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.
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).
The problems with LLC too is you have to hire an attorney to represent you.
Many landlord/tenant cases are frivolous. It's kind of like Judge Judy.
If someone files against you, you would have to pay out of pocket for an attorney.
There is 1 gigantic missing key piece to this whole conversation on LLC's; you can have all the LLC's you want in the world and it wont protect your assets not 1 bit, not all your other properties and other business's, not your personal home and autos and monies, it wont do a thing for protection unless you are following FULL separation between entities, that means NO co-mingling of banking, credit cards, managers, nothing. Everything that co-mingles is very VERY easily attached by any 1st yr practicing lawyer.
So the entire debate of a LLC per property is completely pointless unless your going to have everything completely entity separated; accounting, banking, all of it per EVERY LLC otherwise all that work is just for a lot of nothing IF anything did every happen.
From my experience in the court's of both being sued and having sued a great many persons, make a LLC per property manager, that makes it all nice and neat with separate banking and accounting and so on, and this level of FULL separation of entities with zero co-mingling makes any piercing attempt very difficult and that alone will keep most wolves at bay as any good lawsuit first does exploration to verify the road is worth the effort.
Next key factor, what is your risk exposure level? If a person is say a slumlord who delights in breaking every law available until forced to comply, well than that person should make it a top priority right after therapy, although if your like most landlords looking to make a reasonable profit operating a legal legitimate operation than it is the rare oddball incident we are talking about, and for that insurance is a key piece not building a maze of entities.
Myself I operate a s-corp as a parent company under which my other companies are held as subsidiary companies, all formed as LLC's. Each main subsidiary LLC has its own accounting and banking and everything. Some of those LLC's also own other LLC's themselves, although those generally "contract" services such as accounting from there parent co the main LLC. So here is where the creativity comes into it, the name of the game is legal separation, that dosnt mean everything has to operate as an island it just means there must be separation like service contracts for "contract accounting" and "out sourced management". You can also use DBA's in legal form to allow subsidiary LLC's to use the banking of the parent LLC while retaining there autonomy and separation, yes I know in essence the funds are together but in legal eyes they are all separately in the same account, lol, strange but true.
The benefit of the top parent company s or c corp, use of shares to move ownership to say a trust, and its the best structure to receive maximum funding. Downside, double taxation.
Found this old thread and it's been very helpful. It's worth reiterating that the reason to form an LLC is primarily personal liability protection. If someone sues for a tort related to real property, the amount of damages is limited to the value of the property held by an LLC if it is held in that form. If you own as an individual, then the plaintiff could come after you to satisfy the judgment as well. There are also privacy advantages, since a property title search will turn up only the names of LLCs if property is held in that form. Finally, there are tax advantages since some corporate forms pay lower taxes than individuals; there are other ones that tax professionals can explain.
So in theory if you have an LLC that owns 10 of your investment properties and someone is injured on one of them and sues the LLC, they could collect to the extent of all ten properties' values, not just the one that the suffered the injury on. That seems to be the logic of getting a different LLC for every different investment property.
It seems from the collective wisdom of this thread though that since most owners will have an insurance policy (a requirement for getting financing and sound practice generally), that diminishes the imperative of dividing up liability. And @James Hamling makes a good point that any degree of commingling may allow a smart lawyer to pursue individual liability regardless of LLC status. So the transaction and other costs of the LLC don't seem to warrant
In terms of trusts, you can convey the assets in an LLC to a trust, and hold in using that legal device. This does not do much for liability limitation or taxation, but it may be helpful for estate planning purposes. For example, if you own property in different states from your residence, upon your death there would be an ancillary probate proceeding in every state where you own real property other than the one where you are domiciled. If the property is held in a trust in your state of domicile, it may be possible to avoid this outcome.
The wrong way to look at this is how many properties should be under an LLC.
What really matters is the amount of net equity at risk. If you have 10 cheap houses that are worth each $40k, collectively $400k for all 10 together, maybe put them in a single LLC. If that fits your comfortable level.
However, if you had 10 properties that are worth $2M each, collectively $20M all together, it'll be better to move the properties into separate LLCS. Unless you're mega rich, and this exposure seems low to you... Anyone worth less than $25M, probably won't want to risk 9 other properties worth $18M, for 1 outlying property worth $2M. The amounts are significant enough that you want to protect each of them separately, and well worth the small amount of money and time to protect it.
The real question is, for you as a person, how much do you want to risk $ wise in assets. If the properties are big enough, sizable equity, meaningful amounts that you would NEVER WANT TO RISK LOSING if co-mingled with another liability, then it's advisable to be separated.
Consider, once the assets reach a different size (dollar / liability exposure), separate the liability from others. But if they're so small, if you want to save a bit, you can mingle them all together because your exposure is already low.
10 cheap paid off houses in Detroit in one LLC has considerable less monetary risk exposure than, 10 paid off California beach front properties in one LLC. It's the amount of assets at risk, not the number of properties. For each person, this will be a different number, what we're comfortable for.
And if it's a high risk building, for whatever reason, potential fire, lawsuits, deferred maintenance, earthquake, anything that is a potential, serious risk to potential legal exposure - separate those. No need to risk the others, if one has potentially way more liability than others.
Finally - like has been mentioned above, the LLCs need to be ran properly, to avoid piercing the corporate veil. It does add time and effort, but if most of your wealth is tied up into real estate, and you don't want to lose it, learn how to do it properly, and do it as such.