To LLC or not to LLC

13 Replies

What are the pros and cons of landlording as an LLC?

Depends on what other options you're weighing - the recent Bigger Pockets Podcast featuring Sam Smith (episode 109) lays out some of the benefits of an LLC, as well as other legal entities. Sam is a lawyer that specializes in real estate, and he says that you should never do a deal under your own name (it should always be under and LLC or other legal entity such as a partnership, Delaware Statutory Trust, LLP, etc.) Forming a legal entity for your business will have extra filing fees along with the hassle of additional regulatory filings, but those cons are significantly outweighed by the benefits of limited liability.

Always get an LLC.

Investors who hold property in their own name are insane in my opinion.

When, and not if, you get sued, the LLC has the greatest asset protection.

Plus, great tax benefits.  The cost is minimal compared to the risk of not having one. 

In addition, each one of your properties should have its own LLC.

We just name each property under the address. For example, 123 Main street is 123 main street LLC.

Nick is right. The benefits of having a LLC in real estate investing is a level of protection you should have as an investor. The LLC will help protect your personal assets from your business assets. You could also look into using Land Trusts inside the LLC for an additional layer of protection. There is a cost for the protection just like you would have for auto insurance and the protection it provides. Do your research and decide what is best for your situation.

There are cons to an LLC as well. Such as the inability for a new LLC to obtain residential financing.

Scott Smith is the lawyer from episode 109. He talks about either Series LLC or Delaware Statutory Trust for enveloping MANY properties into separate LLC's. Based on your question, I interpret that you have not listened to that podcast. It is freakin AWESOME and not boring like you think law lectures would be. Biggerpockets episode 109 "you will get sued". (free on iTunes)

This question gets asked on BP a LOT. Everyone who is getting started wants to know if they should form an entity or not. Folks think it's the first step to becoming a successful investor and a necessary exercise to protecting their butts. Others who are new to the business jump on the bandwagon and overwhelmingly agree that you should form an entity and asset protection attorneys (who sell legal services) add more wood to the "form an LLC" fire. The question was asked once on BP--"has anyone been sued and your LLC saved you?" No takers.

If you are investing with someone else, an LLC is necessary versus the two of you going on title as individuals. You don't want your partner's troubles clouding your title. I'll endorse that.

But I don't endorse the concept that everyone needs to own all real estate in an entity.  Entities add additional layers of cost not just to form them, but to maintain them whether it's annual fees to the state or the cost of doing a corporate tax return.  I have close to 20 entities and it costs me around $50K/year (maybe more but I'd rather not know I'd probably get depressed) for the privilege.

I've owned over 700 properties most in entities but many were not.  Not once has one of these entities offered my any level of lawsuit protection.  That is what my insurance is for.  The attorney on Podcast 109 is right, you will get sued.  I've been sued several times.  The problem with lawsuits isn't a judgment, it is the cost of defense. 

My LLCs didn't help in the lawsuits because I won all of them.  Well, actually, I did get one judgment.  We sold a flip and the new owner claimed that our contractor didn't do something right.  He was correct.  We offered to fix it right away, and they wouldn't let us.  Instead they filed a small claims suit for $5K for a repair that would cost $1,500 max.  We offered to pay $1,500 and they refused.  Went to court, and the judge ruled in their favor and issued a judgment for $1,500 which we paid immediately by handing them a check.  Did we win or lose?  I'd say we won.  It was a shakedown for $5K and it didn't work.

On the other hand, I had another suit that cost me $175,000 to defend and I won. But did I win or lose? Would an LLC help me? Not at all, your LLC won't pay the attorney's fees unless you put the money in the LLC and write the check.

Don't take advantage of people, conduct business honestly and fairly, and carry good insurance.  That's the best asset protection there is, in my book.  Save the LLCs for segregating investors or for joint ventures where a business structure is needed.

The significance of an LLC really depends on your investment case. In contrast, a sufficient liability insurance is imperative for every property owner. And with sufficient, I don't mean $250 000, as I have seen in various policy offerings. In my opinion, you should be insured for a million bucks or more per property. If you only have a few properties, get a liability umbrella based on your primary residence. I don't think it gets any cheaper.

Besides protection, can anyone tell me about forming an LLC for the purpose of borrowing money? Lenders are telling me they only lend to LLC's. I've been using my own cash but its all tied up now. So I was about to form an LLC where I live, AZ, however, I never invest in AZ, I hate the overinflated prices, so I do (rehab) other states. Now do I form an LLC in a state I already have property>? OR in the state I live?? OR in the state I hope to invest in next????

These are legal questions for your real estate lawyer. Good luck.

Originally posted by @Jarrod Askin :

What are the pros and cons of landlording as an LLC?

Biggest Pro - liability protection

Biggest Con - can't purchase a property with bank financing using your LLC

Originally posted by @Brian Burke :

This question gets asked on BP a LOT. Everyone who is getting started wants to know if they should form an entity or not. Folks think it's the first step to becoming a successful investor and a necessary exercise to protecting their butts. Others who are new to the business jump on the bandwagon and overwhelmingly agree that you should form an entity and asset protection attorneys (who sell legal services) add more wood to the "form an LLC" fire. The question was asked once on BP--"has anyone been sued and your LLC saved you?" No takers.

If you are investing with someone else, an LLC is necessary versus the two of you going on title as individuals. You don't want your partner's troubles clouding your title. I'll endorse that.

But I don't endorse the concept that everyone needs to own all real estate in an entity.  Entities add additional layers of cost not just to form them, but to maintain them whether it's annual fees to the state or the cost of doing a corporate tax return.  I have close to 20 entities and it costs me around $50K/year (maybe more but I'd rather not know I'd probably get depressed) for the privilege.

I've owned over 700 properties most in entities but many were not.  Not once has one of these entities offered my any level of lawsuit protection.  That is what my insurance is for.  The attorney on Podcast 109 is right, you will get sued.  I've been sued several times.  The problem with lawsuits isn't a judgment, it is the cost of defense. 

My LLCs didn't help in the lawsuits because I won all of them.  Well, actually, I did get one judgment.  We sold a flip and the new owner claimed that our contractor didn't do something right.  He was correct.  We offered to fix it right away, and they wouldn't let us.  Instead they filed a small claims suit for $5K for a repair that would cost $1,500 max.  We offered to pay $1,500 and they refused.  Went to court, and the judge ruled in their favor and issued a judgment for $1,500 which we paid immediately by handing them a check.  Did we win or lose?  I'd say we won.  It was a shakedown for $5K and it didn't work.

On the other hand, I had another suit that cost me $175,000 to defend and I won. But did I win or lose? Would an LLC help me? Not at all, your LLC won't pay the attorney's fees unless you put the money in the LLC and write the check.

Don't take advantage of people, conduct business honestly and fairly, and carry good insurance.  That's the best asset protection there is, in my book.  Save the LLCs for segregating investors or for joint ventures where a business structure is needed.

Brian has my vote for best post of 2016 here on outlining how the duty to defend, which you get from your insurance not your llc, is often key ( and I like a landlords policy with all bells and whistles plus an umbrella, as I have just few residential as small scale landlord with only  1-4 unit property) .. the cost of the defense now may eclipse the liability in some cases and is present even if you prevail..so insure properly whatever you decide for an entity...

...Other cons, you may also lose the ability to represent yourself in an eviction and have challenges in financing and refinancing as mentioned  ( and I won't get to due on sale here but search that on BP for more discussion there)... I do like the llc for reasons Brian mentions, for commercial, and perhaps for paid off residential... Definitely not a "one size fits all" decision.. Look at what works best for you and get good advice (ideally by those with both credentials and street cred like rentals or rei background).

I was wondering if anyone had any feedback, pros/cons regarding the use of a LLC for the purpose of managing my own rentals? In AZ you only need a broker's license to manage other peoples properties. I've been advised to get a LLC for ALL of my rentals, and on the other hand, I was told an umbrella insurance policy will do the trick.

Thanks!

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