Stumbled into a mess ....

9 Replies

Here is the story, ..... We currently have 5 rental properties with a contract on a vacation rental at the beach.  We started out getting rental properties when our oldest son was about to attend college.  With eleven children (7 biological and an adopted sibling set of 4), we knew that we could not pay for college.  Well, we bought our first condo in TN where we assumed our son would attend college.  We actually live in AL, but both attended a state school in TN.  He received a full ride somewhere else ... TN gave him very little scholarship money.  So we rented it out to our nephew.  It went so well, we purchased a second condo there.  Both have been rented non-stop for years and are doing well.  We purchased another condo in AL where my second child was going to school.  We have had a couple of hiccups there but it also has done very well.  Second son ended up in MS with a AFROTC scholarship. Yep, we built our house of card up another level.  Now I have three in MS .... three kids and three houses.  Non are in LLCs, all are easily rented.  Now we are purchasing a 3/2 condo in PCB, FL.  It will be managed by a professional.  

So here is my question .... I assume it makes more sense to put the condo on the beach in an LLC. Does it make sense to put all of our others into an LLC of their own?

Thanks

Yes, they should all be in an LLC. I wouldn't do it any other way nor would my clients. Here's why:

"An LLC for real estate is an established legal entity that allows investors to purchase and own real estate in such a way that protects them from personal liability. This means that the investor buys and sells real estate, as well as conducts other business, in the name of the LLC, rather than as an individual. In case any outside entities or individuals make a claim, the individuals behind the entity are able to avoid personal liability. In addition, property owners are allowed to establish individual LLCs for each separate property, meaning that they can avoid cross-liability between properties." (End; Fortunebuilders)

An example. Let's say someone is injured on the property and they decide to sue for the moon. The LLC removes all of your personal property and assets from the mix. If a judgement was awarded, only the assets held in the LLC could be attached.

There is no reason to commingle your personal and business assets. The potential liability is too great. As for the tax implication, it's a non-event:

"When the IRS "disregards" an LLC, it means that, although the LLC and it's owner are separate entities (for liability purposes), the IRS "disregards" them and just taxes the LLC however its owner is taxed. The IRS treats the owner and the LLC as one and the same." (End, LLCUniversity)

Some of my clients place each investment property into a separate LLC and others "group" them based on some criteria. 

And, congratulations on that over-achiever family of yours.  Very large - definitely impressive!

Originally posted by @Patricia Steiner :

Yes, they should all be in an LLC. I wouldn't do it any other way nor would my clients. Here's why:

"An LLC for real estate is an established legal entity that allows investors to purchase and own real estate in such a way that protects them from personal liability. This means that the investor buys and sells real estate, as well as conducts other business, in the name of the LLC, rather than as an individual. In case any outside entities or individuals make a claim, the individuals behind the entity are able to avoid personal liability. In addition, property owners are allowed to establish individual LLCs for each separate property, meaning that they can avoid cross-liability between properties." (End; Fortunebuilders)

An example. Let's say someone is injured on the property and they decide to sue for the moon. The LLC removes all of your personal property and assets from the mix. If a judgement was awarded, only the assets held in the LLC could be attached.

There is no reason to commingle your personal and business assets. The potential liability is too great. As for the tax implication, it's a non-event:

"When the IRS "disregards" an LLC, it means that, although the LLC and it's owner are separate entities (for liability purposes), the IRS "disregards" them and just taxes the LLC however its owner is taxed. The IRS treats the owner and the LLC as one and the same." (End, LLCUniversity)

Some of my clients place each investment property into a separate LLC and others "group" them based on some criteria. 

And, congratulations on that over-achiever family of yours.  Very large - definitely impressive!

All of the things you mentioned are better mitigated by purchasing umbrella insurance, which is a far more important step to take in ensuring personal protection.

In terms of buying the newest condo in an LLC, buying a property in an LLC makes getting a loan on the property orders more difficult.

@Frank Jiang

Frank, that would be your opinion, correct? I gave mine too and I simply don't believe in spending more money on insurance to keep my business assets in my personal name. I also prefer having privacy in my holdings which an LLC provides. Even my client who owns a large insurance firm titles in LLCs.

As a former wealth banker, I wanted my clients to have non-recourse financing (again, separating personal and business) and accepting collateral titled in an LLC was not problem; a simple hypothecation agreement resolved any issue on that front.

I know the investor who posted the question will appreciate your perspective.  

the Poster needs an umbrella policy anyway right? They are 100 x more likely to do something personally that gets them sued than have something happen at the property over their insurance limits, maybe 1000x with 11 kids. If they own the llc they’ll just be giving the llc to the person they hit In a car accident, or the family of the kid that drowns in their pool, or gets hurt at their private residence. 

I’m sure someone can say “no legally you can do this and totally screw the victim that deserves the money by putting in an llc owned by an llc owned by someone else” or some such thing. But maybe the umbrella is lower cost and better protection and the victim is made whole. 

They dot have to worry about separate  taxes, separate bank accounts, more expensive loans to llc versus personally, etc. 

I would talk to an accountant. We recently set up LLC's for our properties. Our accountant said we could've done the same thing with umbrella insurance, however, there may be some tax advantages to setting up LLC's as well. I think he was also annoyed that he had to file separate claims for each LLC :). If you are trying to do a self directed retirement fund, this is a good way to go.

It also depends on which state the LLC's are in. Some states have a high yearly fee for LLC's that has to be paid regardless of whether or not your business makes money.

@Michele B Cagle

There is a lot of good info on BP regarding the age old argument whether insurance or an LLC is the best way to address the risk of owning rentals. In my opinion an umbrella policy is the most cost effective method of addressing that risk. It broad coverage that can be set up quickly with minimal time needed to maintain coverage where an LLC for multiple properties in multiple states will be expensive.

with several properties in several states you have various compliance issues/costs associated with setting up LLC's to get the tru benefit you would want each property in its own LLC ( maybe a series llc would be a good option)

-consider the due on sale clause if you have any mortgages on the properties as transferring the title to an LLC technically triggers this ( most banks won't call it as long as the loans current but they have the right to)

here’s an article with a quick breakdown

https://www.landlordology.com/umbrella-insurance-replace-llc/

Originally posted by @Michele B Cagle :

Here is the story, ..... We currently have 5 rental properties with a contract on a vacation rental at the beach.  We started out getting rental properties when our oldest son was about to attend college.  With eleven children (7 biological and an adopted sibling set of 4), we knew that we could not pay for college.  Well, we bought our first condo in TN where we assumed our son would attend college.  We actually live in AL, but both attended a state school in TN.  He received a full ride somewhere else ... TN gave him very little scholarship money.  So we rented it out to our nephew.  It went so well, we purchased a second condo there.  Both have been rented non-stop for years and are doing well.  We purchased another condo in AL where my second child was going to school.  We have had a couple of hiccups there but it also has done very well.  Second son ended up in MS with a AFROTC scholarship. Yep, we built our house of card up another level.  Now I have three in MS .... three kids and three houses.  Non are in LLCs, all are easily rented.  Now we are purchasing a 3/2 condo in PCB, FL.  It will be managed by a professional.  

So here is my question .... I assume it makes more sense to put the condo on the beach in an LLC. Does it make sense to put all of our others into an LLC of their own?

Thanks

 Hey Michele,

It sounds like what you are building is becoming quite expensive both with time and work. The issue is that as you scale with this method, you will be increasing your work as well as the risk of mismanaging or commingling funds - which would place your liability protection at risk. The issue you are running into is common for anyone scaling their real estate investments, and this can in turn put all their assets at risk. I want to lay a groundwork for how I explain asset protection, but I want to highlight Pillar 3 and specifically the Series LLC to you.

When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

The added benefit of these pillars is that they are structured to be built into an estate plan through the use of the land trusts. This means that not only are your protecting the assets, but they are also streamlined to be passed down to your family AS you continue investing and building the portfolio. 

Just some ideas. This isn't legal advice, just my opinion as a real estate investor.

Whew!  I have been reading each comment/replay.  Overwhelming, but informative!  I am taking steps to rectify these issues.  As I digest this info, I will be asking for more real work experience/guidance!