Different LL C for each property?

20 Replies

Question -- do you set up an LLC for each individual property typically or one for all your properties?

Thanks for any help


@Joe Villeneuve Can you explain when you are first starting out how you get the properties in the LLC name? Without purchasing all cash I've heard most banks these days won't allow you to put the title in the LLC name. If you put it in your name and then transfer to the LLC won't that trigger the Due-On-Sale clause?

One for each. Lots of different reasons for doing so from liability to cost of transfer.

@Joe Villeneuve  I have read your post that you strip out your equity and yet you only have one property per llc? This seems risky to me (under capitalization can mean personal responsibility), I assume you have great insurance so its prob a non issue. Have you looked into using Trust? I would think that 1 llc would get expensive unless you are using them as disregarded and layering them. Even then the requirements to file and missing one could open you up to liability. Just wondering how you mitigate these concerns. 

@Alexander Merritt  

1 - Offer is made in name of LLC

2 - Accepted offer is closed in the name of the LLC

3 - Financing is acquired (if not a cash deal) by managing member of LLC

4 - My banks don't care if title is in LLC so long as the LLC grants permission to be used as collateral for loan, and the manging member of the LLC is the one who is on theloan.

@Jeremy Tillotson  

In Michigan, an LLC costs 50 to start, and 25 per year to keep. LLC's are trickle down incometo your normal tax returns from a Shedule C. They're not that complicated...or expensive. The separate LLC's actually insulate you from personal issues, as well as insulate each property from each other property.

I don't strip out all the equity...just access it by refi.  I still have 25% left in it.  Underap isnever an issue.

A separate LLC for each property is overkill. And a lot of extra work. And paying for multiple businesses. It really doesn't protect you much. Especially if you have a mortgage on these properties anyway, if someone sues you and manages to win, what are they going to get out of you if you have hardly any equity in your properties?

The key is have proper insurance. The other possibly even bigger key is to do everything within the law. Know your rental and real estate laws.

While it can be tough to get a loan for a LLC, I got my LLC's first mortgage within a few months of forming. Six months later, got another mortgage....and less than a year later, yet another mortgage. All with the same local-area bank. Your best bet is to go to local banks in person and talk to them. But talk like you know what you're doing. Show them the numbers on your potential deals. You'll probably have to sign a personal guaranty, but the loan will be in the LLC name.

I would agree with @Nicole W. on this one. But I also think it depends on the area you're in too. In Illinois the LLC costs I believe are much more expensive. At one time, I think my attorney told me the annual fees for LLC were $250 per year. And then you also need to do separate tax returns which will cost you money. It adds up. All of a sudden, you're paying $350 a year for separate LLC's?

At the end of the day, are you really protecting yourself that much more? These attorneys can still go after anything. The LLC protection may prevent you from losing it. But it may not. But the real damage is having to defend yourself against it anyway and the LLC isn't going to protect you from that.

Plus, I just don't think the paperwork effort is worth the return. I think it would be cheaper in terms of costs and time/effort to go with an umbrella policy and basically accomplish some of the same things as the LLCs would.

But again, I do think some areas are far easier/cheaper to stand up and maintain LLCs so thats truly a bit of a tricky question.

If your state has Series LLC's, that might be an option. But if you're planning on holding numerous properties long-term where there will be substantial equity, you may get with an attorney about a Delaware Statutory Trust which has benefits over a typical LLC but still allows for separate properties to be held in different "arms" of the trust.

Scott Smith (BP Member), Board Certified Attorney in both Texas and New York works uses these with clients who need serious asset protection.

Every state will have differences and every individual will (and should ) have different needs based on their own portfolio. @Mike H. mentioned umbrella liability insurance. I would caution this tactic as the insurance will only protect you in a liability suit, not a civil suit, or a suit where you can be proven negligent. 
What happens if property is owned by an LLC and the documents have not been drafted properly to address divorce, death, partner buyouts, management roles, etc. When a civil suit is filed, your insurance is useless...........

Happy Investing

Derek Dombeck

@Joe Villeneuve are you able to get umbrella insurance with your LLC's?

@Rob Fordham  you didn't define what you mean by "property". 

Please don't mistake the following for legal advice. I'm not an attorney, I'm just a guy that has bought several hundred properties over the last 25 years. If you are talking about houses, duplexes, quads, etc then one LLC or perhaps no LLC at all is appropriate if you own these yourself or with a spouse. Just get good insurance and an umbrella policy with a big liability limit. Multiple LLCs can be very costly if you have to file informational tax returns, which all but disregarded LLCs do. If you have investors or business partners, different story. One LLC per relationship is usually fine.

If you define "property" in the context of this question as apartment complexes, shopping centers, office buildings, etc...you'll put each one in into its own sole-purpose entity such as an LLC. Your lender is likely to require you to do so.

In Florida (home of hanging chads), an LLC costs about $200, annual fee $135, tax returns - depends. I think this is too costly for 1 LLC per transaction. I use a lot of Florida Land Trusts. And good insurance, but I agree with @Derek Dombeck  . Insurance isn't all that great.

My attorney told me any first year law student can crack a sole proprietor LLC.

You should look into a series LLC. That way you have one LLC but place each property in a different series.

Can someone please explain how attorney's pierce the "corporate veil" of the LLC? I understand that they will look for any discrepency in your paper work and how you run the LLC (separate bank accounts, reimbursements, etc) but if everything is in order and you're running it properly, shouldn't the LLC do what it was intended to do and protect you personally? The whole point is to shield your personal assets, right? Not your assets or insurance policies owned by the LLC.

Originally posted by @Nicole W.:

A separate LLC for each property is overkill. And a lot of extra work. And paying for multiple businesses. It really doesn't protect you much. Especially if you have a mortgage on these properties anyway, if someone sues you and manages to win, what are they going to get out of you if you have hardly any equity in your properties?

 This is very dangerous advice, and draws a faulty conclusion. 

Firstly, you need to understand the purpose of an entity is to protect assets, and insulate your personal assets from your business assets.  I have written about a dozen posts on this topic, and before you take anyones advice (including mine) please take a little time and consult a business attorney that specializes in real estate transactions, many will do this for free or a flat fee.

Some things to keep in mind:

1) Any lawsuit against a business/individual that is awarded, (meaning the person suing wins a judgement), places ALL assets available in that business/individual to fulfill the judgement.

(Example: You/business is sued for $600K. Judgement is awarded for that amount. Everything in that business/personal assets, will be seized/liquidated AT MARKET VALUE, to pay the judgement. If you have 20 properties in a single LLC or personally, the judgement is against all of them, if you have only 1 property in an LLC they can only go after the 1 property. If the judgement is not fulfilled, the remainder is held against the entity sued, nothing else.)

2) A lawsuit can only be against 1 person/entity. So if you have 5 properties 1 in each LLC, a lawsuit can only be against 1 of them. Now this does not stop someone from filling multiple lawsuits against each one, however, how would they know about them?

3) There are tons of ways to get property financed through banks or lending institutions and still protect your property in an entity.  If the bank your talking to doesn't or won't, find another.

4) There are dozens of real estate strategies on how and when to use an entity for asset protection, more than I could list here or am qualified to do so, and also will vary based upon your risk tolerance and type of transactions your doing. 

5) Insurance and Entity's are totally separate things and work completely different. Proper use of both insurance and entity asset protection are needed to properly protect your investments.

In closing, I am not an attorney. And nothing I have said should be construed as legal advice. I HIGHLY RECOMMEND that you consult with one BEFORE making an decision that could expose you to serious legal and financial liability. 

@William Baumann  What I said is not "dangerous". Also, you left out the rest of my quote regarding doing things correctly and legally in the first place so you're not sued left and right.

The first question to answer should be: is your goal for setting up your property in an LLC?

Before going that route the goal would need to be fully understood before recommendations can be made with clarity.  

Consult with a knowledgeable attorney in your area once you've established your reasons. 

I too agree with @Nicole W. that too many go straight to the LLC and feel protected while in reality a good umbrella insurance policy will meet your liability protection goals.

Like any good captain, you're not tested until the storm - anyone can sail in calm waters. I am guessing most have not been tested (litigated or claimed against) but may feel protected in an LLC.

@Nicole W. You are correct, I did not quote the portion of your post that was not dangerous advice, The second half of your post was valid, and I think you will find ANY business attorney will completely disagree with your position that I quoted.

@Jim Gramata  You will be amazed at just how many holes there are in umbrella insurance policies in the face of lawsuits. Sadly, when people do find out, it is too late and can lose everything they own. 

But please, do not take my word for it, pick up the phone and get a free consultation with a business lawyer. Find out what liabilities your exposed to.  

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