Is there any need to set up an LLC or any separate entity for passive multi family investments? We set up an LLC last year for a couple of rental homes that we have but are now branching out into some passive syndications in the next couple of months. Would there be any purpose to set up an additional LLC for these investments? Should we do it through the LLC that we already have? Or just leave it in our own names? Pros/cons?
The primary purpose of an LLC is for asset protection--ensuring if something goes wrong, someone cannot come after all your other assets. As a passive investor or limited partner in a syndicated multi-family investment, your assets are not at risk--the only money that is at risk is the amount of money you have invested in that particular deal. This should be clearly identified in the operating agreement for the syndication. Therefore, I do not believe there is any value to creating an alternative LLC simply for passive real estate investing--you are fine just going through your own name or through the LLC you already have. Creating an alternative LLC just for passive just adds expense as you have to file taxes for that entity, etc.
@Melvin Maxwell awesome. That makes a ton of sense. Thank you!
@Adrienne Binder I mostly agree with Melvin. The pass through tax benefits of a syndication, if invested via an LLC, would ultimately pass to you, the owner, anyway. So no benefit there. Since your risk is already limited in a syndication deal to your invested capital, investing in an LLC is mostly just a preference/piece of mind. So no tangible benefit there.
The one exception I would outline is if you want to pool money with someone else and invest together. I've had folks (family members, business partners, etc.) do this as a way to either (1) come up with the minimum investment if neither party has the full amount alone, or (2) diversify; meaning, if minimums are say $50K and you only have $50K, you can invest in two deals instead of one by combining money with someone else looking to invest $50K.
Disclaimer: I'm not CPA or attorney, just speaking from my own experience!
If by we, you mean a partnership, then investing in the LLC may make sense, especially if that allows you to qualify as an accredited investor. If it is just you individually or you and your spouse, then it doesn't make much of a difference. It is pass through income anyway.
This is coming from a lead Sponsor, not a CPA, so reach out the your CPA and attorney to confirm.