Should I create an LLC for my properties?
Darsh PatelPro Member
Boston, MA · Member since 2016 · 60 posts · 15 votesHi everyone,
I own a few small multi-family properties (8 units total) and I have heard that it is good to transfer rental properties over to an LLC ownership. I wanted to ask what would be the benefit of doing this? Also, how would I go about creating an LLC/transferring the properties over and how much would it cost?
I'm trying to figure out whether the cost of the LLC is worth doing it now or if I should wait until my portfolio gets bigger. Any help is appreciated! Thanks
Hey Darsh: Great question.
From an investors perspective based on growth not taxation or asset protection
If you want the best taxation advise talk to a good accountant or CPA.
Asset protection talk to a good attorney.
Where do put properties in your personal name, LLC or S corp is going to depend on your goals, asset protection, long terms planning.
If you are under 8 properties you can hold them in your personal name and insure them property with a additional umbrella coverage.
If you want to grow quickly then here is a plan we follow: Assuming you intent to scale to 25 properties.
For Rentals.
Each LLC or a Each series in the LLC holds 5-6 properties for asset segregation.
1-5 properties Personal Name - Then transfer to LLC or S Corp (S corp has some other advantage not getting it to that for this discussion)
6-25 Properties Buy directly in LLC (limiting 5 per llc)
Some people in the tread had suggested that 1 property per LLC. I don't think it makes sense because of the costs. I think a few properties per LLC makes more sense and will depends on your goal.
As far as insurance. We have 1 Million per property and Personal Umbrella of 4 time your net worth. So assuming you Total assets owned - Liabilities = 1 Million then we carry a 4 Million personal Umbrealla in addition to the insurance on each property.
See Examples Below on the setup .
Marcus has a good point, if you are concerned about the liability you can get umbrella insurance policy which will give you coverage of $1MM and most likely will cost you less than the cost of setting up and maintaining the LLC. Also make sure that you have at least $300,000 worth of liability insurance coverage on your landlord policies.
@Dmitriy Fomichenko is there a specific reason you say to have over $300,000 in liability insurance coverage?
And that is a really great tip that I did not know, thanks @Marcus Johnson
@Darsh Patel I'd like to expand your question just it a bit if I can: I've also heard of investors creating a separate LLC for each property. That just seems like a ridiculous amount of paperwork unless you're a bureaucrat at heart... Is there a legitimate reason to do that?
@Marcus Maloney is that really standard to have you transfer property out of an LLC just for a refi...?
My bad! I meant that to type @Marcus Johnson but clicked @Marcus Maloney too quickly! Sorry guys!
The you want to have at least $300K in liability coverage for the same reason you are considering stetting up an LLC - to protect yourself from the liability of being landlord. $300K is adequate amount of coverage and will cost only just a bit more that let's say $100K.
Thanks for the info @Marcus Johnson. So do you think this transfer requirement is due more to Fannie Mae or is standard with all lenders?
Hey Darsh: Great question.
From an investors perspective based on growth not taxation or asset protection
If you want the best taxation advise talk to a good accountant or CPA.
Asset protection talk to a good attorney.
Where do put properties in your personal name, LLC or S corp is going to depend on your goals, asset protection, long terms planning.
If you are under 8 properties you can hold them in your personal name and insure them property with a additional umbrella coverage.
If you want to grow quickly then here is a plan we follow: Assuming you intent to scale to 25 properties.
For Rentals.
Each LLC or a Each series in the LLC holds 5-6 properties for asset segregation.
1-5 properties Personal Name - Then transfer to LLC or S Corp (S corp has some other advantage not getting it to that for this discussion)
6-25 Properties Buy directly in LLC (limiting 5 per llc)
Some people in the tread had suggested that 1 property per LLC. I don't think it makes sense because of the costs. I think a few properties per LLC makes more sense and will depends on your goal.
As far as insurance. We have 1 Million per property and Personal Umbrella of 4 time your net worth. So assuming you Total assets owned - Liabilities = 1 Million then we carry a 4 Million personal Umbrealla in addition to the insurance on each property.
See Examples Below on the setup .
Wow @Andrew Holmes, what a great breakdown! That makes a lot more sense and really helps to put things into context. And I'm a real visual learner so the image was fantastic! I've been looking for a good CPA that is familiar with real estate investing and this really helps drive home the point that I need to find a competent one. Very much appreciated.
Thanks for the breakdown @Andrew Holmes! That makes sense. The visual really helps put things togther. Finding a good CPA and real estate attorney is on my goal list for the year too @Mike Snyder
Hey Darsh: Great question.
From an investors perspective based on growth not taxation or asset protection
If you want the best taxation advise talk to a good accountant or CPA.
Asset protection talk to a good attorney.
Where do put properties in your personal name, LLC or S corp is going to depend on your goals, asset protection, long terms planning.
If you are under 8 properties you can hold them in your personal name and insure them property with a additional umbrella coverage.
If you want to grow quickly then here is a plan we follow: Assuming you intent to scale to 25 properties.
For Rentals.
Each LLC or a Each series in the LLC holds 5-6 properties for asset segregation.
1-5 properties Personal Name - Then transfer to LLC or S Corp (S corp has some other advantage not getting it to that for this discussion)
6-25 Properties Buy directly in LLC (limiting 5 per llc)
Some people in the tread had suggested that 1 property per LLC. I don't think it makes sense because of the costs. I think a few properties per LLC makes more sense and will depends on your goal.
As far as insurance. We have 1 Million per property and Personal Umbrella of 4 time your net worth. So assuming you Total assets owned - Liabilities = 1 Million then we carry a 4 Million personal Umbrealla in addition to the insurance on each property.
See Examples Below on the setup .
Before you setup an LLC make sure you seek out some legal advice on the protection and liabilities that your specific state or the state of the purchase will be held. Some states don't offer LLCs in the way of much protection and have higher tax rates. It can be a great benefit but you should have more information before you dive into it completely. A few questions to ask yourself: What kidn of investor are you? Do you plan to have enormous growth in the next year? What benefit would you have from setting up a LLC beside for liability purposes? Do you have a team member, Lawyer & CPA who could assist you in the setup and ask questions? What are the other kind of protections and reduction of liability that can be pursued to decrease your overall personal responsibility and assets? What type of Landlord are you or your Property Manager? What states offer the greatest amount of tax and liability protections for LLCs.
Also, Have liability insurance and a umbrella policy is a great thing; GREAT IDEA! Cost is not bad.
The other decision you would have to think about is how you are going to structure the LLC and how the flow through processes will be conducted.
I would agree that have one property for Each LLC would a hassle and think you have a good idea in limiting the number per LLC. Why you do have a limit per LLC? Why do you have 4 time the amount in personal liability vs property? Why have it per property and what kind of account would be need to accomplish this strategy?
Marcus has a good point, if you are concerned about the liability you can get umbrella insurance policy which will give you coverage of $1MM and most likely will cost you less than the cost of setting up and maintaining the LLC. Also make sure that you have at least $300,000 worth of liability insurance coverage on your landlord policies.
Great comment and I would agree ... I would also add that you can get umbrella insurance for more coverage ... $2M, $3M, etc. and it is still relatively inexpensive. The $300,000 of liability coverage required will also most likely already be mostly/completely covered by your existing property insurance, even if the property values are not that much because insurance will go by replacement value. We found that our existing insurance did not quite cover this, so we had to increase the coverage a little on the individual policies, but the costs to do so were not much, and the total all in was still MUCH MUCH less than would've been with standing up and maintaining a LLC, not to mention lack of hassles and no issues with financing. Now, having said that, there is a point that if you grow beyond (say $10M+) then it would make more sense to go the LLC route, and folks do this all the time for large commercial properties for example, but it doesn't sound like you are there yet. If/when you do get to that point, you could then convert over if you choose to.
I have each property in its own LLC. Almost zero time involved other than setting up the LLC on the SoS website and getting an EIN. maybe 30 min. Then filing with the state each year (5 min per LLC. Also online).
I have 30 something LLCs but still manage out of one bank account (under the name of my management entity). All bills and income come to/from the management entity.
It ads no complexity. New LLC in Texas is $300. So that's the only cost. If you already have property and need to transfer them a title co will do it for $150/each or so.
I'm doing this on my phone so the full "why" is too long to type but for one, when I refinanced a bunch of properties with Freddie they needed them in their own LLCs.
You pay $800/LLC/yr CA state franchise tax?!? Note, it does not matter where the LLCs are or where the properties are located ... if you live in CA, the CA wants their fees and they will find you and you will owe. Something for you to consider if you have not already.
wow. Stephen E. Great info. Im working on wholesaling and i am thinkingabout a LlC becauze of taxes and protection of interest. So i guess i need to talk to a CPA for answers.. thank you.
I have each property in its own LLC. Almost zero time involved other than setting up the LLC on the SoS website and getting an EIN. maybe 30 min. Then filing with the state each year (5 min per LLC. Also online).
I have 30 something LLCs but still manage out of one bank account (under the name of my management entity). All bills and income come to/from the management entity.
It ads no complexity. New LLC in Texas is $300. So that's the only cost. If you already have property and need to transfer them a title co will do it for $150/each or so.
I'm doing this on my phone so the full "why" is too long to type but for one, when I refinanced a bunch of properties with Freddie they needed them in their own LLCs.
You pay $800/LLC/yr CA state franchise tax?!? Note, it does not matter where the LLCs are or where the properties are located ... if you live in CA, the CA wants their fees and they will find you and you will owe. Something for you to consider if you have not already.
My business is in Texas. As are my properties. $0/year/LLC in Texas (welcome to a business friendly state).
I have no desire to open a business in this messed up state (CA). The federal government already tries to run our lives. Running a company in CA would mean Sacramento would pile on. Pass.
I just happen to love the ocean and the weather.
I have each property in its own LLC. Almost zero time involved other than setting up the LLC on the SoS website and getting an EIN. maybe 30 min. Then filing with the state each year (5 min per LLC. Also online).
I have 30 something LLCs but still manage out of one bank account (under the name of my management entity). All bills and income come to/from the management entity.
It ads no complexity. New LLC in Texas is $300. So that's the only cost. If you already have property and need to transfer them a title co will do it for $150/each or so.
I'm doing this on my phone so the full "why" is too long to type but for one, when I refinanced a bunch of properties with Freddie they needed them in their own LLCs.
You pay $800/LLC/yr CA state franchise tax?!? Note, it does not matter where the LLCs are or where the properties are located ... if you live in CA, the CA wants their fees and they will find you and you will owe. Something for you to consider if you have not already.
My business is in Texas. As are my properties. $0/year/LLC in Texas (welcome to a business friendly state).
I have no desire to open a business in this messed up state (CA). The federal government already tries to run our lives. Running a company in CA would mean Sacramento would pile on. Pass.
I just happen to love the ocean and the weather.
It does NOT matter that the business is in Texas, it does NOT matter that the properties are in Texas, if YOU live in CA, you earn income and pay taxes here, then you owe the $800/LLC/yr CA state franchise tax. If you have not been paying it, they will find you and they will make you pay it. You need to consult a CPA immediately on this ... I believe that they will confirm that I am correct and you may owe years of back taxes.
I also live in the peoples republic of California and I have been told that you dont owe the $800 extortion (min llc tax) if you dont 'do business' in CA. if you have a property in texas and an llc in texas and a property mgmt company in texas and you take a trip or 2 per year there.. it seems you can make the argument that you arent DOING any business in CA. thoughts?
The reason for the limit per LLC is so we put a approx $ 750K to 1 Million in company.
So the though process to limit your liability.
So lets say you have 50 propeties.
Then you and put 5 properties in each LLC and have 10 LLC's
Or 10 per llc. for asset protection and segregation.
So let just say I of your LLC's get sued. Then in case of liability only that company has to deal with it. To own 50 properties and 50 LLC's would not make sense.
So to maintain an LLC and taxes it costs minimum of $ 1000 per year. So if you 1 proeprty per LLC and your cash flow from the property is a total of $ 5000 that year then you have lost 1/5 or more of your net earning just in maintenance of the LLC.
I think for each investor it's what they feel comfortable with based on the advice of their attorney and accountant and their judgement and growth plan.
So the reason 4 Times net worth in umbrella is because as your equity and net worth grows you should keep up with the umbrella coverage growth. Another thing to keep in mind is not just net worth but also cash flow earning each month. That should be taken into account as well.
I went and spoke a few different trial lawyers that have sued landlords and property owners directly and won massive cases and this is what they suggest. Unfortunately most of the advice given by most attorneys should be taken with a grain of salt because yes it is better than coming up with stuff on your own but most of these attorney are not in court. Unless you have ever been sued you don't realize that most attorney's do not go and argue cases. Once you are in court a lot of games that people play with hiding assets and silly things these seminar speakers want people to do does not work. A lot of it is BS. it sounds great in a seminar reality has nothing to do with it.
I also live in the peoples republic of California and I have been told that you dont owe the $800 extortion (min llc tax) if you dont 'do business' in CA. if you have a property in texas and an llc in texas and a property mgmt company in texas and you take a trip or 2 per year there.. it seems you can make the argument that you arent DOING any business in CA. thoughts?
Yes, I for sure do no business in California and have no income made or from California. No business, no properties, no nothing. I have a home in California but I have other out of state homes as well.
Great state to live in -- terrible state to do business in. Cudos to people that can have any business in California. It's not for me.
...I'm trying to figure out whether the cost of the LLC is worth doing it now or if I should wait until my portfolio gets bigger....
Limiting risk to source of risk:
First, the theoretical basis for owning property under an LLC vs in your personal name is the same reason it is advisable (based on level of risk you are exposed to) to conduct business as an LLC vs say as a sole proprietor. Should a liability arise, the court can order the liquidation of your personal assets to cure what was business related debt and liabilities. People are generally familiar with this concept.
The idea behind creating multiple LLCs is also to manage risk or should we say, legally 'segregate' risk. If say you own two LLCs -- LLC A & B and both are used to hold two different apartment complex. If LLC A has $2,000,000 in assets and LLC B only has $1,000,000 but LLC B gets in trouble -- lawsuit from a tenant alleging negligence on your part led to her falling down an improperly maintained stairs with a baby, and this led to her and the baby all sorts of injuries, cracked skull etc..
If the court enters a judgement of say $1,500,000 against LLC B, the most you can loose in whole is the $1,000,000 of assets in LLC B. Unless you did something structurally or fundamentally wrong, LLC A and its assets remain intact and unpiercable.
If however you only had the one LLC (or no LLC at all) but still owned both apartments with combined assets of the $3,000,000; got the same lawsuit but now your exposure is the full $1,500,000. Obviously you may have insurance that may further limit your exposure if they do not find some technicality to have you stuck with the bill alone but the idea behind creating multiple LLCs is to segregate, compartmentalize or limit your risk exposure only to the properties (or entities) that generate the risk.
Transfers may trigger entire loan balance to become due:
Now if you bought the property already and hold title personally, and then you attempt to transfer personally held title to an LLC, the bank may get nervous and demand balance in full on the loan (call the loan). You want to look into the terms of the mortgage to see if it is transferable or under what conditions you could transfer it if at all.
Cost of LLC formation and yearly LLC maintenance fees vary by state:
There often can be a material difference between setting up an LLC in Massachusetts ($500) or California ($800) and say Kentucky ($40) in terms of both initial setup fees and recurring yearly maintenance fees.
I also live in the peoples republic of California and I have been told that you dont owe the $800 extortion (min llc tax) if you dont 'do business' in CA. if you have a property in texas and an llc in texas and a property mgmt company in texas and you take a trip or 2 per year there.. it seems you can make the argument that you arent DOING any business in CA. thoughts?
You owe the $800/yr if you live in CA and you open an LLC ... doesn't matter that the properties aren't in CA, doesn't matter that the LLC is not in CA. Consult a CPA and I believe they will tell you the same. Be careful about who you take advice from on this kind of stuff ... if you ask enough people you will undoubtedly find one that will tell you what you want to hear, that does not mean that advice is correct ...
The way around it that I am aware of, and what I do and recommend, is to buy the properties under your own name as a sole proprietership (the default legal entitity when bought under your name). Then you do not owe $800/yr CA franchise tax. Then buy an umbrella policy as previously advised.