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Okay, so I see this a lot in our industry. Investors will buy a property and put it into a LLC or buy it with the LLC outright. My question is whether or not to make a NEW LLC for every investment property you own?
I know of a investor that has a mix of SFH and commercial property and he's used a different LLC for all of his 45+ properties!!! This seems excessive to me but on the other hand I don't own 45+ properties. When you purchase your investment properties do you make a new LLC each time and if so... Why?
(I understand LLC creation is a deeply personal choice! That said, I am curious to hear all the reasons!)
LLCs are limited (as the name states). LLCs are only one part of the equation though. What entity is actually owning the LLCs and how that entity is formed will help concrete your asset protection plan.
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Real Estate Agent Florida (#SL3473500)
- Global Investors Podcast
- https://harborsidepartners.com/commercial-real-estate-podcast/
Wow, hearing a different LLC for 45+ different properties gives me a headache. Think of all the bookkeeping...I believe it is more of a personal preference. I have clients who are completing hundreds of transactions a year through just one or two entities. Less work to manage and cheaper. That said, a benefit to creating a new LLC for each deal is if you have partners you want to bring on, which some of my clients do, it formalizes the ownership and equity structure, not to mention separates liability and prevent "spillover".
Found an article on BP which might serve for interesting reading: https://www.biggerpockets.com/...
Not sure there is a "wrong" answer here. I think it more depends on your goals for the investments and how you want to structure your portfolio.
Happy Investing!
Quote from @Brandon Elliott:
Okay, so I see this a lot in our industry. Investors will buy a property and put it into a LLC or buy it with the LLC outright. My question is whether or not to make a NEW LLC for every investment property you own?
I know of a investor that has a mix of SFH and commercial property and he's used a different LLC for all of his 45+ properties!!! This seems excessive to me but on the other hand I don't own 45+ properties. When you purchase your investment properties do you make a new LLC each time and if so... Why?
(I understand LLC creation is a deeply personal choice! That said, I am curious to hear all the reasons!)
An LLC should protect something. If you have 100 properties with equity of $10,000 each you have $1,000,000 to protect right? Not really. Before you get sued, an attorney will run an asset search.
If all of your properties have only $10,000 equity, you are not "sueable". That's because you don't really have $10,000 in equity after cost of sale. With umbrella insurance, one LLC would do the job better than an LLC in that situation. That's because umbrella insurance doesn't require meetings and minutes to maintain, but an LLC does require regular interaction on your part.
If a proeprty has enough equity to attract a lawsuit ($100,000 in equity for instance) or is paid off, I'd put it into an LLC.
You kind of need to know why LLCs exist and what happens in a lawsuit to understand this.
Also, if you use LLCs and don't have an Operating Agreement you have a very weak LLC anyway. If you have an operating agreement but don't follow the agreement you have a very weak LLC. And in places like California I believe they charge $800 a year for each LLC.
So, it depends.
There is generally a lot of information out there about LLC's and whether or not they are needed. I think that they serve an important role in liability protection and can help to protect you. I understand that some investors think you should set one up for each property but it is typically easier to do a Series LLC you are looking to scale your business and acquire additional properties over time.
The benefit of the Series LLC is that, generally, you have all of the benefits and protection of multiple LLCs, with a lower maintenance cost that would be similar to having a single LLC. There is some variation among the different States that offer the Series LLC, but you will likely only being paying for a single registered agent and single annual State compliance (if applicable). Maintaining a Series LLC will be easier than having multiple LLCs, but slightly more complex than having a single LLC.
I'd recommend checking out the BP interview with Brian Bradley. He gives great advice on how to protect your assets. You would be surprised by what he says about LLC's
Quote from @Mike Hern:
Quote from @Brandon Elliott:
Okay, so I see this a lot in our industry. Investors will buy a property and put it into a LLC or buy it with the LLC outright. My question is whether or not to make a NEW LLC for every investment property you own?
I know of a investor that has a mix of SFH and commercial property and he's used a different LLC for all of his 45+ properties!!! This seems excessive to me but on the other hand I don't own 45+ properties. When you purchase your investment properties do you make a new LLC each time and if so... Why?
(I understand LLC creation is a deeply personal choice! That said, I am curious to hear all the reasons!)An LLC should protect something. If you have 100 properties with equity of $10,000 each you have $1,000,000 to protect right? Not really. Before you get sued, an attorney will run an asset search.
If all of your properties have only $10,000 equity, you are not "sueable". That's because you don't really have $10,000 in equity after cost of sale. With umbrella insurance, one LLC would do the job better than an LLC in that situation. That's because umbrella insurance doesn't require meetings and minutes to maintain, but an LLC does require regular interaction on your part.
If a proeprty has enough equity to attract a lawsuit ($100,000 in equity for instance) or is paid off, I'd put it into an LLC.You kind of need to know why LLCs exist and what happens in a lawsuit to understand this.
Also, if you use LLCs and don't have an Operating Agreement you have a very weak LLC anyway. If you have an operating agreement but don't follow the agreement you have a very weak LLC. And in places like California I believe they charge $800 a year for each LLC.
So, it depends.
Love all of this! Thank you for your thoughts here!
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#1 Tax, SDIRAs & Cost Segregation Contributor
- Tax Accountant / Enrolled Agent
- Houston, TX
Quote from @Brandon Elliott:
I know of a investor that has a mix of SFH and commercial property and he's used a different LLC for all of his 45+ properties!!!
And I know people who still wear masks while being alone in the car. Some of them wear rubber gloves, too.
There is no way that this investor properly maintains separation between 45 LLCs and keeps them in compliance. I bet it's just on paper.
A few things to consider in answering your initial question :
1. If you own two properties in two different states, then it would be prudent (for reasons we won't get into here) to form separate LLCs to hold each property. Advice I have received is that properties should be held in LLCs that are organised in the state where the property is located.
2. The number of properties you hold in one LLC depends on several factors : the value and equity in each property, and more importantly, the value of each property as a percentage of your overall net worth. If one property is a significant amount of your net worth then it makes sense to put it into it's own LLC. If a few properties added together are an insignificant amount of your overall net worth then by all means go ahead and put them together in one LLC to reduce paperwork and administration costs.
3. The risk profile of each property. If holding ownership in an LLC is to limit liability then it makes sense to me that say a 10-unit building with 10 tenants carries a similar risk profile as 10 SFH if you take the view that each tenant is a "risk". Also if a particular property has a high risk profile (i.e. potential for a lawsuit for whatever reason) then again it makes sense to put this into it's own LLC.
May I recommend some of the free video material put out by Clint Coons from Anderson Advisors. You can find his videos on Youtube. Having followed up with lots of research and consultation with lawyers, I can confidently say that his advice on the use and proper structuring of LLCs to optimise asset protection and anonymity has turned out to be pretty accurate.