Should I form an LLC for each rental property I acquire?
Rental Property Investor · Atlanta, GA · Member since 2019 · 11 posts · 7 votes
Should I form an LLC for each rental property I acquire?
Most Popular Reply
Scott SmithPro Member
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votesHey Joseph, great question. I would say that it just depends. I know people who clump a few assets together in LLCs (not recommended, but it's better than having it all in the same LLC!) Other people will keep each asset in it's own LLC [or in a Series LLC, which I made for scaling investors] while there is another group who work with assets that can call for multiple LLCs to adequately operate. The last group will have one LLC for a restaurant building, one LLC for the operations and activities of the restaurant and finally a third LLC that hold all the branding.
So instead of getting list in the weeds, I will just explain asset protection in a general sense and you can decide the best way to move forward. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
If you bite the bullet and just establish a Series LLC early on it saves you a lot of money and hassle over the years. But I don't recommend it to everyone, as some smaller investors who are just starting can spend that money on scaling up faster. The best thing you can do is find an experienced attorney who can help you navigate these issues and then choose the strategy that best fits your own investing goals!
Feel free to TAG me or shoot me a colleague request if you want to know more.
26 Replies
- Rental Property Investor · MN · Member since 2017 · 864 posts · 555 votes7y
Hey @Joseph Nigro You can certainly do that and it'd be a good practice, however I personally put up to three units under one LLC, anymore than that and any law suit could wipe you out! Consult with an Attorney for specific advice
- LA, CA · Member since 2019 · 9 posts · 5 votes7y
Hey Joseph,
You might create multiple LLCs when purchasing rental properties if you can find lenders in your area that are willing to loan to LLCs. You can title the property with the LLC's name at your county's courthouse. You'll need to purchase insurance in your name with the LLC as an additional party insured, and you might find run into some resistance finding an insurance company that will cover LLCs as a 2nd insured. Hope this helps!
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
Hey Joseph, great question. I would say that it just depends. I know people who clump a few assets together in LLCs (not recommended, but it's better than having it all in the same LLC!) Other people will keep each asset in it's own LLC [or in a Series LLC, which I made for scaling investors] while there is another group who work with assets that can call for multiple LLCs to adequately operate. The last group will have one LLC for a restaurant building, one LLC for the operations and activities of the restaurant and finally a third LLC that hold all the branding.
So instead of getting list in the weeds, I will just explain asset protection in a general sense and you can decide the best way to move forward. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
If you bite the bullet and just establish a Series LLC early on it saves you a lot of money and hassle over the years. But I don't recommend it to everyone, as some smaller investors who are just starting can spend that money on scaling up faster. The best thing you can do is find an experienced attorney who can help you navigate these issues and then choose the strategy that best fits your own investing goals!
Feel free to TAG me or shoot me a colleague request if you want to know more.
- Rental Property Investor · Amarillo, TX · Member since 2018 · 17 posts · 15 votes7y
@Scott Smith
Thank you for the great information! I’m deliberating these issues right now as I scale. I had a meeting with my lawyer today and I wish he had explained it as well as you did. Thanks!
- Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes7y
It really depends on your own individual situation. Don't buy into the individual LLC for every single piece of RE. I'd consult a good attorney and cpa.
I personally do my flips through 1 S Corp, rentals in another LLC, & ground up developments have their own individual LLC for each. I have a large umbrella insurance to cover everything. Much simpler in an operational and management perspective.
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes7y
@Scott Smith
Hi Scott,
I am new to this and really like the idea of series LLC. Just a quick question: how different is series LLC to multiple LLC in terms of asset protection and tax implications? Or there is no difference and the only thing that makes series LLC is better than traditional multiple LLC is the cost of forming the LLCs?
Thanks.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
I wouldn't ask you question(s) to anyone other than an investor-friendly accountant who knows your personal situation. The right answer will vary with every situation.
But some general comments-
- if you don't already own properties, thinking about LLCing each one individually is really putting the cart before the horse. Just deal with getting started first. (unless you've already started, then ignore this)
- financing becomes atrociously more difficult with an LLC
- an umbrella insurance policy is way cheaper and provides liability protection. LLCs don't offer 100% protection like people think they do.
- MD · Member since 2018 · 14 posts · 3 votes7y
I've been doing a lot of research on this subject as well. Here's a video I found that was helpful.
Check out this video from Mark Kohler
I will say I've yet to find a local bank that will write a loan to an LLC for a property. I know I keep reading it can be done via smaller banks here on BP, but haven't experienced it personally yet. I think they're crucial for asset protection, but you must ensure you keep proper books etc to protect the corporate veil.
- Specialist · Lynchburg, VA · Member since 2017 · 161 posts · 90 votes7y
Hey @Joseph Nigro I am not an attorney I am just a normal investor. From a normal persons perspective it would seem to be whatever financially makes sense and security in combination. If you have to pay through the nose to have an LLC and think you can still cash flow at the end of the year if you bunch them together than do it. But if it financially doesn't make sense than you lose the benefits of cash flow and investing. The way I have mine structured is mirrored with my REI mentor which is a certain value limit. Each LLC holds no more than a number that you feel is a comfortable risk that if the sky starts to fall on you, your loss is potentially capped at that dollar amount in your portfolio.
The reason behind it is that you are still protecting yourself with the LLC and the veil. And the second benefit of limiting the number of LLCs you actually have is come tax time you wont pay as much to file for each LLC for each property. Sometimes people over look the tax bill.
Hopefully what I said helps even a little bit or sparks an idea. If you have any other questions please feel free to reach out. Best of luck to you.
- Rental Property Investor · Atlanta, GA · Member since 2019 · 11 posts · 7 votes7y
Great feedback thank you so much for your time!
- MD · Member since 2018 · 14 posts · 3 votes7y
Originally posted by @Joseph Nigro:
Great feedback thank you so much for your time!
Here's some good info on just getting insurance and no LLC as some will advise.
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
Originally posted by @Jake S Mckinney:
@Scott Smith
Thank you for the great information! I’m deliberating these issues right now as I scale. I had a meeting with my lawyer today and I wish he had explained it as well as you did. Thanks!
Yeah, sure thing. If you run into situational issues feel free to message me for an opinion on them, too. Best of luck to you moving forward!
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
Originally posted by @Courtney Duong:
@Scott Smith
Hi Scott,
I am new to this and really like the idea of series LLC. Just a quick question: how different is series LLC to multiple LLC in terms of asset protection and tax implications? Or there is no difference and the only thing that makes series LLC is better than traditional multiple LLC is the cost of forming the LLCs?
Thanks.
The Series LLC is an entity that was created for investors who were scaling up and having difficulty keeping up with creating and maintaining multiple traditional LLCs. The main difference is that you only need to file the Series LLC one time, and each "child" series you add is something you can privately create from your computer at home. This means that you can scale infinitely without the hassle of needing to file each individual asset, but still getting the benefit of having each asset's liability compartmentalized. Once you create the Series LLC you can choose whether to operate all "child" series under it through a single EIN and bank account, or you can split some into their own EINs. It is a very versatile entity and can make tax season pretty simple if you establish it correctly.
While some of the Series LLCs I work with have only a handful of assets in them, there are some investors who will put 20+ in separate child series within the Series LLC. There are some general rules to how to operate the Series LLC, but it is much more flexible than a traditional LLC and allow of scaling investors to focus their attention forward, rather than chasing down bank accounts and EINs all the time.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes7y
@Joseph Nigro why would you do that to yourself? Such a headache. Your attorney will love you though as they charge you 600 bucks per LLC.
- Rental Property Investor · Atlanta, GA · Member since 2019 · 11 posts · 7 votes7y
@Scott Smith thank you this is great feedback and I will definitely look into a series LLC.
- Rental Property Investor · Atlanta, GA · Member since 2019 · 11 posts · 7 votes7y
@Ali Boone I spoke with an investor friendly CPA. She told me all of her clients have separate LLCs for each investment property. I think that is over kill as I am just starting out. Which is why I asked the question to see how others do it and advice as well. Yes, I agree this does seem like putting the cart before the horse. After I get a few properties in my portfolio I will re evaluate my situation. Thank you for your feedback
- Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes7y
@Joseph Nigro, there are pros and cons to each opinion you have received here. There are some threads on here about those you might do well to look up. My opinion is worth what you paid for it. It depends. If you are buying $10 million dollar apartment buildings go with the advice of scott. If you are buying $80K houses I would probably group them. If your net worth is a couple of million talk to scott if you your net worth is $20K I probably wouldn't bother with an LLC or corporation just yet. If you are netting huge amounts every month you can get serious about multiple entities and the massive book keeping it can entail. If you are barely making it adding in what scott suggests might break your company. There are a lot of details that make each way better than others. A shoe salesman can get you the best pair of shoes for you sometimes, other times you buy shoes that you really don/t need.
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
@Courtney Duong When tax season comes around you will be doing yourself a favor by using a Series LLC because you can roll up all of the "child" series under on EIN based off the "parent" Series vs doing multiple tax returns. In addition when it comes to bank accounts many of my clients prefer using one account vs multiple. So short answer, simplicity and cost effectiveness.
- Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes7y
@Joseph Nigro - There's no ONE right answer to your question. Just like economics, you can have one economist say one thing while another says the exact opposite and both think they're right based on their schooling and experience. Same with asset protection. There are a number of ways to protect your assets, many of which you actually control (how well you maintain your properties, the tenants you place, the integrity with which you operate your business etc). You can keep each property in its own LLC or you can put multiple properties in each LLC and get an umbrella policy. You need to do what's right for you. Dollar wise and time wise. If you're only going to have 3 rental properties then you can protect each one by having them in their own LLC. If you plan to have 50.... do you have the time and the money to deal with 50 separate LLCs and 50 tax returns, 50 checking accounts etc?
- Property Manager · TX · Member since 2019 · 327 posts · 69 votes7y
Thanks for your response Scott. Just 1 more question: does that mean traditional LLC is not compartmentalized?
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
Originally posted by @Joseph Nigro:
@Ali Boone I spoke with an investor friendly CPA. She told me all of her clients have separate LLCs for each investment property. I think that is over kill as I am just starting out. Which is why I asked the question to see how others do it and advice as well. Yes, I agree this does seem like putting the cart before the horse. After I get a few properties in my portfolio I will re evaluate my situation. Thank you for your feedback
Interesting. I think you're thinking along the right lines. No need for overkill so fast. And maybe get a second opinion before doing anything too.
- Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes7y
@Joseph Nigro Here is a graphical representation of your question to help you in a decision:
- Milwaukee, WI · Member since 2019 · 21 posts · 9 votes7y
@Scott Smith If operating multiple "child" series under 1 EIN and/or 1 bank account, doesn't that risk losing the separation of assets in the case of a lawsuit? I was under the impression whether with separate traditional LLCs or "child" series in a SLLC, you need to be careful to keep separate bank accounts to show they are separate business entities.
- 7yScott SmithPro MemberAttorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
Originally posted by @Matt Quock:
@Scott Smith If operating multiple "child" series under 1 EIN and/or 1 bank account, doesn't that risk losing the separation of assets in the case of a lawsuit? I was under the impression whether with separate traditional LLCs or "child" series in a SLLC, you need to be careful to keep separate bank accounts to show they are separate business entities.
You will still need to keep the operations separated between you different "child" series. But this can be accomplished through the same bank account with the software that is available today with ease once you have the initial setup done. You need to be able to prove in court that these companies are operating separately, and while they may all use the same bank you will be "earmarking" all of the transactions to signify which expenses belong to what property.
The main reason this is a benefit rather than a detriment is that you aren't juggling multiple bank accounts - which is the main reason most people get caught up commingling their funds (sometimes you just grab the wrong card or check book when paying for services at one of your properties.) Having everything accessible and well-kept is a powerful tool - and it's one of the reasons I don't recommend getting and SLLC for people who always DIY. Part of the benefit of working with an experienced attorney while forming these entities is they should teach you how to properly use them for maximum benefit - the best will even tie in the asset protection pieces with tax savings and estate planning strategies so it's all connected and ready for you to use.
Ultimately, bookkeeping used to be a bit of a nightmare, but software has made it easier when you know how to use it. In the end you just need to prove that those entities operate independently of one another, and you can do that while their funds are flowing through the same account as long as you are tracking the money correctly.
- 4yMackay OakeyPro MemberIdaho Falls, ID · Member since 2021 · 53 posts · 38 votes
Quote from @Scott Smith:
Hey Joseph, great question. I would say that it just depends. I know people who clump a few assets together in LLCs (not recommended, but it's better than having it all in the same LLC!) Other people will keep each asset in it's own LLC [or in a Series LLC, which I made for scaling investors] while there is another group who work with assets that can call for multiple LLCs to adequately operate. The last group will have one LLC for a restaurant building, one LLC for the operations and activities of the restaurant and finally a third LLC that hold all the branding.
So instead of getting list in the weeds, I will just explain asset protection in a general sense and you can decide the best way to move forward. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
If you bite the bullet and just establish a Series LLC early on it saves you a lot of money and hassle over the years. But I don't recommend it to everyone, as some smaller investors who are just starting can spend that money on scaling up faster. The best thing you can do is find an experienced attorney who can help you navigate these issues and then choose the strategy that best fits your own investing goals!
Feel free to TAG me or shoot me a colleague request if you want to know more.
Thank you for the super detailed and great information! Being new to the community and new to RE investment in general this was very helpful to read in such detail!
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