Should You Form a LLC for Each Individual Rental Property?

86 Replies

My wife and I just bought our second property and were considering forming an LLC for them. I just read something that said some investors opt to form an LLC for each individual property as a shield so that any lawsuit could only be filed against THAT particular property and not risk having all other owned properties included in the suit. Seems a little overkill to me, but it does make sense.

Thoughts on this?

We've owned our first rental for almost 4 years now so it's definitely time to form something!

Generally, it is overkill. When discussing the same with clients, I look at what the overall market value is of all rentals (or potential rentals) in a given LLC, the total debt (if any) of the LLC, and what the individual owner(s) net worth is.

@Chase Cline Good question. As usual, it depends. The majority of the time you will see an LLC formed for each property.

Also, you will need an EIN and bank account associated with each LLC. Keep in mind LLC fees ($200 in NC).

Separate LLCs with their own bank accounts tend to keep things cleaner come tax time. 

Lastly, grouping properties in 1 LLC can potentially have unfavorable tax consequences when not selling "substantially all" of the activity (ie selling only 1 SFH of 10).

As always, consult with your lawyer and CPA regarding your specific situation. 

A lawyer once explained it too me thusly. The LLC is a legal entity separate from your personal self. It keeps tenants, gold-diggers, etc. from suing you, they can only sue the LLC (this is a bit of an oversimplification). So keep putting properties into the LLC until the amount that you could potentially lose in a law suit begins to worry you. (The lawyer called this amount my "personal pucker factor" ) Then form another LLC, rinse, repeat.

I see no point in that but I would keep all my properties under 1 llc either. I wouldn't even form an LLC until you have a substantial amount to protect.

I have an LLC for each of my properties. I agree with @Lance Lvovsky and @George Pauley. Risk vs. Reward.

It's an insurance policy.  

I walked into my lawyer's office expecting to get 1-2 LLCs.

He did a search on my name and within 30 seconds knew about all the properties I owned in that area.  He said, if someone were to get injured on one of my properties (hypothetically) and walked into his office wanting to sue me, he would most likely take that case based on the amount of houses I had and the assets to go after.  It convinced me that I wanted to do what I could to mitigate that risk.

To each their own - there's no right answer.  I'm just sharing my story with you. 

@Chase Cline

Two lawyers will never agree on the best strategy for asset protection. I hosted attorney panels in local REI clubs, and there never was any consensus.

In our great state of Texas, your best option could be a Series LLC: one LLC that has individual compartments for each property. However, as in all other cases, attorneys will not agree whether it works as intended.

@George Pauley lol yes the pucker factor is always a great metric! I think I will take this method for now and once I get a team maybe I will have them do all the bank accounts, forming, etc.

@Derek Janssen  didn't think about it that way, great point. Definitely something to think about.

@Michael Plaks I have never heard of a Series LLC before, I will definitely have to do some research on that. Thanks for the response!

@Tom R. I see your point, but it would suck to really start making some headway and then one "accident" cause you to lose everything simply because you didn't take the time and spend $200 to incorporate

@Chase Cline I agree the setup of multiple accounts can be cumbersome initially, but using accounting software (QuickBooks, Xero) you can have multiple bank accounts linked to one file. 

From there it's point and click categorizing and tagging of income/expenses to their respective properties. 

@Michael Plaks That LLC panel would of been enjoyable and interesting.

@Chase Cline Actually, it makes it so much easier come tax time in regards to accounting. I currently have a separate LLC (with its own bank account) for each property. Previously, I let one LLC own 2 properties and share the bank account but it was a pain keeping track of which expense was for which property. Never again.

Just so you know....a series LLC costs about 10,000 to create and it is a product that is not tested or even recognized/understood in most states. Make sure you consult with a legit and knowledgeable attorney...

I've always gone the route of avoiding the LLC. In my research when I initially wondered the same questions about whether I should my properties in one or not (or in several), I came up with the conclusion that it's not the 100% asset protection most people think it is in a lot of cases. Here's details on why I didn't do the LLC and instead did the umbrella insurance policy-

https://www.biggerpockets.com/renewsblog/2013/08/1...

If you do go the LLC route, I think you need to consult with your accountant to decide whether you need multiples or how you want to structure it. I think all scenarios can be different and also different depending on what state you live in, so I don't know how people on here could (or should) generically advise on that one.

Originally posted by @Sean McElligott :

Just so you know....a series LLC costs about 10,000 to create and it is a product that is not tested or even recognized/understood in most states. Make sure you consult with a legit and knowledgeable attorney...

 Some lawyers may charge that much, but there is nothing that time or skill intensive to create. 

In all of these hypothetical discussions, we never know how much equity is in property, what the type of SFR is etc. These are key facts that help me advise a particular client if they should form an LLC.

Originally posted by @Chase Cline :

@George Pauley lol yes the pucker factor is always a great metric! I think I will take this method for now and once I get a team maybe I will have them do all the bank accounts, forming, etc.

@Derek Janssen  didn't think about it that way, great point. Definitely something to think about.

@Michael Plaks I have never heard of a Series LLC before, I will definitely have to do some research on that. Thanks for the response!

@Tom R. I see your point, but it would suck to really start making some headway and then one "accident" cause you to lose everything simply because you didn't take the time and spend $200 to incorporate

I get what your saying Chase but the odds of someone suing you are actually very low if you are running an honest business. The best thing you can do to protect yourself is to get a rock solid lease and good insurance and make sure you keep your property maintained and provide all the safety equipment required by law.

I only own one property atm and I don't even own the house I live in so I don't think the risk is worth the cost but once I get a few more properties I will definately get an LLC for my properties.

Originally posted by @Derek Janssen :

I have an LLC for each of my properties. I agree with @Lance Lvovsky and @George Pauley. Risk vs. Reward.

It's an insurance policy.  

I walked into my lawyer's office expecting to get 1-2 LLCs.

He did a search on my name and within 30 seconds knew about all the properties I owned in that area.  He said, if someone were to get injured on one of my properties (hypothetically) and walked into his office wanting to sue me, he would most likely take that case based on the amount of houses I had and the assets to go after.  It convinced me that I wanted to do what I could to mitigate that risk.

To each their own - there's no right answer.  I'm just sharing my story with you. 

Keep in mind a good lawyer will find out each and every LLC you own to.. this is really were good insurance comes to play. you need good insurance if you have substantial assets to protect.. LLC is fine but I can guarantee they will sue you personally not matter what.. And you will spend thousands trying to argue that you should not get sued personally and especially if its single member or just family. that's reality.. For most that have vanilla LLC's were they bought a rental put 20% down and own a few of them to me its over kill.

when you move into larger multi million dollar deals then yes I see most folks buying those in separate LLCs.. but have partners who have only one and own HUGE holdings in the one company  shopping centers , MF  industrial tilt ups.. but with monster insurance. 

Originally posted by @Deryk Kennedy :
@Derek Janssen

Can you explain how that works for you (what it looks like from your end) and what information led to you choosing or developing that way?

 I originally started with a $1M umbrella policy bc hey, I live in CA and that seems to be the starting price.

I think it was <$300/yr. I had always heard an umbrella is better than an LLC - they will always go after the money and keep digging until they find it. Umbrella is number one.

As I acquired more rentals, I thought I should add in another level of protection - an LLC. I initially thought I could get away with one LLC, but my lawyer convinced me that a separate LLC per property would be best. In AZ, it's a one time fee to set up an LLC and you're done. It was a decent chunk of money, but if it protects those assets better, I think it's good. If a good lawyer has a client that hurts themselves on your property and sees you have significant assets, I feel you're easy picking without some protection.

And as @Jay Hinrichs points out, this is not a bulletproof protection strategy.  A good lawyer can dig and find out all your LLCs.  With the umbrella policy, if you get sued, the insurance company provides the lawyers for the amount up to that policy (I believe).

It does help to invest in a state that is landlord friendly tho...

Random disclaimer - I'm not a lawyer, nor should this be construed as legal advice.  I'm just sharing my story, my experience and reasoning.  I recommend you consult a lawyer for professional advice.  

@Chase Cline Another idea that I came across in the book "Real Estate Loopholes" by Kennedy and Sutton, says "if you hold real estate in a state with weak or non-existent charging order remedies, you may want to consider using two LLC's for protection." The example has a Nevada LLC hold membership interest in a New York LLC, which holds the real estate. The reasoning is if the person is sued for something unrelated to the property, there is a much stronger argument that Nevada's superior charging orders must apply. Then if a creditor wants to reach the person's membership interest s in the Nevada LLC they will have to use the Nevada courts and fight to obtain a less than desirable (from a creditor's point of view) charging order. Disclaimer, not an Attorney