asset protection for Rental Properties 1 LLC? or Many individuals

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asset protection for Rental Properties 1 LLC? or Many individuals

Justin Summers
Baltimore, MD · Member since 2015 · 7 posts · 7 votes

I'm looking at buying several properties (8-10) in a lower income area of Baltimore Maryland for cash as a retirement income plan. The area cash flows very well.  My concern is with litigation mainly from tenants.  

I was thinking about this senerio. I would create a single member llc for each property that I purchased for example 123 main st , llc then each LLC would be owned by another single member LLC let's call it MyMain, LLC.

I was also thinking about recording a large lein/mortgage/judgement against the mymain LLC to further judgement proof the rentals and myself

My thinking would be that if some sued 123 Main St , LLC worst case is they would get a judgement only against that LLC which only owns 1 house.. The prior recorded mortgage/lein against Mymain , llc would have priority since it was recorded at the purchase of the propery. So Mymain, llc would get paid on the sale of the property owned by 123 main LLC before any judgment would be paid.

My questions:

1. Does this seem like it would work for asset protection? 

2. Would I be okay recording a lien against the Main LLC (MyMain, LLC) or should I record a lein/mortgage against each property individually?

3. Since I would own My Main LLC as a single member and each of the 8-10 property's llcs would be single member llcs owned by MyMain, LLC would everything be considered disregarded entities in the eyes of the IRS for easier taxation and filling?

4. What ways would a plaintiffs attorney try to get at my other assets?  Basically what argument could they make?

I know this sounds like I'm going a bit overboard but I'm looking at investing the only $500,000 I have saved for retirement into these rentals and will be renting to section 8 tenants that like to "work" the system anyway.  That the all the houses were built in the 1920s and there have been quit a few huge lead paint lawsuits won by poor section 8 tenants against landlords in the area. 

Thanks for any input

Justin

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  • Gabriel G.
    Real Estate Agent · Baltimore, MD · Member since 2014 · 215 posts · 123 votes
    10y

    @Justin Summers, just my $0.02 here but have you owned any rentals before? Specifically section 8 rentals? I hate to burst your bubble but section 8 tenants are a handful and you don't just get section 8 tenants right off the bat. It could be a month, a year or even two until a you get a section 8 tenant in one of your rentals. This means that you might be having to rent to regular folks for a while. Also, it seems really risky to grab all of your retirement funds and put them in the most difficult type of rentals which leads me to my first question, how much experience do you have? Let me just put it this way, Baltimore city is the most tenant friendly jurisdiction in the state and landlords can barely get anything done in courts since the system is so skewed then on top of that, you are dealing with homes that have lead and the cap on lead lawsuits was taken away. It just seems like a recipe for disaster, especially If it is the "only $500,000 that you have". I hate to be the negative Nancy but I would just mix things up with a couple of nicer properties in nicer areas (maybe even different county). It's the whole "don't put all your eggs in one basket" type of thinking. 

    Now for as far as the LLC, I would talk to an attorney and CPA about that, it seems a little excessive to have an LLC for each property especially since you might have to be doing separate tax filings for all the LLCs. Also, it is a lot more things you need to track (I'm sure you want the least amount of work during your retirement years) and if you forget to do certain things your LLC can end up not being in good standing which puts you at risk for lawsuits. Basically if you aren't running the LLC like a business and are not in good standing or any other multitude of things, then a attorney could easily argue in favor of piercing the corporate veil which makes it seems like you didn't even have an LLC in the first place. Luckily the things you have to do to keep a LLC running are a lot easier than a corporation but still, if you multiply the things you have to do by 8-10 properties, it's easy to mess something up and end up at risk. Hope that somewhat helped lol...

    ***I am not an attorney or a CPA and this is simply my opinion and should not be taken as legal of financial advice***

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  • Derreck WellsPro Member
    Specialist · Pelham, NH · Member since 2013 · 547 posts · 269 votes
    10y

    I've seen a discussion very similar to this before, I don't remember hte outcome but if you search the forum, you should find it.

    It's my understanding there are people who set up an LLC for each property. You're attorney can deal with all the legal filings as you get old and feeble minded so they don't get messed up.

    My question is this; "Are you planning to be a slumlord?" I believe the best protection against lawsuits is to do things legally. When you buy a building, have it deleaded. The result? You're not going to get sued for lead paint. If the water heater starts putting out rusty water, replace it. If the roof starts to leak, fix it. If you don't give the tenant legal ground to stand on, they sink. 

    The biggest issue I've seen with my friend's section 8 tenants is the bugs. They tend to bring roaches and bedbugs with them when they move in. On the other hand, they're easier to evict then "normal" tenants.

    My tip to new landlords is this. Charge enough for the rent so that Section 8 pays you what you really want for the apartment. I'll use round numbers to keep this simple. If you have a unit that you'll get $1000 from a "normal" tenant, then list it for $1200. Section 8 will pay the $1000 and the tenant is responsible for the other $200. When they don't pay, you're still getting what you originally wanted for the unit. Now, don't tell the tenant they don't have to pay. Every month ask them for the rent and listen to their excuses. (They'll be entertaining.) Never say "Don't worry about it." always act upset. Let the arrears grow. Sometimes, they'll get you a lump sum from whatever agency they get their housing from which makes a nice bonus, but even if they never pay, you're still getting what you would be from a "normal" tenant plus you're getting something WAY more important. Leverage. If the tenant becomes difficult, you have a legal standpoint to evict, they're behind on their rent. Now the best part is, if you simply tell said tenant that you're fed up with the non-payment and are intending to evict, they'll move. If section 8 finds out they haven't been paying, they'll lose their benefits, so the tenant will be anxious to move without Section 8 finding out why. They won't want to go to court, they'll just go. 

    Don't be afraid of the deleading process. It's not as scary as people make it out to be. I don't know what MD's lead laws look like, but here in MA, you can't rent a unit to a family with a child under 7 without a lead certificate on file for that property. You also can't discriminate against a family, so basically they have the laws written so you have to delead any rental with more than one bedroom. However, there are financing programs you can take advantage of in terms of no interest, no payment loans that get paid on the sale of the house as well as low interest loans that you can pay off anytime. There are also $1500 per unit tax breaks for deleading. So while they have basically made it mandatory, they've made it as painless as possible. In terms of cost, again I don't know MD, but here it can range from $2000 to $5000 per unit, counting the common/exterior as a unit. So I'd consider a building with 3 rental units to be 4 units in my "guesstimating". On a flip, that number can be substantial, but can benefit by gaining a higher price on the sale. On a buy and hold retirement plan, that $10-$20K can roll into the budget fairly easily. 

    Good luck with your retirement plan!

    Derreck

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  • Justin Summers
    OP
    Baltimore, MD · Member since 2015 · 7 posts · 7 votes
    10y

    @Gabriel G. Thanks for the reply Gabriel and also the concern, I do have other rentals and other investments I had just marked that $500k for retirement. I have been in real estate for 30 years investments and brokering. I am aware of the section 8 challenges and 2 section 8 properties in baltimore already. As far as paperwork as long as each of the LLC being owned by the 1 single main LLC are all considered disregarded entities by the IRS the paperwork /filling for taxes is really the same since it's all under the same EIN.

    I have about 2 millions in other assets (Other than the $500k in Cash)   which is what I'm trying to insulate from any judgment.   

    For those that don't know about the lead issue in Maryland the courts have really gotten out of hand with it.   Terrance Smith claimed he got lead paint from a row house he lived in 20 years ago and never completed high school and can't get a job now at 22 y/o.  He had higher than normal lead tests when he was a child ...  They never tested the house for lead and never proved that that lead poisoning came from that house but the jury still awarded him a 9.3 million judgment against the property owner.   Even though they never introduced anything showing that the lead poisoning came from the house or that the house even had lead based paint.. Only because it was built prior to 1978.   That and the Maryland Courts recently eliminated a cap to landlord liability in lead based paint cases.

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  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    10y

    Lets answer your questions. the LLC's protect nothing. LLC's can be pierced. Their is a law in Maryland stating those that are directly involved in running the LLC are equally liable for the actions of it and can be sued directly. AKA, the LLC's protections have been circumvented.

    how to protect yourself???

    1. Want to protect your assets? don't have any.

    2. keep houses lead free from jump street.

    the end.

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  • Andy Gross
    Baltimore, MD · Member since 2014 · 145 posts · 65 votes
    10y
    Originally posted by @Account Closed:

    Lets answer your questions. the LLC's protect nothing. LLC's can be pierced. Their is a law in Maryland stating those that are directly involved in running the LLC are equally liable for the actions of it and can be sued directly. AKA, the LLC's protections have been circumvented.

    how to protect yourself???

    1. Want to protect your assets? don't have any.

    2. keep houses lead free from jump street.

    the end.

    Gonna echo what Seth said, but add the caveat that LLCs protect nothing if they are improperly established and managed. If, for instance, you constantly drain the LLC of cash for other uses (eg, paying yourself, other LLCs, etc), it might get pierced. You also need to be concerned about operator liability, which, in short, means that if you own the LLC but manage the rental yourself, you can still personally be at risk.

    You should talk to an attorney about how to set up the structure. If done incorrectly, you've wasted time and money for a false sense of security. You might also want to talk to a financial advisor who understands RE.

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  • Michael Lee
    Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
    10y
    Originally posted by @Justin Summers:

    @Gabriel G. Thanks for the reply Gabriel and also the concern, I do have other rentals and other investments I had just marked that $500k for retirement. I have been in real estate for 30 years investments and brokering. I am aware of the section 8 challenges and 2 section 8 properties in baltimore already. As far as paperwork as long as each of the LLC being owned by the 1 single main LLC are all considered disregarded entities by the IRS the paperwork /filling for taxes is really the same since it's all under the same EIN.

    I have about 2 millions in other assets (Other than the $500k in Cash)   which is what I'm trying to insulate from any judgment.   

    For those that don't know about the lead issue in Maryland the courts have really gotten out of hand with it.   Terrance Smith claimed he got lead paint from a row house he lived in 20 years ago and never completed high school and can't get a job now at 22 y/o.  He had higher than normal lead tests when he was a child ...  They never tested the house for lead and never proved that that lead poisoning came from that house but the jury still awarded him a 9.3 million judgment against the property owner.   Even though they never introduced anything showing that the lead poisoning came from the house or that the house even had lead based paint.. Only because it was built prior to 1978.   That and the Maryland Courts recently eliminated a cap to landlord liability in lead based paint cases.

    Hello! It might have to close under your name but I would transfer into an LLC to reduce my liability. Just make sure you treat that company like a company and you should be fine. You might want to talk to a CPA first to get his opinion. Good luck!

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    Consider the cost of the LLCs. I would not do 1 LLC per property. You will have a $300 a year tax per LLC. plus accounting and administration costs. If you skip those administration costs you will have an LLC that is easily pierced.

    I think @Account Closed overstated the case, but LLCs don't provide near as much protection as people think. It is your last defense behind insurance and properly running your business.

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