Is LLC really necessary when you just start out?

Question

Hi BP members,

My husband and I started our RE investing and bought a 29-unit apartment in Texas and a 16-unit in North Carolina this year. (We bought our residence with a VA loan back in 2011 in California.) After reading many posts on BP, we're now more leaning to purchasing an umbrella insurance, instead of forming an LLC for a few reasons.

First, it's harder to work with a bank. We really took advantages of OPM and are now building the equity by improving the property and plan to refinance in a few years. Lenders don't typically like to work with properties under a LLC. (Our Texas property has a fixed rate now but will have an adjustable rate after 5 years.)

Second is the cost, even if we form the LLC in Texas, where one of the 2 properties is located, we still need to pay the $800 to California state for California has strict rules about LLCs, in addition to the fees to Texas.

Lastly, based on our situation, we don't really have much personal assets to protect. An umbrella insurance of 1M~2M should be sufficient to cover our assets. But as we continue to purchase more properties and build our wealth, we'll for sure form LLCs in the future.

Did any investors, especially out-of-state investors like us, have similar experiences and might be able to pinpoint things I don't see? I don't want to simply form a LLC just because everyone else does and would love to hear any experienced investors' comments. Thank you!

Becky

Ethan Ard · Answer

Really, you bought 45 doors and you're fussed about the $800 / year california LLC tax?  That's less than $1.50 per door per month.

Don't assume that your umbrella policy will cover you for everything.  With separate LLCs, if you get sued on one property, the other property (plus your non-RE assets) are safe.  If you own everything as a sole proprietor, you are completely exposed.

Thomas Morris · Answer

There is an argument to be made that you need both an LLC and an umbrella policy. Listen to podcast 109 for an explanation.

Rob Beland · Answer

@Becky Luan umbrella policy is typically priced based on the value of the policy not the number of units (doors) it covers. Do you know approximately how much equity you have total with the 45 units?

Becky Lu · Answer

Just curious. Do you both form the LLC and get an umbrella insurance for your rental properties, on top of the property insurance? Or depending on your risk tolerance, it's more either or?

For our 2 properties, the umbrella insurance comes up to almost $1,700/annually. At first, I thought it was expensive but then realized the quote is for 45 doors. Anyone has similar situations?

Thank you!

Becky Lu · Answer

Thank you to all your comments.

@ Ethan Ard - I Appreciate you pointed out. That's the conflict I have too and it's silly to think about it now after we have owned 45 doors. I know as we grow, we'll for sure need to form a LLC but it's time now. Thanks.

@ Douglas Belt - Thanks for your comments. I first I thought we could just do 1M but with what we have, I do agree at least 2M. Thanks.

Leandro Rodriguez · Answer

Not legal advice. Follow at your own risk.

Check local laws.

Insurance under LLC's might be different (conditions and costs).

LLC is also a cost, to form and to maintain.

I am not in the same league you are, but was thorn btw LLC or Personal Liability+Umbrella a few months ago. I networked, got two RE attorneys recommended to me and had a sit down with each one. Ended up going the insurance way.

Now, I have the equivalent of 3 doors. With as many doors as you have, the chances of getting a bad tenant skyrocket so I would probably add an extra layer of security putting each property on an LLC.

Do proper research on how to structure the LLC to avoid "veil piercing" - you want to make sure you have all the documents, articles and OA in place, properly filled and maintained.

Good luck and congrats.

Douglass Belt · Answer

@Becky Lu

In addition to your LLC, I would HIGHLY encourage you to get at least a $2M umbrella. it is peanuts cost wise compared to the protection you get. you don't need to be a millionaire to be sued for a million bucks. I have seen it happen with rental properties car accidents where people are put in the hospital and rack up $700,000 in medical bills like that! Which does NOT include other things you can be sued for, such as wages lost, state law regulations (check local wrongful death statutes), physical therapy, litigation fees, etc. I have a large umbrella policy and 1 rental house. Even if you had no rental properties, I would still recommend EVERYONE have an umbrella of a MINIMUM $1M. Sorry to be so adamant but I have seen a lot of really bad things happen to good people where they lost everything and have their lives turned upside down by not having this added layer of protection.Good luck and congrats on your success with your properties! I hope to be there someday too!

Casey Miles · Answer

Sounds like you really jumped into RE investing, congrats! I have a 1 million dollar umbrella policy and it covers me for all my properties. My portfolio lender will lend to LLCs but I'll always need to personally guarantee it. They don't offer non recourse loans.

I'm comfortable with my umbrella policy but do have an LLC as well.

Jeff Semrow · Answer

While I don't have any investment real estate yet, I can say that if you are a gambling person you can work without the safety net of a LLC or S corp.

I have started llc's for both investment and management upon the advice of attorneys in Wisconsin. It'll help you sleep at night knowing the tenants and attorneys aren't going to be able to take you for everything you have.

You have to remember now that you are the "Land Lord" you have the deep pockets.

Is LLC really necessary when you just start out?

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