Should I start a LLC for my rentals?

25 Replies

So i currently have 3 rental properties in my name only. I am ion the process of acquiring 3 more.I also plan on expanding as often as the opportunities come about. I am considering starting an LLC for the rental properties I have. My question is should I do a LLC for each one, would i need a separate bank account for each LLC/property, or should I have multiple LLCs own 2 or 3 properties each. I have also considered starting a LLC in the near future that would act as the property management company. Looking for thoughts and ideas that have worked for others in the past.

Thank You

The advantage of having an LLC is that it limits your financial exposure to what is contained in that LLC in the event of a lawsuit. Your personal assets are not exposed.

Say someone slips and falls on your broken rental property sidewalk, all they could sue you for is the equity held by that LLC and nothing more. No personal assets.

If you put all properties in one LLC, all properties are exposed in the event of a lawsuit originating from any one of the properties in the LLC.

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

Originally posted by @Antoine Martel :

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

So you can have one parent LLC that owns each individual property LLC is what you're saying correct?

Originally posted by @Brian Garrett :
Originally posted by @Antoine Martel:

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

So you can have one parent LLC that owns each individual property LLC is what you're saying correct?

 Yes

Originally posted by @Antoine Martel :
Originally posted by @Brian Garrett:
Originally posted by @Antoine Martel:

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

So you can have one parent LLC that owns each individual property LLC is what you're saying correct?

 Yes

So the parent LLC is protected even if it owns the LLC's which hold the assets?

Someone wouldn't be able to go after the parent company if they wanted to?

Originally posted by @Brian Garrett :
Originally posted by @Antoine Martel:
Originally posted by @Brian Garrett:
Originally posted by @Antoine Martel:

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

So you can have one parent LLC that owns each individual property LLC is what you're saying correct?

 Yes

So the parent LLC is protected even if it owns the LLC's which hold the assets?

Someone wouldn't be able to go after the parent company if they wanted to?

 Someone could go after whatever they want to. But since there are two layers there is more protection. 

Typically people may put 1-3 properties per LLC formed. The mix of which property in which LLC depends on the amount of equity in each property (risk exposure) and which properties maintain the most value long term, such as in stable appreciating markets in good neighborhoods.

Having an LLC doesn't offer you nearly the liability protection you think....when you are a small time investor, a half decent lawyer will get around your LLC in a heart beat. All they have to prove is that you use some of your personal bank accounts to pay for items used in the LLC ...or some of the payments to the LLC go into your personal accounts and you are sunk. EVERYTHING needs to be separate and strictly accounted for....Plus depending on your state paying for an LLC adds up...like in CA.

In my opinion you are better off having heavy liability insurance coverage, than doing a bunch of LLC when you are a smaller investor. An LLC is a thin veil that will not protect you as a small investor with a small number of properties....

Originally posted by @Antoine Martel :

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

Antoine,

I've been looking into this LLC structure more and I really like the idea. I have an accounting question, would I need an account for each LLC or just the parent LLC

Originally posted by @Kyle Reynolds :
Originally posted by @Antoine Martel:

Kyle.

The way that I have it set up is that I have one LLC for each rental property. Those LLC's are all owned by the same banner LLC so that one income tax return is filed.

Antoine,

I've been looking into this LLC structure more and I really like the idea. I have an accounting question, would I need an account for each LLC or just the parent LLC

If the sub LLC's are owned by the parent LLC then only 1.

If each property is in a separate LLC, all owned by an umbrella LLC, how do you do your financing? Do you put the property in your name, then do a quit claim deed on the property to move it into an LLC? Have you been able to get a traditional mortgage loan on the property if it’s in an LLC?

@Kyle Reynolds Per my CPA an LLC that holds the property can also be the property management company. So you dont need a separate LLC just for the management company.

I just buy up liability insurance.  Every property I own has overkill liability insurance.  Each unit has  $300-500k in liability coverage to include my $18k condo..

Last time I spoke to my attorney, he said it was sufficient and didn't see an LLC providing that much more protection. Additionally LLC's complicate financing.

Purchasing investment properties in your personal name will result in significantly better financing terms from your lender. From my personal experience, I have been able to acquire multi-families with very low interest rates with 30-yr amortization periods. Most banks will not provide 30 year loans for LLCs. If you decide to acquire in your personal name, get a good business owners policy and maybe even an umbrella for protection.

Everyone also seems to forget that there are Tax advantages if you can structure an LLC properly. If you are married, a partnership LLC with your spouse will allow you to split profit in a way that reduces tax exposure. In addition if you are flipping, an LLC allows you to do an S-Corp election which really helps reduce the amount of gains taxes you pay. You should really speak to your accountant.

Speak to an accountant -  as long as it isn't @Brad E. 's accountant.  LOL  

Never combine a passive asset/activity with an active income activity inside the same entity.  Sheesh

I wouldn't put a little house with debt inside an LLC. In the name of 'asset protection', you will forever be subject to crappy commercial financing with short terms, balloons and adjustable rates. Other problems with insurance and such abound, but over-sophisticate if you want to.

I have LLCs for my commercial assets and an s-corp for my mgt co, so I'm not anti-entity, just match up the asset type to the commercial business entity and you'll be fine.  

@Kyle Reynolds - It depends on what your budget is and what your risk profile is. To order your options from most expensive and highest protection to least expensive and lowest protection, your options would be to: 

1. Putting each property in an individual LLC

2. Putting all of your properties in a single LLC or

3. Keeping them as is under your personal name. 

Unless you are really dealing with high risk properties, I think spending the money to setup 6+ different LLCs would be a waste of money. 

#3 is pretty risky once you start getting 6+ properties. The odds of one causing you trouble runs much higher. An option would be to look for an umbrella insurance policy that covers the value of your assets. 

I would suggest going with #2. Putting all of the properties into one LLC should be relatively inexpensive while protecting your personal assets from anything going wrong with your rental properties.

If you're looking to save on taxes, I'm not sure the LLC matters much. As I'm sure you know, you can reap the same tax benefits whether you have an LLC or not.

I'd suggest talking to a CPA or a lawyer, but that's my two cents. 

So getting an LLC doesn't provide any sort of tax benefits? It only protects your personal assets?

@Mark S. What would the expected interest rates and amortization periods if I tried to get a loan under an LLC? Also I read that many banks won't lend to an LLC for a SFH home. Is this true? Would I be able to use a commercial lender in this scenario?

What is the monthly cost of decent liability insurance? I am in NJ if it matters

Originally posted by @Derek E.:

So getting an LLC doesn't provide any sort of tax benefits? It only protects your personal assets?

The posts I liked on here were from  Mark Sutton, Anna Buffkin and Ned Jackson. Just saying :)

Originally posted by @Joe Vastola :

@Mark Sutton What would the expected interest rates and amortization periods if I tried to get a loan under an LLC? Also I read that many banks won't lend to an LLC for a SFH home. Is this true? Would I be able to use a commercial lender in this scenario?

There are several factors that would have an impact on interest rates for an LLC. These would include your personal financial strength (as a guarantor), the relationship you have with the bank, your experience investing in real estate, and the collateral being taken. For a new borrower with modest personal liquidity, rates are generally around 5% with amortization periods of 20-25 years. Some banks do provide 30 year amortizations to LLCs, but those are rare exceptions.

Originally posted by @Derek E.:

So getting an LLC doesn't provide any sort of tax benefits? It only protects your personal assets?

As far as I am aware, there are no tax differences between a single-member LLC and having the property in your personal name. Both would fall under Schedule E of your personal tax return.

@Kyle Reynolds as you can see from the posts there are a lot of opinions.  Much of the answer depends on your current personal financial situation, you personal risk tolerance, and weighing advantages vs costs. 

@Ned J. is right, an LLC does not give as much protection as people think. It certainly is not a replacement for insurance. In fact not having adequate insurance for an LLC could be a reason for a court to "Pierce" the LLC. **.

Despite the fact that an LLC does not provide as much protection as people think and that running it incorrectly can cause even more problems, I don't know an attorney that would own property in their own name.

LLCs with a parent company need to be run as completely separate companies with different bank accounts. or you might as well not bother.  The IRS looks at single owner LLCs as a "Disregarded entity" so the sub LLCs do not file a separate tax return. The does not mean that running them as one company is good legal practice. 

I suggest you check out books by Nolo Press on the various types of entities. While I am not suggesting you "do it yourself" regarding starting an LLC, I do think it wise to study some of the issues involved so you can speak more intelligently when consulting with a legal or tax professional.

** Obviously with a name like NED, Mr Jackson must be brilliant! However I hate comments like Ned's about insurance, as it implies there is a choice to get less insurance with an LLC. Insurgence is a MUST, Whether to get an LLC in addition to insurance is the question.

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