Can you have too many LLCs?

Question

Hello and thank you for the comments and suggestions in advance. Given the ideal situation when owning a rental property (for this example residential 1-4 units) is to hold that property in it's own LLC for liability and tax purposes. Is that simply the process no matter how many properties an individual or fund implements? Meaning let's say a real estate fund owns 2,500 properties. Does every one of those 2,500 properties exist as it's own independent LLC? If so I'm assuming that there is a Holding or Operating Company that then owns all 2,500 of these LLCs?

Thanks in advance,

Pat

Thanks in advance,

Pat

Dustin Singer · Answer

I am by no means a lawyer or CPA so take my advice with a grain of salt....but we personally do flips in one LLC, and rentals in another LLC. I also have a 3rd LLC I do business in with a partner. Our flips because they are short term I don't worry about as much. For rentals, and this is a controversial topic, I actually create individual trusts to hold title to each and every rental. It doesn't cost any money to create a trust once you have the necessary paperwork, and my rental LLC is the beneficiary for all the trusts. The owner of the title company I use holds title to the properties as trustee providing an added layer of privacy. My tenants or anyone else for that matter, have no idea my LLC actually "owns the property". Technically it doesn't, the trust does. But it allows me to keep one bank account and file one tax return, while still spreading out over multiple entities.

Linda Weygant · Answer

Please note that there is no TAX reason to create an LLC for each property or, indeed, any LLC at all.  LLC creation for rental properties is purely a liability protection strategy.  I also recommend one when unmarried partners want to invest together, for ease of tax filing if no other reason.

Whether or not you NEED to put each property in a separate LLC is a great discussion to have with your attorney.  They will happily create all the entities you ask them to all day long (charging a nice fee for each one).  But unless you know and understand the reasoning behind it, and are sure the reasoning applies to you, opening up all these LLCs because "everybody does that" or "that's what my real estate bible told me to do" is a pretty silly way to run a business.Taxes and, I assume, legal issues, are never cookie cutter, one-size-fits-all issues.  Both situations are very individually tailored.  Just because some dude on the internet did it one way does not mean that you also should.

Patrick Hancock · Answer

@Basit Siddiqi

Thank you for the reply.  Yes I am familiar with all that you mentioned as I have several LLC's for my business and investment properties.  Your comments are exactly why I asked the question.  For those investors, funds etc who have hundreds of properties do they set up a LLC for each property? As like you said it gets very expensive and seems like an accounting nightmare.

Pat

Bob Floss II · Answer

@Patrick Hancock Unless the lender requires a single use entity for the loan or the asset is large (100+ units), I don't see the need to put into each individual LLC. I tell clients to separate out based on asset class and use. An LLC for your single family rentals and then cap the capacity, say 10 houses. An LLC for your 2 flats or duplexes, another for apartment buildings. ALWAYS keep your rental holdings in a separate LLC from your fix and flips. Same goes for property management and if you start a contracting company to pull your own permits. If you state allows series LLC's, it makes this much easier.

Mike Lee · Answer

LLC for flips

LLC for college rentals

LLC for long term buy and hold SFR

Sarah Brown · Answer

I group my rentals into LLC’s.  For example, each LLC would have 5-7 properties.  I wouldn’t want to manager or track hundreds if I could avoid it.

Basit Siddiqi · Answer

@Patrick HancockLLC's are not free and there are costs associated with LLC1) Formation costs - potential attorney fees and setup fees with the state2) Registered agent fees if the LLC is not in the state that you operate out of3) Annual fees to keep LLC active4) Bank fees

There are also additional administrative burdens with having so many LLC's. Each LLC's needs their own bank account. How many account numbers do you want to keep track of?

Michael Smythe · Answer

@Lane Kawaoka did you notice this post is 4 years old?

Lane Kawaoka · Answer

Using separate LLCs for each real estate investment offers significant benefits in liability protection and risk management, by isolating legal and financial issues to individual properties. This approach aids in easier property management and selling, but increases administrative costs and tax complexity. Alternatives like umbrella insurance or series LLCs may offer similar protections with less overhead. High-net-worth investors over 2-3M will probably opt for irrevocable trusts to get assets/liability out of their personal estate.

Lance Pederson · Answer

@Patrick Hancock As many people have already mentioned liability protection is the typical reason people put each asset into a separate LLC. We're a real estate fund administrator and most of our clients that have many SFR properties will hold them in just a handful of LLCs and the determination or whether a new one is needed is typically based on the lender providing them with a blanket loan/LOC. If they hold them free and clear they will just keep them in the main Fund LLC.

The other thing that some people are doing is forming a Series LLC. The allows you to have a Master LLC and then spin up separate LLCs underneath it without having to pay an additional franchise tax or file a separate tax return but gives you the flexibility to hold certain assets in those entities and even have the ownership structure be independent (e.g. Property #1 through #10 are owned by Investor #1, #2, #12, #18 and Property #11 through #18 are owned by Investor #3, #19 - #28).

You are right though, it is very difficult to be in the real estate game without spawning dozens and dozens of LLCs.

Can you have too many LLCs?

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