Separate LLC for each property?

13 Replies

I often hear investors say they have each of their rental properties under it's own LLC.

Does that mean the people who have hundreds of rental units also have hundreds of LLC's?

Or is there a better structure that is typically used once you scale to a certain point?

Do you suggest putting each individual rental in a separate LLC or having multiple properties under one?

Lastly what about flips?  Due to the capital gains I know it's more tax advantageous to elect the S-Corp tax structure.

I'm assuming you wouldn't want to have a flip under the same LLC as a rental since they should be taxed differently.

Should I set up one LLC (elected to be taxed as an S-Corp) strictly for my flips and separate LLC's for each rental?

I'd like to keep things streamlined and simple so I'm trying to figure out the best approach here.

I can only speak to properties that you hold as I have never done a flip. This is an age-old debate you'll see tons of threads on this website alone about one LLC per property vs not.

I'm in the camp of not doing a LLC for every single property. But I am for a LLC for each *state* you own property in. Or perhaps, have a value cap on each LLC. For example, once you have $500,000 or $1M (or whatever) amount in assets, then you form another LLC. 

A LLC per property will make for a ton of extra work and fees. You'll have to have bank accounts for each LLC, pay the fees for each LLC, tax returns for each one, and everything else that goes with running and organizing a LLC magnified.

Especially when just starting out, one will not likely have a lot of equity. So it's a bit of an overkill to separate each and every property.

That's my opinion.

I'll second a lot of what Nicole just stated. Really when it comes down to how many LLC's you want to have it depends on your risk tolerance. Where I live $500,000 could mean 5-10 houses. Single member LLC's are still taxed under your personal tax return as they are disregarded entities. This means that you won't have to file a separate return for those LLC's which should work in most situations for smaller rental properties.

Flips in an S-Corp make sense because of self employment taxes. There is always an argument to be made for what should or shouldn't constitute self employment income in an S-Corp. It's a grey area and there are many different thoughts behind what portion is subject to SE and what portion isn't depending on who you are talking to. There are guidelines but they allow for interpretation and using reasonable judgment.

Originally posted by @Nicole W.:

I can only speak to properties that you hold as I have never done a flip. This is an age-old debate you'll see tons of threads on this website alone about one LLC per property vs not.

I'm in the camp of not doing a LLC for every single property. But I am for a LLC for each *state* you own property in. Or perhaps, have a value cap on each LLC. For example, once you have $500,000 or $1M (or whatever) amount in assets, then you form another LLC. 

A LLC per property will make for a ton of extra work and fees. You'll have to have bank accounts for each LLC, pay the fees for each LLC, tax returns for each one, and everything else that goes with running and organizing a LLC magnified.

Especially when just starting out, one will not likely have a lot of equity. So it's a bit of an overkill to separate each and every property.

That's my opinion.

Thank you Nicole and I agree with you about all of the extra work, hassle and fees. I'm trying to avoid that if possible.

Originally I was just intending to have all of my rentals under one LLC but now I'm worried about protection that way.

You can also have an umbrella insurance policy to be there in case of litigious events that go above and beyond property and auto insurance caps.

Originally posted by @Chris Clark :

I'll second a lot of what Nicole just stated. Really when it comes down to how many LLC's you want to have it depends on your risk tolerance. Where I live $500,000 could mean 5-10 houses. Single member LLC's are still taxed under your personal tax return as they are disregarded entities. This means that you won't have to file a separate return for those LLC's which should work in most situations for smaller rental properties.

Flips in an S-Corp make sense because of self employment taxes. There is always an argument to be made for what should or shouldn't constitute self employment income in an S-Corp. It's a grey area and there are many different thoughts behind what portion is subject to SE and what portion isn't depending on who you are talking to. There are guidelines but they allow for interpretation and using reasonable judgment.

Thanks for your input Chris. I guess I can start with one LLC for my rentals and re-evaluate as I scale.

For the flips I would assume it's fine to have a single LLC since the properties aren't held very long anyways.

Originally posted by @Nicole W.:

You can also have an umbrella insurance policy to be there in case of litigious events that go above and beyond property and auto insurance caps.

This umbrella policy would be for me personally or for the actual LLC holding the assets?

@Brian Garrett ,

You use business entity structures for many reasons, including asset isolation. That is, if litigation is brought regarding one property, you want to limit the exposure faced by the rest of your portfolio. Some folks limit the total property value in each entity for this reason.

An LLC per state is another approach, and is useful in states which permit series LLCs. A "child" LLC is cheaper to establish than a new "parent".

Ask for legal and financial professionals for their input.

Starting out, you just want to protect your personal possessions of the inherent risks of the business. "Control everything, own nothing" is the target.

Originally posted by @David Dachtera :

@Brian Garrett,

You use business entity structures for many reasons, including asset isolation. That is, if litigation is brought regarding one property, you want to limit the exposure faced by the rest of your portfolio. Some folks limit the total property value in each entity for this reason.

An LLC per state is another approach, and is useful in states which permit series LLCs. A "child" LLC is cheaper to establish than a new "parent".

Ask for legal and financial professionals for their input.

Starting out, you just want to protect your personal possessions of the inherent risks of the business. "Control everything, own nothing" is the target.

Thank you David I appreciate your input.  I'm only planning to invest here in my state of Florida at least for now.

I follow @Nicole W. advice of picking a target amount to have per LLC, but with one clarification, I do it based on equity not total asset size. This might have been what she meant. But, as an example, having a million dollars in assets in an LLC but have $900k in debts, and the $100k in equity split between two people to me is very little risk.

I try to limit my actual exposure, one example was last year, I had 24 units in a single LLC, we had about $600k in debt, but it had a value of $1.1 million. That is essentially $500k someone could try to grab in a lawsuit. We were looking at setting up a new LLC for further properties, but decided to go with a sale.

I also set up different LLCs based on partnerships. I don't want to co-mingle funds from different JV or partnerships.

Also look at your costs for setting up and maintaining an LLC. In NC it was pretty cheap, $200 a year filing fee. But the higher the cost, the more net cash you want to have to have it make sense.

Originally posted by @Andrew Kerr :

I follow @Nicole W. advice of picking a target amount to have per LLC, but with one clarification, I do it based on equity not total asset size. This might have been what she meant. But, as an example, having a million dollars in assets in an LLC but have $900k in debts, and the $100k in equity split between two people to me is very little risk.

I try to limit my actual exposure, one example was last year, I had 24 units in a single LLC, we had about $600k in debt, but it had a value of $1.1 million. That is essentially $500k someone could try to grab in a lawsuit. We were looking at setting up a new LLC for further properties, but decided to go with a sale.

I also set up different LLCs based on partnerships. I don't want to co-mingle funds from different JV or partnerships.

Also look at your costs for setting up and maintaining an LLC. In NC it was pretty cheap, $200 a year filing fee. But the higher the cost, the more net cash you want to have to have it make sense.

Great insight Andrew thank you.

@Brian Garrett If you want to use cash as quickly as possible, you can build each property with its own LLC. There is no seasoning necessary if you build an LLC, put the money into a checking account tied to the LLC. Buy the property using the cash from the LLC. Then file the deed for the loan at the courthouse.

Use the money from the LLC to buy and fix up the property. Once the property is completed, the conventional lender comes to refinance the loan. The conventional lender runs title and sees there is a loan. The conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.

Then take the funds and put back into the HELOC and the LLC keeps the remainder as well as the property. Confirmed and verified by my CPA who has many clients doing this, here in NE Florida. The cost of the LLC is a few hundred bucks, the title work at the courthouse is a few hundred bucks, but having cash available quickly for another deal is invaluable.

Originally posted by @Jack Bobeck :

@Brian Garrett If you want to use cash as quickly as possible, you can build each property with its own LLC. There is no seasoning necessary if you build an LLC, put the money into a checking account tied to the LLC. Buy the property using the cash from the LLC. Then file the deed for the loan at the courthouse.

Use the money from the LLC to buy and fix up the property. Once the property is completed, the conventional lender comes to refinance the loan. The conventional lender runs title and sees there is a loan. The conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.

Then take the funds and put back into the HELOC and the LLC keeps the remainder as well as the property. Confirmed and verified by my CPA who has many clients doing this, here in NE Florida. The cost of the LLC is a few hundred bucks, the title work at the courthouse is a few hundred bucks, but having cash available quickly for another deal is invaluable.

I'm not sure I'm following you. My plan to have cash available quickly for another deal is the BRRRR strategy.

How does this differ from that? This sounds similar in terms of buying and then cash out refinancing 70-80% LTV.

@Brian Garrett Sorry, I should have mentioned that if you plan to use a Line of Credit, you can set up separate LLCs for each property and use the benefits of an LLC to go around the seasoning requirement. Something to think about with an LLC for each property. Sorry about the confusion.

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