One company v.s. a bunch of companies

6 Replies

What was the first you did when you started investing in real estate? Mine was to start an LLC. My training and experience as an attorney told me that protection against liabilities is a very high priority. Seven years ago, I set out to build a real estate micro-empire, I started with one LLC. When I acquired the first rental property, I created another one. When we decided to enter another aspect of the real estate business, I created another one. When I acquired a rehab property, I created one. Before I know it, I now have 5 different LLCs, each complete with a bank account (or two), Quickbook, insurance policy, certificate of organization, operating agreement...

From a strictly liability standpoint, to properly protect your assets, an attorney would advice putting each "at risk" or rental property that you acquire in a separate LLC. Each LLC becomes a single-asset-entity and creates a protection that limits liabilities to the extent of your investments in the entity. Additionally, there are other reasons to create multiple companies, the nature of the business of each may be different leading to different tax treatments, or if you do 1031 Exchange through an entity, that entity can't be the one that you flip houses in (I learned this from Bill Horan of the Realty Exchange Corporation).

From an accounting standpoint, this is a bookkeeping nightmare. My accountant tell me that my books are the most complicated of all of her clients. She uses multiple computers due to all the inter-company activities between my LLCs and needs to spend more time reconciling the books between the various companies. When I keep my own books, it is a complete paperwork overload. This leads to procrastination and the reason why I am still not completely finished with my 2013 taxes.

This really worries me, especially because I am really still in the beginning of my career. I am worry that I will one day decide to retire simply due to paperwork overload. That would be a terrible way to suck passion out of something I love so much.

I think it is time to consolidate. Although my investment properties are not all units of the same building, I am beginning to see northern VA as one location and my homes are just units within that location. I mean multifamily owners own the entire building in one entity, right? I understand this may cause "spill-over" of liability from one property to another. However, each one is well-maintained, well-managed and adequately insured. So, I don't see a big problem there. This may also allow me to access more equity if I am able to find a lending willing to cross-collateralize.

I don't think there is a right or wrong answer to this but I know the status quo is not workable over time. Any thoughts?

@Roger Lin  

1. How about hiring a bookkeeper?  

2. What about putting everything under an umbrella holding company so the "flow through" taxation is easier on everyone?  Or does a holding company defeat the purpose of separate LLCs for liability?

3. Hire someone to organize your office?

I think entities are over-rated. I have much less fear of a judgment stealing my personal or business assets than I do of getting bled to death by attorney's fees defending myself...and no entity will solve that problem.

I suggest you either do away with the entities in favor of good insurance, or at the very least consolidate your entities by strategy, such flips in one, holds in another, etc. If you have a particularly worrisome asset, then by all means put that in a sole-purpose entity.  If you hold large commercial property or apartment complexes, your lender will likely require a sole purpose entity for each of those assets.

I have over 20 entities so I can relate to your accounting problem. I don't have these entities for asset protection, I have them to segregate investors, so there isn't any way around it. The accounting is difficult, but I still manage to have all returns done and K-1s out to my investors by the end of March or earlier. Then again, I have an accounting staff of two full time positions. If you don't want that headache, and it sounds like you don't need it, simplify.  Think of all of the money you'll save on accounting, franchise taxes, and higher borrowing costs!  Spend some of the savings on more insurance.

As an insurance broker, I agree with Brian. My most successful clients don't let the tail wag the dog. There are reasons why you may need different entities (with other investors involved) but for small properties it is overkill in my experience. For a fraction of the cost, time and energy needed to set up and properly maintain multiple entities, you can have an excellent insurance package with high enough limits to keep an attorney from even bothering with your personal assets.

My most successful SFR investor client (120+ nice properties) holds his properties in his name. He holds his personal residences and other businesses in a trust to provide some separation but it is much easier to purchase and refi in his own name. A $10m umbrella costs about $5500 per year... How much would it cost to properly maintain LLC's for all of those properties?

Put on your attorney hat for a second. Your client has been legitimately and severely harmed and there is a $1m primary policy and a $5m umbrella policy ready to pay. Do you take the $6m settlement, putting $2m in your pocket right now, or do you spend the next 2/3 years trying to get your hands on the owners assets while he is using every truck in the book to avoid paying you? In my experience, if the insurance limits are significant, an applicant attorney is happy to take the quick and easy payday.

Joe B,

Hopefully you have a good case and don't need to pay the 6 million.

Roger,

On the lending side, we typically want to see single asset bankruptcy remote entities when we are doing large scale commercial loans. If you have your property in a single entity LLC, it will be harder for another lender to go after that asset if things go south on another asset in the parent company's portfolio. We want to make sure that one property isn't going to bring the rest of the empire down.

Mark

These comments are all very helpful.  They are helping me to come to my conclusion that that single asset entity strategy is way overkill.  I think the really good insurance policy strategy is a good way to mitigate the liabilities created by putting all the eggs in one basket.

I agree with Brian that grouping them by strategy/business type makes sense too.  You can't really mix.  I am starting to have companies with various partners too and I can foresee more partnerships coming my way.  Since I can't consolidate those, I should consolidate the ones I already have. 

@Roger Lin  and then after all that it is questionable how much protection a single member entity has.

An attorney that teaches RE land-lording laws to our REIA holds his properties that he has mortgages on in his own name. He also has properties with partners that he holds in LLC's.

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