLC is “vested” (again, his language and not a codified term), which means that it now has a decent shot at being respected as an entity separate from its owner for liability purposes. It is now standing on its own two feet with multiple properties and multiple incomes. But before that point? Not worth the out-of-pocket cash, which in California consists of a $70 filing fee with the Secretary of State plus the $800 franchise tax plus an additional fee based on gross receipts.

    Also, you may want to double-check with your accountant on # 3. I know that loss of the mortgage deduction would certainly be the case if you held your primary residence in a multiple-member LLC (I have NO idea why anyone would do that), but I am not sure that you lose this deduction if you are the sole owner of a single-member LLC, which will generally be disregarded for income tax purposes (like a living trust would). But then again, I could be wrong.

    • Scott Trench

      Thanks for this comment Logan. I think that I agree with your lawyer that maintaining separation between my business and my personal would be very difficult for me. I will definitely check into the tax situation of moving the property into a single member LLC. I may well have some things to learn on that point – I just believe that most business entities, with the possible exception of a single-member LLC, are not eligible for mortgage tax deductions.

      • The risk you are taking is with your credit. When you get sued (and you will, real estate is the most litigious Industry.) Your credit will be damaged significantly and possibly knock you out of the game forever.

        As a commercial Insurance Agent who works primarily with RE investors having an umbrella is important but understand you want multiple layers of protection. You may want to consider a trust.

    • Zach Barnes

      LLCs in California actually have some decent protections even above some other states. While I agree your owner occupied wont make any sense, after that it certainly will unless you want to risk that property for an issue that comes up on another. Members of LLCs cannot be sued for their personal assets outside of their interests in the LLC from those within. This is the “inside” part of the inside/outside risks. The other major benefit in California is the charging rules make it tough to collect or foreclose and LLC and they cannot dissolve it.

      However, you can be sued for your interests in an LLC from something that occurred anywhere else in your life, but there are ways to help with that as well, mostly good insurance and then umbrella insurance. Then it gets fancier with things like equity stripping, etc…

    • Hi All,
      Obviously a little late to the thread, but I was hoping someone still notices. I am looking at some property that has 1 house and a potential 2nd house (not sure if it legally livable yet). Assuming it is, I was planning on living in the smaller unit and using the larger unit as a vacation rental since the property is on a very quiet lake. To be very ambiguous here, I have a potential large deal with a large company on a little company R and R with health field training etc (my field).

      Due to the potentially large deal, would it be more wise to form an LLC? I plan on putting 30% down regardless, but then I must go into renovations. Do renovation write-offs work the same under myself personally or an LLC, or is that just a function of having a property listed as a rental?

  2. Amy A.

    I have two more for you: LLCs are easier to foreclose on, even during bankruptcy. Also, some states don’t allow you to do evictions yourself if you are an LLC. It would be practicing law without a license, since you’d be representing your LLC.

    An additional article I’d like to see would be by a person who has been sued and the LLC protected him. I always hear potential horror stories (your building burns down and takes a whole city block with it), but have never heard first-hand experience.

    Yes, I have an LLC. It’s cheap and easy to do where I live, but I’m still not convinced it’s worthwhile. Also, my lender made me sign that I’d be personally responsible for the mortgage, so I could still lose my home if I defaulted.

    Keep up the good work and keep moving up the ladder!

    • Scott Trench

      Thanks for these additional points! I think that they are great and that they exemplify the additional complexities and difficulties that come with setting up business entities unneccessarily.

      As for your article about someone getting sued and the LLC protecting them, I think that you are unlikely to find many examples. For one thing, the LLC in and of itself probably prevents much litigation before it gets started. For another, an LLC that is run correctly probably forces the business owner to do basic things correctly, reducing the chances of litigation against them.

  3. Terrence Arth

    Hello Scott, you make great points. To expound on a couple of them, an umbrella policy is a screamin’ deal. Plus, for an extremely low additional cost, you can up the topside limit to $2MM or $4MM. Try to think of some incident that might precipitate a lawsuit worth $2 or 4million dollars? Dog bite? Trip and fall? Hardly. Yes, everyone has heard a story of an investor losing everything to a slimy tenant with a slick lawyer. However it is important to note that filing a lawsuit typically requires expertise, like a lawyer and upfront cash from the litigant. Lawyers don’t work for free and the vast majority of tenants don’t have the experience. If you know that only a minuscule number of lawsuits filed ever get to a jury trial and you run your business professionally and ethically the chance of losing a law suit is negligible. What they hope for is a settlement after loads of grief and aggrivation. And that’s what insurance is for. If what ever caused a lawsuit generates that big of a settlement, I doubt whether an LLC or other legal entity would have protected you either because the chances are extremely high that you broke laws, willfully endangered your tenants or for some period of time lost your mind and common sense. I agree with Scott and for me, lots of insurance, ethical business practices, a family trust and excellent screening are my best strategy.

    • Terry H.

      Hello Terrance. If you don’t mind me asking, how much is an umbrella insurance policy and can a single individual set up a family trust? The property I am currently looking at is owned by a trust. And would you recommend setting up a trust to a first time investor?

      • Darren Young

        Hi Terry. I have a $1M umbrella policy with my insurance company for $300 a year, but I also have multiple insurance policies through them (life, auto, home, renter, rental, etc…). I don’t have an LLC for the very reasons Scott has mentioned. As my networth, number of properties, and potential liabilities increase, I’ll set up an LLC. I have a trust for my children. I’m not sure why you would want to set up a trust if you’re single, in your twenties, and have no children.

      • Terrence Arth

        Hi Terry, I pulled one policy and for a condo in Scottsdale, the whole policy including $2MM umbrella is $289/yr. I’m not sure how it all breaks out but it’s a good deal. As for the family trust, my daughter is my attorney. She and my wife are always monkeying with that stuff. I have personal assets in there including my family home but NO investment property. At least yet. I’ll check with her about that though. Sorry if I implied the RE investment were in a trust, they are not.

      • Karen O.

        Hi Terry.
        I had a similar question and recently got three quotes for umbrella policies through Geico. I have other insurance with them, so I don’t if these quotes had multi policy discounts applied. Still, the info may give you some ideas when you shop around.
        $385 for $1M
        $635 for $2M
        $925 for $3M.
        Good luck.

      • Allstate is no longer covering rental property with their umbrella policies. My million dollar umbrella just came up for renewal, and under Changes it says they will not cover anything that involves people you have a contract with. I confirmed with my agent that the insurance companies NO LONGER WANT TO COVER RENTAL PROPERTIES WITH AN UMBRELLAS POLICY. Make your preparations now.

  4. Andrew Syrios

    I would note that you can buy a house as an owner and then just transfer it into your LLC. I think banks frown on it, but they don’t really care. I’ve had lenders tell me just to do it after the closing. Probably something to check with an attorney about first, although. I’ve never done it personally.

    • Scott Trench

      I’ve heard this theory as well. In my case, I believe that I continue to have strong incentives to keep this property under my name. The potential benefits of added liability protection and anonymity have likely already been forfeited due to my occupying the structure. Secondarily, I was advised that in my situation here in Denver, CO, the financial risk of having my note called due by transferring ownership to an LLC was far greater than the financial risk of any liability over and beyond the limits of my insurance coverage.

      • Andrew Syrios

        Yeah, I wouldn’t be shocked if that happened, but from my talks with a few lenders, some don’t seem to care at all. I guess it depends on the bank. I would certainly be very careful doing this kind of thing.

      • Josh Howell

        This past June, I refinanced a single family rental home that my wife and I hold title to as individuals and was told by several lenders that technically we could not file a quit claim deed and transfer title to an LLC without invoking the due on sale clause in the loan agreement. I had one small local bank tell me that technically transferring title would cause the loan balance to be due, but he said that he knew people did it all the time and they (the bank) wouldn’t call the note due if I chose to transfer title as long as they kept receiving their payments. This was a local bank that serviced their own loans, so they were more flexible, but at the same time it seemed a bit risky. For new debt, I know that Luther Burbank offers ARM products for individuals that allow title to be transferred to an LLC after loan closing.

    • Bo Wagner

      Depends on the lingo on the Security Deed (the instrument used in GA) or Mortgage, Deed of Trust or whatever they use in your State. Again, in GA, the Security Deed typically (always?) includes a “Due On Sale” clause where they could foreclose if you do anything to change the title. An extreme case would be simply adding your spouse to title on your own personal residence! Could they call the loan due? Based on the lingo, YES. The better question is WOULD they? I can’t say that most would care as they are still getting their monthly payments BUT you’d sure hate to be that borrower they decide to turn into an ‘example’.

      With that being said, I like putting rentals into an LLC as it’s pretty cheap here in GA ($100 to file; $50 annually) and it’s just one extra layer to get through to sue, etc. BUT I still think a crafty litigator will always find a way to get to someone… But that’s just my opinion as a dirt lawyer ; )

  5. Terry H.

    Great blog. You’re in the same boat as me. (Except that you already have a property). I plan on becoming an owner-occupier as well. I was going to ask this question in the forums, whether or not I need to form an LLC, but you’ve pretty much answered my question. Of course I’ll still consult a lawyer though. By the way, how much is an umbrella insurance policy?

    • Scott Trench

      Thanks for the support Terry! Insurance, like most things in real estate varies from property to property. My insurance is probably far more expensive than other insurance policies because of factors unique to my structure (a flat roof). It is usually pretty simple to figure out what insurance rates typically go for in your area by calling up an agent and asking them what that typically runs for the types of properties you are interested in.

  6. Charles Worth

    I am not sure not having assets would matter. Wouldn’t the judgement be a debt? It would make you a much less juicy target because a debt on your future earnings does not help a trial lawyer pay off his car but for you it still puts a big debt on you.

    • Ryan Watkins

      If you have assets they come after that first, then debt against future earnings if their are no assets to be had. Dealing with a bank right now trying to put a lien against two of my late fathers commercial building lots.

    • Scott Trench

      Charles, I guess that’s fair. Everything in this is give and take. I think that in the extremely unlikely event that I something went wrong enough with this property to result in a lawsuit, that the lawyers decided to go after me with a debt against future earnings, I have one powerful last option:


      If someone does successfully sue me for $1 M and I lose the house, my other few remaining assets, and any cash on hand, I have the option to declare bankruptcy and wipe out those debts.

      • Brandon Hall

        “If someone does successfully sue me for $1 M and I lose the house, my other few remaining assets, and any cash on hand, I have the option to declare bankruptcy and wipe out those debts.”

        Not necessarily. I’d suggest reading up on what debts can and cannot be discharged through bankruptcy. More than likely you’d be able to discharge, but its a good idea to understand what debts you may still be held liable for if this is your strategy.

        • Scott Trench

          It’s my understanding that very few and specific debts cannot be eliminated by bankruptcy – mostly tax-related, student loan related, or related to some type of malicious or ill-intented acts like fraud, drunk driving. Because I plan on operating legally and honestly, and most of the debts that you are still liable for after bankruptcy are related to poor personal decisions that would not be protected by an LLC anyways, I think that bankruptcy would in 99% of cases be a viable option for me.

  7. Ryan Watkins

    This is fine for a young 20’s something with nothing else to their name.
    If you have any serious net worth or major assets, you need a LLC and umbrella insurance. Both have been a saving grace for myself on several occasions.

    • Scott Trench

      Thanks Ryan! I think that I certainly will use an LLC to protect “serious” wealth, should I ever have those major assets to protect.

      I think that I along with some of the other commenters here would love to hear an explanation of how the LLC has protected your wealth and how things would have turned out differently if the assets had been under your own name. This would be a phenomenal forum discussion I believe.

      • You realize that even without high net worth, you put a lot at risk holding rental properties in your personal name? For example, if you get sued for $1mm, and you only have $50,000 in assets, they will garnish your wages for the rest of your life to pay the balance of that debt. Many lawsuits, depending on the nature of the claim, also have circumstances that will not allow you to file bankruptcy to remove the judgements. Honestly, your advice is ill advised. It’s true that the vast majority of investors take the risk and invest in their own name without issue. It doesn’t mean that they aren’t putting themselves at substantial risk. Umbrella insurance is extremely important regardless of how the property is structured but the policies don’t cover every circumstance or risk. The biggest thing if you create an LLC is that you need to treat it as it’s own entity at all times. If you hold your primary residence in an LLC, you need to have a lease agreement and pay your LLC rent. There are also many advantages to having the LLC not the least of which is that the LLC will eventually build it’s own credit. As your investments grow, and your LLC assets grow there becomes a time where it can sustain itself and you would no longer need to personally guarantee your purchases. The truth is that you can take the risk and will most likely never have a liability issue. For me the risk isn’t worth the few extra dollars you save.

    • Totally agree Ryan. There is absolutely no way I would not have my properties in a legal entity. I have a few LLC’s and an umbrella insurance policy in place. Without the LLC or other legal entity, I could lose everything I’ve worked years to obtain. Not wise advice in my opinion.

  8. Mike M.


    You claim the LLC protections are weak but plan on using one when you acquire more assets. Is the protection level of an LLC a function of asset base?

    Insurance is not a liability limiter. It only provides liability coverage up to a certain $.

    My cost for an LLC was $350 initially and about $400 annually. Some of that money is tax preparation that I’d pay on my personal taxes if the properties weren’t owned by the LLC. Considering the cost and potential liability limitations (not coverage, limitations), couldn’t one reasonably consider holding properties in an LLC as part of a liability-reducing strategy?

    I’ve found the extra cost and lesser commercial terms the biggest negative of owning property in an LLC. I hope to never have to use the veil as protection, but should that day come it’ll be nice to have that layer of possible protection.

    Thanks for the article.

    • Scott Trench

      Thanks for the comment Mike. My intention was not to describe the protections of an LLC as “weak”, but as “minimally relevant” in my own personal situation. In my case, the protections are minimally relevant and might be easily pierced by a good attorney because piercing the corporate veil is a matter of implicating personals with business. I think that it would be very difficult for me personally to separate any personal actions with business actions as they relate to my running of this duplex as an LLC. I think that were I to buy a second duplex down the road, that I could much more easily run that under an LLC successfullly.

      The protections of an LLC have everything to do with the size of the assets they contain. An LLC with $1M in assets and equity for the owner has liability up to $1M. An LLC with $10,000 in equity has liability for up to $10,000. People have potentially unlimited liability, in contrast.

      You are right about the insurance not limiting liability. It’s a numbers game. I think that things would have to go unbelievably, horribly wrong for me to get sued in excess of $1M. If that happens, then I am liable for everything beyond that. Fine. If I’m sued for $10M, boom all my assets are gone and I start over after declaring bankruptcy. I think that’s unlikely, and not that much more of a risk than losing just the property (which is most of my net worth anyways).

      • Zach Barnes

        Almost all the benefits from not being in an LLC are much less to do with not having an LLC and almost solely to do with this being an owner occupied property, and lets face it that benefit only works once. After that, its pretty similar with at least the chance of separation of personal and business.

        I also think your umbrella liability is far too low given how cheap it is in general and how fast it can be hit. If you think some rinky dink explanation and minimal long term harm cant be sympathized with by a jury, you’re mistaken. People get wild judgements often in this country without the corresponding level of actual damage.

        The other not mentioned benefit is to somewhat conceal your identity from the average tenant so your just a nameless faceless corporation, while this doesnt apply at this time to yourself, its very important to some investors.

        • John Shipley

          ‘Almost all the benefits from not being in an LLC are much less to do with not having an LLC and almost solely to do with this being an owner occupied property, and lets face it that benefit only works once. ‘

          Exactly, Zach

  9. Robert Andres

    Self representation in court. Someone mentioned evictions, and I would like one of the experts to verify this. I have my property self held with a insurance as well. Yes only one, so again let us see whom else chimes in here.

    As an LLC you need to be represented by a lawyer as far as I know in NJ.

    I just had a problematic tenant that left. Did some damage above the security deposit. Not enough to take the person to court. I was lucky. It could have gone much worse. I because I read all the articles on here, have before and after photos of the unit. (Thanks Josh, Ben, and everyone else here.) I can take them to small claims. I’m not even sure you can use a lawyer in small claims. I would have to lawyer up, pay a great deal of money per hour. That makes the amount of damage worth it needing to probably be me eating at least 1000 dollars or more before I can go after them and have it be worth it.

    • Jerome Kaidor

      Around here, the lawyer fee for an ordinary eviction is
      $300 – $350. And you only pay that if they file an answer. I’ve done it both ways – lawyer and Pro Per – and I prefer to use a lawyer.

      If it really gets nasty – say a jury trial – the sky’s the limit, but I would
      vastly prefer to have a lawyer in that case. Never been there yet.
      Jury trials are routinely requested in the SF Bay area though.

  10. Marcus Auerbach

    Tax deductions – is that true?

    I have to ask my CPA about this. As far as I know LLC’s are a disregarded entity when it comes to taxes. That should at least be true for a single member LLC. Multi member LLCs are a different story. But if you file jointly and the members are husband and wife it might still work, but I will have to clarify that.

    Can anyone comment on this? Otherwise great post and good information. Thanks Scott.

    • Nate T.

      There is no tax code for LLCs. As an LLC, you have to make to elect how you want to be taxed — as a partnership, sole proprietor, S-corp, C-corp, etc. If the tax election that you select would be “pass through”, such as sole propriertorship, then your LLC is taxed as a pass through entity.

    • Scott Trench

      This is yet another comment on the tax deductions. I’m not a tax expert, and the way that this was explained to me was that a business can’t claim personal income tax deducations. It may very well be the case that I could still benefit from some or all of these tax breaks through certain types of LLCs. That said, this would vary from situation to situation and I mose likely woudln’t be able to claim the FHA mortgage insurance… simply because I don’t think that the FHA allows first time homebuyers to purchase properties through limited liability entities with less than 5% down.

    • Zach Barnes

      In community property states like California an LLC consisting of single proprietors or husband/wife are usually considered a single entity (an individual, since most are pass through S corps) and you can still get the benefit of most deductions and capital gains tax protections on primary residences. It wouldnt work for multi member LLCs though.

  11. Bryan O.

    Great article. It’s not often you see anyone push back against the masses. I agree that an LLC is not wise in the beginning for residential investing. The biggest draw-back I noticed (beyond the FHA that you discussed) was that no lender would do a 30-year fixed with me. For LLC, they said they would only do 15-year fixed. Bleh.
    2 points to be very careful on:
    You may NOT be able to choose whatever tenant you want. State laws may remove those exemptions. For example, here in CO I have to follow all the same requirements as normal owners/managers because CO says it only applies if they are living inside the same unit with you. There was a post on BP before that had links to the various State differences.
    Your umbrella is only a hope of coverage. As soon as the dog bits someone, your insurer may say, “Sorry, that bite was caused by your negligence.” Or when the tenant’s friend falls down the stairs and pokes his eye out with the beer bottle, “One stair was 1/2″ different spacing, causing a trip hazard. Coverage denied.” I wholly advocate having that policy, but know that insurance companies make money by collecting premiums and denying claims.

    • Scott Trench


      thanks for your comments here. I did not know that about the CO law. Thanks for the heads up. Also I think that’s a great point about the umbrella coverage. I will say that I think that the LLC, too is only a hope of protection. You are hoping that others will not be able to pierce the corporate veil, which requires just as much diligence on your part as ensuring that you are in good position to receive insurance coverage.



    • Scott Trench

      FYI – I removed that point about exemption from federal anti-discriminatory rental standards from the article because it is not a primary reason why I choose not to invest in real estate through an LLC and might mislead others into thinking that just because they are exempt from FEDERAL law, they may overlook STATE laws.

      Bryan was also kind enough to provide a very handy link for more research on these so-called “Mrs. Murphy” laws, which I’m posting here for anyone interested.

      Thanks again Bryan!


  12. Kimberly H.

    I agree if you have no assets to worry about, the added expense and paperwork of an LLC probably doesn’t make sense. Unless you’re worried about a lawsuits making claim to future assets. I have no idea how often that actually happens since the rumor is most lawyers won’t take a case unless they can see getting paid.

    I hope people are aware that the “umbrella” in “umbrella insurance” does NOT mean it will cover any kind of situation that comes up. You have to read the policy to see if it even adds any type of coverage at all over what the base policy already has. It may only increase the amount of coverage. An umbrella at one company insurer may not mean the same thing as at another insurer. The “umbrella” doesn’t always mean it adds coverage types. At a minimum it will increase the dollar value limit of the coverage you have to the policies you add to the umbrella. Instead of paying more money to have each individual policy covering you up to 1M for example, you have each policy only cover to 300k, and then add an umbrella policy to bring all the policies to the 1M coverage. An advantage is the umbrella costs less than paying more on each individual policy to bring each individual policy to 1M coverage. And if it does in fact add coverage, it will add coverage that is probably not even available with just the base policy.

    Because the umbrella, even if it adds a few types of coverage, it still won’t cover all situations, is one reason why an LLC can be useful. An LLC can also add some anonymity to the ownership (which is easier to pull off if you don’t show up as the registered agent on your state’s website… which of course costs even more money), you can be the “manager” instead of the owner, but then you get into the “piercing the corporate veil” conversation, of which there are already many threads on Biggerpockets about that. Long story short I’ve learned that there isn’t enough case law with LLCs for anyone to really know how easy or hard it is to pierce the corporate veil, and if you ask a few different attorneys you will get their opinions on how to not get your corporate veil pierced masquerading themselves as facts. One thing they all agree on (I would guess because there is case law to support it) is you can’t mix your personal money and LLC money. You need separate bank accounts. So if you can’t/don’t want to do that, don’t get an LLC.

    I would be interested to hear what additional coverage types other biggerpockets users get added with their umbrella policy and what insurer provides it. I would also be interested to hear what non-commercial insurers will provide umbrella coverage for policies that have LLCs added as additional insured. I find it nearly impossible to find these things out upfront because the insurance agents just don’t know themselves.
    ***I am not a lawyer or insurance agent this is not legal advise***

    • Anuj Sharma

      Hi Kim,

      I have LLC and like the idea to keep personal and business assets separate. Even though it costs decent amount of money to open and maintain LLC in Rhode Island still I think its good idea to have LLC especially if your investment is expanding and hopefully touching 7 figure down the road (including liabilities :-)). I don’t see any tax advantages but down the road LLC’s might help to get business credit – of course with crazy rate. I have not done it but if you show bank that you have genuine business bringing decent revenue, they might be more willing to work with you for giving you business credit which you can put at a down towards next purchase (especially if you need bigger purchase). Some big banks like BAC would not help small investors like me as they expect your LLC to be atleast 2 years old and have at least bring 250K revenue which is hard to get in the beginning of the business. Down the road , if you want to buy something big like apartment complex or commercial building, it might be decent idea to have LLC for few years which brings decent revenue. In those circumstances bank would not be shy betting on you for loan as down as well to finance the building. That’s doable via non LLC but I think probability of getting loan and financing might increase if you have genuine business showing genuine tax return and revenue. Good discussion everybody 🙂


    • Zach Barnes

      While you obviously have to read the terms of the policy, umbrella policies are quite liberal and cover above your existing policies and a whole bunch of other things, even many you would not have guessed. Most providers are pretty up front about what is and isnt involved.

  13. Nate T.

    I agree that you should never listen to people who say always or never. 🙂

    The answer, as with any legal question, is “it depends”. On your situation, on your state, on your goals, on your assets, etc. etc.

    I invest in real estate using LLCs because of various advantages, but I understand that I am giving up other advantages that I would get by keeping the properties in my personal name.

    Some other pros and cons of LLCs that I don’t think have been mentioned above:

    Depending on your jurisdiction, you may not have to pay sales tax on rent if you own less than a certain number of properties. If each property is owned by a separate LLC, then you may avoid sales tax of hundreds of dollars per year on each property. (Obviously that wouldn’t make sense in states where LLCs are expensive to maintain and/or set up.)

    If you have a loan in your personal name and you transfer the property into an LLC, that is a violation of the due on sale clause. (I won’t go into details since there are a myriad of other discussions on here about the risks involved.)

    The more entities that you have, the more your administrative and accounting costs increase. This is a serious issue if you are an active investor. Rather than holding each property in a separate LLC, another option is to use “equity stripping” to manage the risk. In brief, equity stripping is where you have one “low risk” entity that doesn’t own any properties, and that entity holds liens on all the properties that you own, in sufficient amounts so the properties don’t have any equity for a lawyer to go after.

    Also, if you’re talking about a property that you live in (as the article was), it would rarely make sense to transfer title to an LLC, because most states have homestead exemptions that don’t allow your primary residence to be taken away by creditors.

  14. John Thedford

    Good article. This is an ago old debate. Fact is that a single member LLC is almost worthless if you get sued and have a judgement entered against you. You have almost the same situation if you have your properties in an S corp. If you get sued, the creditors can come after stock of the S corp. Furthermore, if you find yourself defending a lawsuit, the opposing attorneys are going to demand the court requires the defendant to list ALL of their assets. Your best protection is: liability insurance and making sure you operate legally and within the requirements of the law. As far as I know, about the only way to truly bullet-proof yourself against judgements and creditors might be to form entities outside of the US. I have heard some attorneys promote this idea but…maybe their goal is to drive more fear into people so they get more paying clients. Your best bet is to consult a competent attorney in your state that specializes in asset protection.

    • Scott Trench

      John I think that you nailed it when you said, “your best protection is: liability insurance and making sure you operate legally and within the requirements of the law.”

      LLC, sole proprietorship, S Corp, C Corp, whatever… focusing on building the business in a responsible, ethical, foresighted manner is probably the best thing that I can do to protect myself.

    • Zach Barnes

      This is not really true and the way liens are placed against stock in an LLC formed as an S corp is not the same way it would be liened in a standard C corp.

      The defendent in this case is the LLC and the assets are whatevers in it, thats it, end of that story. The whole point of the structure is separating the members personal interests from those in the LLC.

      Yes, there are nuances to each state but if the above was true no one would ever use the structure as it would be pointless.

  15. David Dachtera

    From my point of view, I’d say it’s a matter of personal preference.

    Personally, I prefer to keep with the concept of “control everything, own nothing”. I prefer to view investment property as belonging to the business which is around it. I don’t own it personally, I don’t support it out of my own pocket and the business pays me to manage it while paying someone else to manage the property. That is, it’s my business, not my job. Someone else could run it in my absence.

    I’m 60 and I have no children of my own, but I still plan to leave what I have of value to my ex’s daughter’s boy whom I claim as my grandson (no blood relationship). So, from the view point of inheritance, he could inherit each business and its properties separately from whatever personal estate I may leave behind. I control the entities which own the businesses, they do not control me except that I am their decision maker.

    From the standpoint of liability, yes – I choose to seek as much isolation from the properties as the law allows and the business structures can afford me. I view that portion as scalable. Whether my holdings are small or eventually grow more substantial, the model should work the same way.

    I agree with your statement about “focusing on building the business in a responsible, ethical, foresighted manner”. I believe it is the right thing to do for all the reasons discussed here.

    My $0.02…

    • Scott Trench

      Thanks for this comment David – I think that you have a great approach in controlling everything but owning nothing. I think that is exactly how I would like to do things down the line. I think that the rewards of that approach over a large asset base are obvious in the increased protections and distance between you and your businesses. However, as a young person just starting out, I find that there are large advantages to owning assets under my own name, and that I’m not willing to forgo those advantages for the benefits of an LLC.

  16. Andrey Y.

    Great article, Scott! And informative contrast to the recent “There is no question, you must have an LLC” thread.

    Quick question, do you have regular property insurance on each property in addition to the umbrella policy? Thanks.

  17. Brian Levredge

    The IRS is going to have something to say if you think you are going to get your capital gains tax free just because you lived in one side for two years. What about the income you collected on the other side, and the depreciation recapture on that side (which the IRS hits you for whether you’ve claimed it or not)? It’s not really any different than if you bought a single family house, lived in it for 24 months, rented it for another 24 and then sold it. There is going to be a blended taxable event of some sort on that transaction. Just because you lived in it for 24 months does not mean you get to keep all the gain automatically.

    Similarly, the same is true with mortgage interest. Mortgage interest is entirely deductible when used for business purposes (whether in an LLC or not) while interest on a personal residence is deductible at your particular tax bracket, but is capped.

    Something you didn’t touch on is that having personal loans for residences in your name is going to affect your credit and put you at a disadvantage at some point since you will be capped on the number of conforming loans you can have in your name. Having an LLC allows you to consolidate those into a single commercial loan thus freeing up borrowing power. Using multiple LLC’s also allows you to ‘strip’ out equity thus offering further asset protection.

    In your situation (where you had no choice) it makes a lot of sense to keep things in your own name. I have done the same at a similar juncture. Mortgages on assets are actually the best lawsuit deterrent, imo. Most attorneys after running an asset search and seeing you don’t have a lot of equity aren’t going to bother pursuing a case for a judgement when they know you can bk and wipe out the claim. That said, LLCs are a valuable tool in the investor’s belt for a bunch of reasons.

    • Scott Trench


      I do not depreciate the residence and for tax purposes treat appreciation just the same as you would on your primary residence. Just in the past 6 months, significant appreciation is likely to have occurred based on comparable sales. The income collected from the other side is just that – income. I report it on my tax returns.

      You are also correct about the personal loans and ability to get credit, along with equity stripping and other advantages in asset protection that come with investing through LLCs. I will absolutely cap out on my ability to get financing by continuing to buy properties under my own name. I do not plan to continue investing under my own name for any longer than these advantages continue to be in effect. In fact, I plan to purchase my next property with a partner through an LLC.

      • Michael Rogers

        First off I think this is a great article. I think people have a knee-jerk reaction to want to form an LLC whenever they start a business.

        I think Brian Levredge’s point on the depreciation is that in an owner occupied duplex you essentially have two taxable units. Unit A and Unit B. If Unit A is being rented to a tenant then it is treated as a business and get’s allocated 1/2 of the property tax, insurance, mortgage interest, and other expenses. You also need to depreciate this unit. You would depreciate it over 27.5 years at 1/2 the basis of the total building. Because when you sell the property the amount that was (or should have been) depreciated is taxed at depreciation recapture rate (25%). This is regardless of whether you took the depreciation expense while you owned it.

        I’m pretty sure (not 100% positive) you are not going to shelter the “Unit A” portion of your gains from $250k homeowner’s capital gain exclusion. I’m pretty sure you can exclude the capital gains related to Unit B (the side you lived in).

        I have included another Bigger Pockets article written by Amanda Han, CPA that talks about how you have to pay depreciation recapture regardless of whether you take the depreciation while you own it.


        Good luck and very good topic!

      • Hi Scott,
        In your article you mention that you are in Los Angeles. In CA (to the rest of the universe) properties tend to appreciate in a bursty manner, and after a “burst” in value, that’s usually a good time to roll the property. A tax vehicle you’ll want to familiarize yourself with is the 1031 exchange, or “like kind exchange” rules for income property. It lets you defer the tax on your capital gains when you sell one property and use the profits to buy another one.
        My wife and I purchased a condo as income property in 2011 (we picked up a short sale following the crash). By 2015 it had well over 100K in equity. We sold that unit and (with some additional cash) purchased some bigger properties. Anecdotally, dealing with HOA’s and rental units is a major pain! Our primary motivation to churn! But the 1031 rules (which I didn’t lean of until I had decided to get rid of the condo) was some serious icing. We were able to defer 111K in C.G. by lowering the basis cost of the new units (actually, just the first one). We plan on kicking that can down the road indefinitely.
        And no, we have not done the LLC thing yet. We have an Umbrella policy for $2M that includes all of our major liabilities (3 properties, 3 cars and a motorcycle) for about $600 per year.
        I don’t know how an LLC affects the 1031 exchange rules, but I’m bound to find out sooner or later.

        • Scott Trench

          Thanks Phil – The 1031 Exchange is a great tactic! Kudos for using that to your advantage. I’m actually in Denver, but we are certainly no stranger to the burstiness of real estate appreciation. I plan to use strategies like this, but also believe in working my system and steadily ramping up in a sustainable way over the years.

  18. David Gardner

    I’ve heard people buying properties in their name and the name of the LLC? So on the HUD it states the LLC and the individuals personal name as the buyer. Does that make any sense? Would they be able to take advantage of investors that buy properties in their personal names only as per this original post?

      • Nate T.

        Of course you could buy a property jointly with an LLC, just like you could buy with a partner or a spouse. A property can have any number of owners. But it’s very unlikely that you could get bank financing that way. And I don’t know what it would accomplish.

  19. Max Mac Phail

    Great points Scott! Running the property as a sole prop is a good idea in your situation as the IRS is much kinder to the situation. Just make sure your insurance is set up properly if anything does go wrong. No need to go through the hassle of setting up an LLC…YET.

  20. Walker Hinshaw

    Scott, great article. I think whether or not to set up an LLC can be one of the most confusing problems for a young investor and an easy way to put off getting some skin in the game. With so many experienced voices on BiggerPockets talking about/displaying in their pro membership tags that they use an LLC to invest, one can easily be convinced that it is the correct way forward if you want to make it big-time. As you have demonstrated, this is obviously not the case for many who are attempting to invest in their first property. Keep up the good work, the young and inexperienced investors, myself included, thank you for it.

  21. Baron Hicklin

    Thank you for this article. Being new out of the box to real estate, this question has been floating around in the back of my mind. Thank you for giving me this insight and all the other post to help me make the best decision for me.

    • Scott Trench

      Mike – I’m unfamiliar with this. Are you saying that you can transfer personal liability in the asset with low cost and to another entity without triggering a due on sale clause? Are you saying that this will NOT trigger the clause, or that it is simply unlikely?

      If so could you please provide links to resources on this topic? I’m all ears and will look into it!

      • Tom Johnson

        Yes and no, it doesn’t prevent it, just makes triggering much less likely. Here is a link explaining it better. http://www.creonline.com/beat-the-due-on-sale-clause.html

        Great article Scott. For the beginning investor with a single property (albeit a multi-unit), under your own name is the way to go to take full advantage of all the FHA benefits and governmental primary residence allowances. After that first property though, none of that would apply so then you need to start looking at protecting yourself and personal assets from your potential business liabilities.

        Just my two cents. Thanks again for the article.

  22. Frank B.

    Good article. Not to be a downer, but your #1 and #2 are the same thing, #3 is untrue, and #4 can pretty much be done with an LLC using a tax-deferred exchange. #5 is a good point.

    LLCs, like most businesses, are taxed based on income. Since interest on a loan is an expense, it reduces the income of your LLC the same way it would be a “deduction” on your personal income.

    • Scott Trench

      Frank – ha! I like the downer challenges. There are so many nuances out there and I’m lucky enough to have extremely knowledgeable people pick apart my writing. Makes me way better than I would otherwise be, though I recognize I still have a long way to go.

      I distinguish points 1 and 2 because point 1 is on the types of financing available (FHA is not available to LLCs), and the terms of financing (lower interest rates for personally guaranteed loans). There’s been some debate in the comments over whether point two is moot or not, because it’s possible to personally guarantee loans on assets in an LLC.

      #3 Is only untrue if you assume that you would be living in another residence. In my case, as an owner-occupier, I believe I AM able to take a deduction on mortgage interest, just like a homeowner.

      #4 the point is that I can spend those capital gains on anything I want instead of “like for like” that’s why I make that (bad) joke about getting a manicure.

      Thank you for your comments here!

    • >Frank B. I was thinking the exact same thing regarding each number.
      >Scott I have been doing the residential rental property thing for about 8 years. My business partner and I are closing on our 16th unit next month. In my opinion, based on whatever experience I have gained in the last 8 years, I agree with your choice to avoid an LLC 100%

      My partner and I waited until our 7th unit before we formed an LLC and it still pisses me off to pay the annual fee and the additional tax preparation costs. Over time you will accumulate enough personal assets that you will want to protect them from the business. At that point the cost of the LLC will be small enough compared to the assets being protected that it will just feel like a no brainer.

  23. jason rohr

    As stated, if its your primary or your duplex, better off personally held. Once you start getting more assets, put those eggs in some different baskets (LLCs). HOWEVER, that anti-discrimination issue is a big one and I think should not be deleted. We can all look up state laws, but here the feds have landed and I know of no state that has tried to contradict the federal court. If you’re a gal, you CAN choose to live with GIRLS and HUD/FHA had been trying to bully people on this issue until a recent 9th Circuit ruling:

    “Today, a panel of the 9th Circuit held Roommates.com could not be held liable on the merits for discrimination under the Fair Housing Act by enabling site users to discriminate on who their roommates would be, or explicitly making such matches based on user preferences.

    [The same judge, the affable libertarian Chief Judge Alex Kozinski, wrote both opinions.]

    Why? In short, because the Fair Housing Act couldn’t intrude into as private a space as one’s own dwelling without raising serious constitutional concerns. “

    • Scott Trench

      Jason – I thank you for bringing this point back up. The reason I deleted the comment is because of the title of the piece. These are reasons why I (ME) do not invest in real estate through LLCs. I choose personally not to discriminate, and that point was not meant to encourage to discrimination, but to acknowledge the possibility.

      I think it’s bad business and has no place in an article on MY reasons for not investing, and can potentially mislead others. That said, I thank you for bringing it back up for discussion here.

  24. Christopher Leon

    Nice post, @scotttrench. I do not use an LLC for the same reasons you listed above. If you buy in dumpy areas, rent to deadbeats, then, yes, you should protect yourself. However, if your running a good business and being attentive, why would anyone sue you? I know anything is possible, but if I lived my life thinking like that, I wouldn’t own as many units as I do. Thanks again Scott.

      • David Dachtera

        I take a slightly different view of that. It’s kind of like saying, “Well, I’m a safe. attentive driver, why do I need auto insurance?” Well, aside from it being the law in most if not all states, the point is that someone might crash into you just as surely as someone might slip/trip and fall on a property you hold in your personal name. Now, your and your family’s personal possessions are in danger (up until then. they were only in jeopardy).

        Remember also, that there are unscrupulous people who make their “living” taking other people’s assets thru litigation. When they’re seeking victims, it becomes very much like the houses which have a security system sign in the yard versus those which don’t. No “advertised” protection? *POUNCE*

    • @Christopher Leon. I waited until my 7th unit to form an LLC. At some point (different for everyone) the cost of the LLC is minimal enough, compared to the $ value of your personal assets that, IMO, you form the LLC just like you pay for insurance. Eventually you’ve made enough progress that you should take steps to protect that progress and an LLC is a relatively inexpensive way to mitigate some risk.

  25. Brent Kelley

    I agree that it would be a good strategy to put multiple eggs in different baskets as you acquire them. However, here in CA, that can become prohibitively expensive.. as each LLC carries an $800 price tag per year. That really takes a huge bite out of your cash flow!

    • Scott Trench

      Brent – thanks for this comment. Here in CO LLCs are just $50 to form and pretty cheap. I recognize that costs can be a huge component of LLCs (not to mention lawyer costs).

      That’s a whole separate discussion, however I’ve found that every time that point is brought up in the forums or the blogs a bunch of seasoned investors or lawyers jump in shouting, “Whaat? There is nothing more important than legal fees!”

      It was an argument that I didn’t want to make because it’s always a crapshoot for the lawyers. I wanted to assume that a perfectly set up LLC was the alternative in this case.

      • Saberian Younger

        Scott this is a thoughtful article. I’m not sure if this has been stated in the comments but once you can no longer use umbrella policies you just move to commercial insurance policies in your own name. Umbrellas are limited to 6 or 7 properties if I remember correctly.
        Still don’t need an LLC though. I’ve spoken with several RE attorney’s about this and the point is that if someone hurts themselves on your property the insurance starts paying immediately. The LLC not so much…. Not saying that there are not appropriate uses for LLC’s but great arguments for the other side as well, as you’ve pointed out.
        Many people get lost in the litigious side of this arguement and don’t consider enough the difficulties obtaining lending through entities.

  26. Richard G.

    First a disclaimer, I am a lawyer and this is not legal advice. I mention only because I state this in my profile.

    I find this fascinating. The most important thing anyone mentioned here is that what Scott has done works for HIS situation. It frustrates me when people default to saying “create an LLC” when maybe one should not be created or a different form should be created. It is equally frustrating when people make blanket statements about LLCs when they know very little about the body of law regarding LLCs. LLCs are a very flexible business organization and have to be carefully constructed based on the members goals for asset protection and tax minimization. There are other factors as well. And there is a large body of case law that upholds the liability shield of LLCs, which is why they are so popular. As long as you operate the LLC separate from yourself (even as a sole member) is not that easy to pierce the veil.

    What is also amazing is thinking that because you “think” you are running your business ethically and within the law, then your umbrella/excess liability coverage is all you need. Many umbrella and excess liability policies exclude punitive damages, which may be the largest part of an award. Intentional torts are also not generally covered by any insurance. Additionally, just like there are innocent people who go to jail, people/businesses are found liable when maybe the facts did not quite support such a finding. A lawyer’s job is to convince the jury the facts support Y not X, so just because you think you are doing X (the right thing) may not protect you.

    Now before anyone comments derogatory comments about lawyers, I note that except for maybe mass class actions, lawyers do not bring actions, their clients do. And those clients want their lawyer to zealously advocate for them within the bounds of the rules we operate under.

    My two cents. If you use one of those online services, talk to your accountant about the tax issues based on your situation and goals and then take the operating agreement from that online service to a lawyer to modify it to address tax and other provisions based on your situation and the advice of your accountant. And it is important that you have an attorney that is familiar with the tax implications of various revenue rulings and proposed regulations issues by the IRS.

  27. Shawn Mohaganey on

    What about this? I have a trust that holds substantial assets. There is a property owned under the trust that I plan to rent out. If a lawsuit comes up would it not be against the trust and put the assets under the trust at risk? So many personalized answers, but none for general situations. Help por favor.

  28. Robert Taylor

    This may have been mentioned in one of the MANY comments, but the part about being taxed at capital gains rates vs the certainly higher unless you make very little income, income tax rates would apply I believe, if this was your ONLY RE investment, or maybe if you had a few of them, but if someone is doing this or ANY activity on a regular basis and its profitable, then you at some point cross over the tax code line from a passive into an active investment and once they deem it active you then are supposed to treat it as income and not a short or long term gain.

    Where exactly that line to cross is, I don’t know because I graduated from college with a bachlor’s in accounting in 1998, worked for a while as a cost accountant for a couple of corporations and even though I got good grades in the multiple tax classes, it galls me to think about the ridiculous and stupid tax code we have, so I almost avoid reading up on things, but any decent practicing CPA who’s well versed in RE investment taxes could tell you, or no they can’t tell you where exactly this line is either, but they can give much more accurate ideas as to where it has been for others, since just like much of the code it is open to interpretation and often varies from IRS auditors, to judges, its INSANE!! Thousands of pages and even then its not clear!

  29. Glenn F.

    My preference is to do a hybrid of both. Own the property personally for ease of financing and taxes, and have an LLC for the management which can be formed online for almost nothing. Collect rents and do business under the LLC. On your insurance policy you can name both you and your LLC as an additional insured for free. That way, you are covered if a lawsuit names you or the LLC.

    I prefer this way because even if the LLC owned the property you can still be named personally in the lawsuit if they think you we’re negligent.

    • Tim Jensen


      You make a great point. One that many people forget to think about. If you have an LLC and self manage, you will be sued personally. You were the one who hired the plumber, electrician, etc or you did the repair yourself, so you are personally negligent. That is the logic at least.

  30. JT Spangler

    For properties acquired as an owner-occupant, for less than 20% down, I agree that purchasing them under an LLC is probably not necessary. The 3 doors I currently own were done that way.

    For properties you buy without conventional financing, or where you have to put 20% down (investment loan), purchasing through an LLC is a cheap bit of very valuable insurance. When I roll my portfolio into one loan, I imagine I’ll transfer them all to an LLC. And if I buy anything without conventional financing, I imagine I’ll do that with an LLC as well.

  31. Scott Schultz

    I agree with the author for their situation, now if you plan to grow your operation to say 10 properties, i would take a different view, the LLC or Corp for that matter is nothing if not managed correctly, keeping it separate is the key, and never peircing the veil.

  32. Paul Gilo


    Any way you spin it. From the sound of what you say you dont really have assets and suing you is pointless. Your housing situation is as if you had a SFR and rented rooms. IMO… if you didnt live there and had good chunk of money in your bank.. than you may feel different. But what do I know… im no lawyaaa. 🙂

  33. Neil Henderson

    I heard an interesting talk tonight from a guy who recommended putting each rental properties inside seperate irrevocable trusts owned by an LLC.

    I don’t claim to understand the particulars but it might be something those of us who are concerned about protecting our assets beyond an umbrella insurance policy, could look into with a legal pro. Disclaimer: which I am NOT, nor am I dispensing legal advice.

  34. Hi Neil my set up is similar except I have a couple trusts different rentals in different irrevocable trusts set up in 2008. The properties are managed by a WY LLC Property Management company which my husband are owners of we also have another LLC to act as trustee for “safe” assets personal residence type not likely to be sued stuff. Doing everything by the book will not prevent a lawsuit unfortunately. I am mid suit and it is crazy frustrating. Long story short the plaintiff and their attorney routinely lie under oath and make completely false and provably false statements under oath. Contradicting themselves from one hearing to the next. The plaintiff was evicted for non-payment never once paid rent on time and after the eviction was started sent a latter from a lawyer with a long false list of complaints “they already had informed me of” NOT! I mean raw sewage in the yard, water unsafe to drink, rats, ants, black mold, broken windows, doors not secure.

    Not only was there no notice, none of these things is true. I have photographs of every room before they moved out and all the damage they were charged for, a receipts for the items replaced and cancelled checks for the people who did the actual work. Affidavits from the septic specialist and water tests. The plaintiffs first lawyer quit and the second lawyer is completely lacking integrity literally making false statements to the court and leading her to lie under oath on things he knows she is lying about. My lawyer a personal friend who is handling it for me (Harvard Law School) says it is surprisingly common for lawyers to lie.

    This is OR so everything must go to arbitration first where a lawyer and his buddy decide and expect you to accept their position and pay the plaintiffs lawyer expenses even though the ruling is not in compliance with any of the laws or justice it is a racket, a scam set up by the lawyers to extort cash from landlords.

    I don’t know if this is how it is other places but it is definitely the way it is here. That said all properties are in irrevocable trusts and have been for years far before the suit. The qualified trustee is a WY trust so if they had a judgement supposedly all they can get is a charging order on the LLC which holds only the operating expenses. All the properties have mortgages for over 90% of their value with payments consistently made on the loans, so from what I understand they could put a judgement on the properties that would sit there for ten years, this is a legacy trust so will continue on long after I die so no need to sell a property. My personal credit is not at risk as I am not a party to the case only the trustee who was acting as manager which is my name as trustee a different entity than me individually.

    I understand Trusts are harder to pierce as anything spent for the property or for the care maintenance or education of a beneficiary is a valid expense and it is difficult to think of anything that would not be in that category.

    Stupid me I thought seeing the property was owned by a trust etc a lawyer would be less likely to sue. Both the lawyer and the plaintiffs refused conversation prior to filing of the suit. I should have known then it was a scam. The Plaintiffs on the hook for thousands in legal bills to the first lawyer, I imagine they are to their second as well. So does this lawyer just drag them along drumming up billable hours? The previous lawyer when I spoke with him after a hearing explaining they had no case and I have everything documented all the way to my phone records showing if I called them or if they called me (they did not) he said “I get paid either way” .

  35. Jerry Padilla

    Great Post Scott! I practice what I preach and I am not a fan of LLC’s. We have a 1M umbrella policy as well. I think an umbrella policy is better coverage than an LLC…. You can still loose the house with the LLC. I think too many investors get caught up in the LLC and don’t realize how much harder and worse off their financing terms are!

  36. Dan Arcaro

    This is a great post! For me, the main reason i’ve avoided an LLC is because I’ve heard that a separate LLC should be set up for each property you own (otherwise all properties are equally vulnerable). I do have personal assets to protect and i have a decent amount of equity in the 4 rentals i own – my insurance agent recommended a liability policy for 1mm AND an umbrella policy for 1mm. After reading about the flaws in an umbrella policy, i think i’m ready to pursue this LLC sooner than later. Also, the concept of equity stripping sounds very intriguing. Would anyone be able to recommend an attorney here that specializes in LLCs for real estate investors and/or this type of asset protection? Thank you all for posting such useful information!

  37. Jessica vollendorf

    I already put my rental into an LLC – eek, it sounds like I may have not made the best decision 🙁

    I am curious about the umbrella policy. Most agents have told me I should have a separate umbrella policy on my personal property than I have on my rental property. One agent told me that they would make an exception and give me one umbrella policy that would cover my personal property and my rental property. Does anyone have an opinion on this. It seems like have one policy for both is not a great idea and that my personal property wouldn’t be as well protected since I am not completely separating the two?

  38. Hi Scott,

    I understand your point of view and appreciate your million dollar mentality, however to be fair FHA loans require MIP up front at 1.75% and the monthly PMI on your duplex has to be a least $170 per month added on to you mortgage payment. That being said your forecast was 10% each year for 2 years earning you 20k instead or 13k with an LLC, but if you add the upfront MIP of $4,375 and 2 years of PMI $4,080 your actually going to come in lower than with an LLC… even if you refi later on to remove the PMI that’s still an expense of $2,500. I’ve used fha and conventional loans on my properties heck I’ll use anyone’s money at the right rate, just keep up the grid either way you choose your still winning $$!

  39. Will Stahl

    I’m 25 years old with no assets and I am looking to acquire my first rental property. This article, along with the rebuttal, answered my questions exactly. I will be buying an umbrella policy and will switch to LLCs as I progress. Thanks for the great information.

  40. GREAT blog everyone! My boyfriend and I own our personal home together, we are both on the deed and both named on the mortgage. We are looking to buy a rental property together and we will not be looking into an LLC at this point. My question would be this. Would we better protect ourselves if we only named one person on the new rental mortgage/deed, than list both of us?
    In the case of a lawsuit, they could then only come after one of us and not both?? Possibly then protecting 1/2 of our assets such as our personal home? Thank you for any input!

  41. Justin Huett

    I can understand with your own situation being owner occupied and the only unit you own. But would that be the same case is you owned a few units and lived in your own single family residence? The less you have to loose the less to worry about Inwould think.

  42. Benjamin Cahn on

    I found myself in a very similar situation and for the same reasons you mentioned in your article. I’m mid 20’s bought my first house and am reaping the benefits of not using the LLC. However, I am now looking to buy a second property to do as a fixer upper with potential to sell or rent, not quite sure yet, but I’m aware of the long term vs short term capital gains tax for LLC’s for that 2 year window after it’s bought. I didn’t know if anyone had any insight on whether or not it would be time to set up an LLC for future real estate investments because I can’t claim two personal residences, obviously. Is there a better way to do it if I were to be renting or selling the house within that yr or two?


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