Protecting your rentals
I know a lot of people use LLCs to protect their rentals. I was wondering if people create a LLC for each individual rental property to maximize protection or do they put all of the properties under one LLC?
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#2 Investor Mindset Contributor
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#2 Investor Mindset Contributor
- Investor
- Milwaukee - Mequon, WI
But why? An LLC does nothing to protect your rental, all it does is contain the damage to inside the LLC and only if you do everything correctly, for example you can demonstrate that it is in fact it's own business with it's own bank account etc..
Asset protection becomes an issue when your net worth is so high that you become a target. You can debate how high that is, but it's more than a few rentals. If you buy a 150 unit apartment complex, it will be in it's own LLC. A duplex is a different story.
In my 15 years of being a very active investor I have not seen anyone being in a situation where they benefited from an LLC structure on a residential rental. I do have LLCs, because my lenders make me have them for commercial loans. Make sure you have a good lease, don't give anyone a reason to sue you AND win, carry an umbrella insurance on top of your regular insurance. That's a lot more important than an LLC.
Just my personal opinion, not legal advice.
#2 Investor Mindset Contributor
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- Milwaukee - Mequon, WI
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#2 Investor Mindset Contributor
- Investor
- Milwaukee - Mequon, WI
But why? An LLC does nothing to protect your rental, all it does is contain the damage to inside the LLC and only if you do everything correctly, for example you can demonstrate that it is in fact it's own business with it's own bank account etc..
Asset protection becomes an issue when your net worth is so high that you become a target. You can debate how high that is, but it's more than a few rentals. If you buy a 150 unit apartment complex, it will be in it's own LLC. A duplex is a different story.
In my 15 years of being a very active investor I have not seen anyone being in a situation where they benefited from an LLC structure on a residential rental. I do have LLCs, because my lenders make me have them for commercial loans. Make sure you have a good lease, don't give anyone a reason to sue you AND win, carry an umbrella insurance on top of your regular insurance. That's a lot more important than an LLC.
Just my personal opinion, not legal advice.
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@Michael Marcotte
What kind of properties are you buying? I would recommend talking to your accountant/ attorney about structuring this in the most beneficial way for you to come out on top in terms of taxes and protection. This is not tax advice or legal advice. I have seen a lot of people have an LLC for each partnership, which is a good idea, but once you start having an LLC for each property, it can become very messy for accounting and costly if you own 20 duplexes with 20 LLCs. It might be more applicable if you own 20 large apartment complexes and each has an LLC, but they are all owned by the same holding company.
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#3 Insurance Contributor
- Insurance Agent
- DFW, TX
@Marcus Auerbach Knows what he is talking about. The real protection comes from insuring your assets at the level necessary. For example, I have seen many people with $3 million in assets and no supplemental umbrella coverage. At that level, you should carry a $5 Million umbrella.
Thanks guys. I'm brand new to investing so this definitely helps!
Scan through the threads.. This comes up daily... Most of don't use LLC's for investing with residential properties for a multitude of reasons --- its all over all the other posts (yeah, I'm tired of retyping and or linking posts in). If you want the LLC, that's up to you. As one other accounting/bp person posts, you can 100 units personally owned, 100 units and 100 LLC's, or 100 units and 1 LLC (something like that). Its all up to you...
I know some investors try to have about a $1mil of equity per LLC. I scratch my head a bit since when you first purchase, your equity is pretty low since you usually buy with a loan with 20% (since its a legal entity you can't use conforming residential loans). Remember, the LLC only provides "limited liability" protection only if you set it up and operate it properly. Also, depending on your state laws, if you personally screw in your life (e.g. somebody trips and falls on your personal residence), the LLC is your asset so they could come sue you for your LLC's assets --- I believe that's call outside protection (or its inside, whatever). I hear its not too common to have that legally...
Lets face it.. Most tenants won't have the money or time to sue you... So, don't be a slumlord and they won't have a reason to sue you.
@Michael Marcotte It is all about your end goals. I work closely with an asset protection law firm that specializes in land trust, asset protection and estate planning. Royal Legal Solutions Using their setup in conjunction with a good independent insurance agent offers the best protection. But like others have said it is completely up to you what your risk management strategy and risk tolerance is.