At a crossroads, LLCs or Umbrella Policy?

11 Replies

Hi Bigger Pockets ,

This post is about a topic I've been struggling with for some time now. Here goes:

I began my real estate investing in 2017. I have a full time job, so i worked with some turnkey providers to purchase single family homes. Right now, my portfolio looks like:

Own primary residence

Own 7 single family homes in Memphis with 3 different management companies

Own 1 single family home in Birmingham with 1 management company (duh)

When I began this journey, I set up an LLC in Tennessee with a registered agent. As of now, I have transferred the first 4 properties I purchased into this LLC, but stopped from there. That means i have the remaining 3 Memphis properties and the Birmingham property in my own name.

Essentially, I am at a crossroads now. The dilemma I am facing is where I go from here with my entities. The scenarios I am envisioning are:

1) Transfer the first 4 properties back into my name, dissolve the LLC, and acquire a large umbrella policy to cover myself.

2) Create a second LLC in Tennessee for the remaining properties, an LLC in Alabama, and perhaps a parent LLC in Wyoming for asset protection.

For some context, I am planning to continue acquiring properties over the years, really with no limit in sight and will look to diversify to other geographic locations. Right now, the next property will be my 10th FHA loan, and I will need to secure financing elsewhere going forward, which is why i have paused at this stage to make sure I have my entities in order. But the 2 scenarios have me in analysis paralysis, and I simply don't know what to do.

Obviously, the 2nd scenario seems to make the most sense, but it's going to come with a steep cost, $1,000 per LLC, $300 annual registration fee per LLC in TN, not sure about Alabama or Wyoming but I'm sure there is a fee. On the other hand, ridding myself of the original LLC and getting the umbrella policy should be less expensive, but I'm nervous about the asset protection in this case. Am I leaving myself open to my personal assets being exposed? Is there a third option I'm not even considering?


@Jeremy K.

Congratulations... you've done well for yourself.

There are several options you are not considering. I will advise you on just one option that you haven't considered:

Remember in Monopoly what happens when you have 4 green houses?  Well Jeremy, you have 8 green houses! It's time to trade up. 

If you have 8 houses with 8 LLC's, (which is the right way to own them for asset & liability protection) you've got a lot of overhead. Plus, you have to know landlord/tenant laws in 2 states (i.e. 2 different leases). You have to manage 4 different PMs! Do you see where this goes if you continue on your current path?

If I have 1 apartment complex with 8 units, I have the same income as you do, but my expenses are lower. Plus, I have only 1 LLC and 1 PM to manage. I also have only 1 roof, 4 walls, 1 mortgage, 1 lease template, 1 insurance policy, 1 electric bill, 1 tax payment, 1 set of laws to know, same vendors for HVAC, plumbing, etc.

@Steve Hall

I should have mentioned i have 20% down and financed these properties, which I think will make it harder to trade up at this point given I've only owned them for 2 years. 

You need to do much more research you don't even have a basic understanding

@Jeremy K.

Some of my clients are in your shoes and they still manage the same way as you know it is such a lot of work to even sort things out and of course it costs money. 

It is actually no brainer. The best way to protect you is one LLC for each property as @Steve Hall said. 

As you are already aware, at least you should properly legally take your properties away from you, individual.

There may be some insurance to cover that but your name is still there. You never know what happens. 

If it is really bothersome and you do not have time to think about, just transfer all of your properties to your existing LLC? It is not ideal but this way, your risks stop at the LLC. It will not come after you.

@Jeremy K. you dont have to form an llc in the state that the property is located.  Seems like you’re working under that assuption.

@Michael P.   yes i am under that impression. would love to learn more before i make another mistake about what you are saying

Hey Jeremy, I wouldn't overcomplicate your business.  I would move in the direction of simplification and insurance unless you have acquired some incredible personal net worth.

I used to have an attorney as a partner.  He was a huge believer in this strategy.  If you get sued, the attorney on the other side is typically only after the insurance policy.  

Assuming you don't have a huge personal net worth, why would he/she (i.e. the attorney) spend a whole bunch of extra time to bankrupt you?  They make almost no money in that instance.

If you've ever been sued and I have, you'll realize that it is a huge game among attorneys.

Certainly, you are taking on some risk in simplification, but I believe it to be a risk worth taking versus all the other admin costs you will incur to protect yourself wholly.

@Jeremy K. , I am going to disagree with most of the folks giving you advice here. First for example, the cost of forming an LLC in Wyoming is $100, next the annual fee unless it is worth many millions is $50 per year to renew it. I would at most have 2 LLCs. You are at 7 rental properties now. If it costs you $300 per year to renew your company that is an additional $2,100 per year and if it costs you $1,000 to form each entity you have lost over a years worth of income from your entire portfolio. It almost makes it useless to have companies if they bankrupt you. Next you MUST have a separate bank account for each rental that has its own LLC. You must have separate books, separate names, separate depreciation schedules, separate your legal costs, and depending on how how you structure your entity separate tax returns for each entity. The extra cost and work is staggering. I am an attorney and would never ever do that. I have over 30 doors at the moment and have only 3 companies, and one of those is strictly for high risk activities. It is safer to have separate entities, but not practical. It is safer to not invest, not drive, not fall in love, not travel places on vacation, etc. but is not practical. I would do 2 entities at most. @Steve Hall has some very valid points, but your comfort level of investing might be different from his. I am mostly SFH myself, because loans are easier to get,my tenant class is usually much better in SFRs than in apartments, and my length of stay 5X longer in houses than apartments. Resale is much easier, and so far appreciation is much better. I do have some apartments and would like more, but to each their own. Keep your books and accounting separate in each company. While I like not having ALL of my eggs in one basket, it is more economical to just use one basket. There is always a trade off.

I think you have done very well.  I very much disagree that you don't know enough to do this, you clearly know enough, you just proved it by acquiring 7 rental houses and seem to be doing great.  You are here because you want to learn more, that also means you know enough to get better at your business..  Congratulations on experiencing the growing pains of having a successful business.  Having multiple properties and trying to figure out how to protect your investments best is a vastly superior problem to trying to figure out how to buy your first property.

Good luck on your next step.

@Jeremy K.

i also own thirteen doors in memphis and have not setup a LLC. we have a lanlord insurance on each SFR and an Umbrella policy which covers all our rental portfolios in Tennessee and Southern California. We pay about $1100 a year for umbrella insurance.

Set us a series LLC since you are in Tennessee. Put 3-4 properties in each series. My thoughts at least...

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