Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
Do you use one LLC for all of your investment properties or one for each property? If not an LLC, which entity do you use and why? Doesn't the added cost of maintaining an LLC substantially eat into profit, especially when you are talking about rentals with $150-500/month in profit?
I have two rental properties with personal loans in my name and I am considering picking up a 3 family in my name with a commercial loan. I know I could create an LLC for the commercial loan property, but what are your options if any with the investment properties that are financed with personal loans in your name? My banks are saying that I can't assign these loans to an LLC.
Attorney · Toledo, OH · Member since 2015 · 84 posts · 58 votes
10y
The best general advice I can give is to look at the 1) class of property 2) type of property, and 3) LLC expenses in your state when determining whether you are going to set up separate LLCs.
1) Class: If you have a top of the market house in an A neighborhood, I would keep that separate from properties in C or D neighborhoods. No reason to leave your best properties open to liability that can be created at your worst properties.
2) Type: There is also a difference between an individual LLC for each SFH, and an individual LLC for each apartment complex.
3) Expense: For example, here in Ohio, an LLC costs $99 plus our fee to set up, and Ohio does not have annual fees on LLCs, so while it is not necessary to create an individual LLC for each property, it isn't a huge expense either. The other side of that coin is California, which will charge you $800/yr plus an LLC tax for each individual LLC (including each LLC in a Series LLC).
Investor · Ogden, UT · Member since 2016 · 45 posts · 12 votes
10y
I have heard of people putting each property in a LLC which IMO sounds like a book keeping nightmare. I would and will never hold a REI property in my name it will go through my LLC. You'll be hard pressed to find a bank that will let you transfer your currently in your name loans into LLC.
Best bet is moving forward create your LLC with a good RE attorney and go from there
That's my 2 cents
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
10y
@Joseph M., I would never do a separate company or LLC for each property. The cost and sheer time involved would be huge. I have all but 3 properties in the same Corporation. I do have one joint venture in its own separate LLC.
Attorney · Toledo, OH · Member since 2015 · 84 posts · 58 votes
10y
The best general advice I can give is to look at the 1) class of property 2) type of property, and 3) LLC expenses in your state when determining whether you are going to set up separate LLCs.
1) Class: If you have a top of the market house in an A neighborhood, I would keep that separate from properties in C or D neighborhoods. No reason to leave your best properties open to liability that can be created at your worst properties.
2) Type: There is also a difference between an individual LLC for each SFH, and an individual LLC for each apartment complex.
3) Expense: For example, here in Ohio, an LLC costs $99 plus our fee to set up, and Ohio does not have annual fees on LLCs, so while it is not necessary to create an individual LLC for each property, it isn't a huge expense either. The other side of that coin is California, which will charge you $800/yr plus an LLC tax for each individual LLC (including each LLC in a Series LLC).
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
I agree that it is overkill. A few examples of having a second LLC would be if you have some rentals in Florida, and some rentals in Alabama. I would have a state-specific LLC for those.
Or, if I had some regular rental houses/duplexes, etc and then a very large apartment complex, I would probably put the apartment complex in its own business.
Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
10y
I have never held my single family rental properties in LLCs and see no reason to do so. The supposed protection is not worth the complications. (Yes, I have discussed this at length with several attorneys and they agreed.) I keep a fairly large umbrella insurance policy. I do have a couple LLCs that I use for other transactions and I hold my share of my multi-family in an LLC. That is, primarily, for privacy reasons.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
As the bookkeeper tax-preparer for my own LLCs and S-corp, I say no way. Each little house? I'd be swimming in paperwork.
Asset type, asset value, location, business structure (partners?) and business purpose should drive your decision, not just blind fear of the slip and fall or some law suit one day we all here about. Not an attorney or tax guy. If you consult with one, ask the actual probability of the worst-case scenario they are trying to protect you from @Joseph M..
Flipper · Wooster, OH · Member since 2012 · 139 posts · 30 votes
10y
A couple of comments:
1. If you have properties in different states it is good to have separate LLC's for those (each state).
2. If properties are in the same state you can put them under one LLC.
3. I'm not a lawyer but I was told, LLC's are to mitigate risk of someone suing and taking your properties, so you should put as many properties in an LLC as you are comfortable with.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
10y
Thanks @Steve Vaughan
Can you explain how and why you use the LLCs and S-Corp in your business?
On a side note, do you know if an investor has to pay quarterly taxes on income for properties in their personal name or would that only be relevant for investors that currently have their investments setup in LLCs, SCorps, etc?
I also hear about people using Trusts. Do you employ that tactic?
Attorney · Birmingham, AL · Member since 2015 · 45 posts · 14 votes
10y
I always advise my clients to hold no more than 5 properties per LLC but if you want you can always hold all your properties in one LLC..... the reason is asset protection. The key is that you use LLCs instead of owning them in your personal name.
Investor · Omaha, NE · Member since 2015 · 366 posts · 184 votes
10y
We have 5 properties in on LLC. However, I think if I expand and get into different types of properties like multifamily or commercial, I would do a separate LLC for the different type. I think that if you have adequate insurance coverage and liability coverage, multiple SFH's under one is ok. But, I'm not a lawyer or accountant. Definitely check with one for some sound advice.
Hackensack, NJ · Member since 2016 · 22 posts · 4 votes
10y
Hi,
I'm no expert but I had this same discussion with my CPA and he advised me that it's best to have a maximum of 2 properties per LLC to limit your liabilities. So if you have an extensive portfolio it would be multiple LLC's holding 2 properties a piece. Then place them under an umbrella or holding company. This also will have some administrative fees so the more LLC's you have the more money it costs. But I would say you want to limit your liabilities by not having too many properties in 1 LLC. If someone sues they can go after everything in that LLC.
Hope that helps. But I'm sure there is better advice or a simpler way to do it.
Brian Cloud, great advice on no more than 5 properties of like type in an LLC. This is what I practice also.
Brian Maida, To answer your question about changing the mortgage from your name to your LLC, you won't be able to do that. But, I believe New Jersey is similar to Texas in that you can file a Quit-Claim Deed and transfer the property deed from your name into your LLC. Now your LLC owns the property and you can also change insurance coverage out of your name.
The possible dark side of this is that your mortgage company probably has a clause in their contract when you signed for your loan that states if they find out the Deed of Trust is not in your name, they can call the loan due in full. There is very little chance it would happen as long as you are paying your loan on time and don't give them any reason to poke around, you should be fine. I also don't know of anyone this has happened to in all the investors I've talked with over the years. If you look at it from the mortgage company's perspective; he's paying on time, we're making our money, everything is good.
Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
10y
I know you're asking about LLCs, but I'm curious why you're using a commercial loan for your third residential property? You'd get better terms with a 1-4 unit residential loan. Even if you own a primary plus two rentals, that's still only your fourth loan--which shouldn't be a problem in today's lending environment.
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
10y
Asset protection is a function of where you are financially. The bottom line gets to, are you worth some bottom feeder lawyer chasing you? No contingent lawyer is going to sue you if they have no hope of collecting. Add an insurance company to the mix and there is a reason to sue. Lenders require insurance to backstop their losses. There have been a number of discussions of using paid off properties in LLC's with no insurance as a means of saving money. It has been advised that single entity LLC's be created and all funds flow through another LLC to avoid the cash being frozen should you be sued.
The other reason for using an LLC or C corp. is for tax advantages. You can issue dividends to yourself and be taxed at a lower rate. Hence, the Warren Buffet statement that his tax rate is lower than his secretary.
Portland, OR · Member since 2015 · 12 posts · 5 votes
10y
Lots of great comments! One of the main reasons for me is creating a firewall between the growing equity in each property. Your goal should be to protect your hard earned equity. Depending on the peril that causes a loss, there could be cases where the insurance will not be collectable, and the plaintiff will go after ALL of the equity in that LLC with multiple properties, or in a worse case scenario none of your equity is protected in an LLC. Then it could be time to start your investing career over from scratch. Not worth the risk. Use a series LLC and put one property in each one and firewall them. (although as others have said, it is difficult in states like CA, but in OR it's only $100yr and if that messes up the property P&L, that deal is too skinny to be in) You can be sued for anything, by a tenant, a visitor, a neighborhood, or a stranger. Can't say I have always followed my own attorneys advice though, nor my doctors and other advisors who say don't take unnecessary risks ... but we can tend to feel invinceable ... until we are not. As I get older and have watched equity grow, it became time to listen to the wise ones, to restructure and protect it. Have properties in LLC's and have them encumbered with loans so there isn't much for a bad actor to go after. Just my 2cents and worth what you paid for it.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
10y
@ Carlos Flores Because 3 year ARM at 3.5% amortized over 20 years with no balloon and less money down (20% vs 25-30). Rate benchmark is 3 year treasury + 1.75 and there is a 5 year tiered pre-payment penalty.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
10y
@ Carlos Flores Because 3 year ARM at 3.5% amortized over 20 years with no balloon. Benchmark is 3 year treasury plus 1.75%. Less money down 20% vs 25-30% conventional and they will let me put it in my name if I would like. Only negative is 5 year tiered pre-payment penalty, but fine with me. I need the loaner down payment.
Cave Creek, AZ · Member since 2015 · 51 posts · 13 votes
10y
This is such an interesting topic that seems to have more then one answer. Thanks for the suggestion of listening to podcast 109 @linval T. Sometimes I worry that these podcasts can become outdated with their suggestions when you get into the older ones.
Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
10y
I think I will wait until my assets have enough equity to make it worth my time. If I got sued now, there would be less than $100K for them to go after other than insurance and umbrella policy. I can see this being more important as I grow my investments. Podcast 109 says at the beginning the advice is for investors with $5-10 Million in assets. I haven't listened yet, so maybe there will be advice for the smaller investor.
I think I will wait until my assets have enough equity to make it worth my time. If I got sued now, there would be less than $100K for them to go after other than insurance and umbrella policy. I can see this being more important as I grow my investments. Podcast 109 says at the beginning the advice is for investors with $5-10 Million in assets. I haven't listened yet, so maybe there will be advice for the smaller investor.
Hello and welcome! It is all about liability and how you treat it like a business. You can create an LLC but be seen as a personality. I think you should limit your libility or you can protect yourself by investing with a qualified IRA plan. The personal liability is what is important. If it's too late at least you should learn by it and keep on going. You might want to talk to a CPA. Just keep everything legal. Good luck!