Business Management

The Pros & Cons of Using a New LLC for Every Property Purchase

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
160 Articles Written

There is so much conversation on LLCs—from the basic stuff such as what are they and why should we use them to more complex topics like which state we should register in and the difference between a manager-managed LLC and a member-managed LLC.

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Today, I am going to take a stab at one of the questions that goes around a lot. Should you get a new LLC every time you buy a property? There are pros and cons for doing this, and in today’s video, I go over them in detail.

Pros of Using a New LLC Every Deal

  1. Ownership structure: Perhaps you are working with several different owners on a new deal. It makes sense to have a new LLC as it will define the ownership percentages and the roles of each owner.
  2. Working in a new state: This could be argued either way, but to me, it makes sense to incorporate in the state where your investment property is.
  3. Doing a flip: Many investors do a new LLC every flip. This makes sense, as it separates that flip from other properties with respect to taxes and liability. More on this in the video.
  4. Asset protection: Holding each purchase in its own LLC will compartmentalize each property from the other. If there is a liability claim with one property, it won’t affect any others held by you. Some would say that this is the main reason to hold each deal individually. Watch the video for a deeper conversation on how valid this is.

Cons of Using a New LLC Every Deal

  1. Higher costs: You will pay a fee to set up each LLC and in most states another fee to file a return every year and a fee to your CPA.
  2. Growing portfolio: Depending on the size of your portfolio, it might be easier to get a loan if you lump several properties into one LLC. Holding each property individually could make it harder to get financing, especially if the values are less than $100k.
  3. Insurance: You can obtain a reasonably sized general liability policy on your properties and arguably have the same level of asset protection as you would if you held each address individually.

I go into way more detail on this in the video, so be sure to check it out.

We’re republishing this article to help out our newer readers.

I know there are schools of thought on both sides of this conversation, and I would like to her from both.

If you are a strong advocate for either, please leave a comment so we can get a good conversation going!

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Toni Husbands Investor from Chicago, IL
    Replied about 2 years ago
    Thank you. This is EXTREMELY helpful. Just purchase a SFH and attempting my first flip. I appreciate the information.
    Jayson Holland Real Estate Broker from Greenwood Village, CO
    Replied about 2 years ago
    Also, there is another big con you forgot to mention. Tax returns. If you own 5 properties or 10 properties with each one in its own separate LLC, you will probably have to file 5 tax returns or 10 tax returns every year. If your CPA charges $300 or $500 per tax return, that is a ton of extra cost annually.
    Shane LaChance
    Replied over 1 year ago
    What you’d probably want to to in this case is create an llc holding company for all the other llc’s. That way you’ll only have one set of tax returns to file. You do still, however, have to keep everything separate (books, bank accounts, cc’s, etc).
    Jon Lanclos Real Estate Broker from Houston, TX
    Replied almost 2 years ago
    Owning rentals in your own name is a disaster waiting to happen – your person wealth would be at risk – owning an a rental in a new LLC is costly and you have to file a tax return for every entity and in some states yearly fees per LLC from what I have heard – the Solution – I created a Series LLC in Texas and I have each property in a separate series – one tax return is filed for the whole series group and liability is isolated to each specific series cell – boom
    Bob Galivan
    Replied over 1 year ago
    Regarding using an LLC to shield yourself from liability: If you are forming a single-member LLC, it is VERY important to check your state laws with regards to corporate shield from liability. It used to be that forming a corporation (like an LLC) would put distance between you as the sole member of the LLC and personal liability. However, recent changes to laws in many states have removed this protection. In Florida, for example, a recent supreme court decision appears to allow a creditor to seize a single-member LLC ownership position to satisfy personal debts. This is something that you should discuss with an attorney who can research which states afford maximum protection in this regard.
    Shane LaChance
    Replied over 1 year ago
    I think this makes a lot of sense and investors will have to look at the value and risks of their properties. For most starting out, or even experienced in single family, multi-family homes, and small apartment complexes it will, in many cases, make sense to depend on insurance. However those investing in large apt complexes and sizable commercial properties, the risk can be significant and that is when structuring multiple LLCs makes a lot of sense.
    Sandy Kurtzman
    Replied over 1 year ago
    With all the recent changes to liability and shielding that affect LLC’s, and to address the profitability (or otherwise) and record-keeping, it makes more sense to have one Corporation as the General Partner of a Limited Liability Partnership, and have all properties under that umbrella. Of course, it’s a good idea to invest in insurance, which addresses liability for accidents, and to have a strategy in place for managing risks associated with ownership. Accounting software, in the other hand, is used to more accurately separate and record the income and expenses, and assets, liability and owners equity for each property, so having a separate LLC for each property seems redundant and unnecessary. It’s also more costly to have an accountant or CPA set up the software for each and every entity (I’m sure they won’t complain…) and to file separate tax returns for each entity. As a State instrument, an LLC is not recognized as a corporation by the IRS, although it does allow the officer/s to elect to file as a Sub-S (1120S) for tax purposes, or to file as a sole proprietor (1040 Schedule C), or a Partnership (1065). Filing for a new LLC for each property can also cost a bundle, too, and many people don’t realize how easy (and how much cheaper) it is to do by themselves (DIY: filing fee vs CPA: filing fee plus an inflated fee for filling out the forms). Another very important aspect, especially in the beginning, is that a Lender isn’t going to loan money to an LLC (or a Corporation that is not well-recognized). The Lender is going to require the Member of the LLC to put the loan under their name and use their credit for underwriting purposes. One final important consideration: Officer remuneration (draws, owner advances, officer wages) are required to be reported to your Stare Workforce Commission and to pay State Unemployment Insurance (SUI) tax on those wages. You’ll also need an online (tax) account with that same agency to file reports and pay SUI taxes*. Best advice: Ask Lenders, Attorneys, CPA’s and your State Workforce Commission for advice and information and then listen to their advice. [*I am a SME and Senior Auditor for the Texas Workforce Commission by day, and a REI 24/7, so I deal with this stuff regularly.]
    Miguel Soto from Baltimore, MD
    Replied over 1 year ago
    These are all great points and real life scenarios. I found that the comments give a more in depth dive into what the video explained, great job all.
    Miguel Soto from Baltimore, MD
    Replied over 1 year ago
    These are all great points and real life scenarios. I found that the comments give a more in depth dive into what the video explained, great job all.