Placing Rental Properties in LLC's

Investor · St. Johns, MI · Member since 2016 · 72 posts · 20 votes

Up until this point, I have only flipped houses, but I want to begin searching for rental units to purchase. I have heard it is best to start an LLC for each rental property you purchase, so that if you get sued, they can only go after the value of one property, instead of all of them. Is this true? If so, how do you make this happen logistically, because you would have to put the offer in on the house, and once it was accepted, file for an LLC, but that can take a lot of time. So what is the best way to make this happen?

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Mike S.

Rental Property Investor · Huntsville, AL · Member since 2013 · 419 posts · 323 votes

10y

When your LLC gets sued, who pays for the lawyer to represent the LLC? If your asset does not maintain enough insurance to cover a claim or you don't keep up with the added expenses to maintain the LLC as a separate entity (comingled accounts, personal checks paying for expenses, etc.) will a judge pierce the corporate veil and come after you anyway? For most situations, and until you get to a certain size, an umbrella policy makes more sense. If you have a $1,$2, or $3 million dollar umbrella policy, you have a $1,$2, or $3 million dollar legal team that will go to court to reduce or eliminate your liability. If you pay for sufficient coverage on your insurance and umbrella policy, then why do you need the overhead of the LLC? If you don't have this coverage, then the judge is going to start looking at you personally.

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Todd Plambeck
Agent/Investor · Murphy, TX · Member since 2013 · 542 posts · 304 votes
10y
You can purchase the property in your own name and then transfer it to the LLC after the acquisition and repairs are done but before it is occupied.
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Nicole A.Pro Member
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
It's really overkill to have a LLC for every single property. That's a lot of extra paperwork to deal with too. That's a lot of separate businesses to run. That's a lot of extra fees to pay.
Just because someone sues you doesn't mean they'll win. You have to be doing something negligent and/or unlawful.
Just because someone sues you and does win doesn't mean they are granted an amount of money equivalent to your entire portfolio.
If you have multi-millions of dollars of assets, then maybe you'd start splitting them up into a few different LLCs. Also, I personally like the idea of a LLC for each state you invest in. So if you have properties in Michigan, those are in your Michigan LLC. Any properties you own in say, Nevada are in your Nevada LLC.
Finally, with or without a LLC, you should really consider umbrella insurance. This would indeed be a great way to protect you from losing all your money if the rare chance of someone suing and winning were to happen.
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Skip Reath
Investor · Belmont, MI · Member since 2015 · 53 posts · 20 votes
10y
I always create a separate LLC for each property. In Michigan it's only $25 a year to maintain an LLC. Just create the LLC then purchase the property in its name. I'm assuming you are the sole member. Umbrella insurance is also a good idea. Good luck!
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Owen RosenBusiness Member
Professional · Clinton Township, MI · Member since 2015 · 678 posts · 259 votes
10y
Many of my investor clients use separate LLC's and I find it's easier to do so at least here in Michigan and safer in terms of protecting assets.
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Scott McGurk
Investor · Indianapolis, IN · Member since 2016 · 40 posts · 16 votes
10y
Todd Plambeck when you say transfer, what are the steps going from getting the loan personally to putting the property in an LLC? Thanks, Scott
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Ethan Painter
OP
Investor · St. Johns, MI · Member since 2016 · 72 posts · 20 votes
10y
@Todd Plambeck AWESOME. How is this done? Is it just a form? Or do I actually have to go through a "purchasing" process from myself to the business?
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Ethan Painter
OP
Investor · St. Johns, MI · Member since 2016 · 72 posts · 20 votes
10y
@Nicole A. Thank you so much!
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Mike S.
Rental Property Investor · Huntsville, AL · Member since 2013 · 419 posts · 323 votes
10y
When your LLC gets sued, who pays for the lawyer to represent the LLC? If your asset does not maintain enough insurance to cover a claim or you don't keep up with the added expenses to maintain the LLC as a separate entity (comingled accounts, personal checks paying for expenses, etc.) will a judge pierce the corporate veil and come after you anyway? For most situations, and until you get to a certain size, an umbrella policy makes more sense. If you have a $1,$2, or $3 million dollar umbrella policy, you have a $1,$2, or $3 million dollar legal team that will go to court to reduce or eliminate your liability. If you pay for sufficient coverage on your insurance and umbrella policy, then why do you need the overhead of the LLC? If you don't have this coverage, then the judge is going to start looking at you personally.
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Todd Plambeck
Agent/Investor · Murphy, TX · Member since 2013 · 542 posts · 304 votes
10y
Originally posted by @Ethan Painter:

@Todd Plambeck AWESOME. How is this done? Is it just a form? Or do I actually have to go through a "purchasing" process from myself to the business?
You can file a quit claim deed yourself but I would suggest having an attorney handle it as laws vary between the states. Also as stated by @Mike S. the first line of defense stated, the first line of defense is you property insurance policy backed up by a healthy umbrella policy for you and/or the LLC.
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Susan M.
Investor · Columbus, OH · Member since 2014 · 124 posts · 67 votes
10y
We have umbrella insurance and no LLCs at all for 12 properties because we self-manage and have always heard that if you self-manage (repairs, renting, etc) that your LLC won't protect you anyway, you've pierced the veil by being personally responsible for repairs. That's what I've always heard. I have no idea how true it is.
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Nicole A.Pro Member
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
@Susan M. But wouldn't you as a member of the LLC be managing/working as a representative/member of the LLC? I guess it'd in the end be up to a judge's opinion, but you're there acting as a LLC member, not as Susan the individual.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Todd Plambeck have you filed a quit claim deed before to transfer a property into an LLC? Was the bank aware and ok with it? I have heard that conventional financing does not allow you to do this, but I am not an expert. Just raising the question.
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David Rawls
Investor · Sterling Heights, MI · Member since 2015 · 98 posts · 26 votes
10y
@Account Closed That's a good way to get banned. You cant hijack a thread to promote your own business. I suggest taking that comment down. However, do feel free to post that in the applicable forum.
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Erick Michael Ford
Investor · Allenton, MI · Member since 2016 · 32 posts · 9 votes
10y
I personally, now remind you I am only 18. I have two rental, single family homes. I was given some advice that putting each property in to a separate LLC is much easier and a safer way to go. Is it true they can only go after what is in that LLC.Thanks for the help
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Chad Olsen
Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
10y
We have one LLC for a state that we have property in. Each person's asset protection situation is different. I would recommend utilizing an asset protection attorney to help scope your plan and to execute. If you want to get a recommendation message me.
No matter what you do. Don't just read this thread and go do something. Do your own homework and talk to a professional or two.
Good luck!
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Nicole A.Pro Member
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
10y
@Erick Michael Ford You're going to get opinions that you should have a separate LLC for each property. And yes, if someone sues your LLC, the idea is they can only go after the assets in the LLC...if they don't "pierce the veil." That could happen by you not running your business properly or using money from an outside account to pay for business things. Next, assuming you're doing everything right and someone still sues you, they probably won't win. Like @Chad Olsen said, a LLC for each state is a good idea. Also, if you have say a huge apartment complex and then several single family homes, it might be a good idea to have a LLC for the apartment complex and a second LLC for the single family homes. Don't make your life more complicated than it needs to be. Set up a proper LLC in the state you'll be doing business and also get your new business a good umbrella insurance policy.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Ethan Painter I am going to lay out a real-world situation to think about this in practical terms.
Let's say for example you purchased two homes and each costs $100K. You finance 80%, so your total investment is $40K. You transfer both into an LLC (after making sure it is ok with your bank). Then you get liability insurance in the amount of $2M as an umbrella policy to cover you. Now winter comes and the tenant has not properly cleaned the sidewalks. Someone walking by slips on the ice and gets hurt. They get a lawyer who talks to your tenant. Your tenant gives them your name and phone number immediately. The lawyer checks county records and sees that an LLC owns the property. The lawyer makes the logical assumption you own the LLC as a way to shield yourself from liability. Lawyer calls you and asks if you have insurance. You say yes and he suggests you call them. Your insurance company asks you not to talk to the opposing lawyer and instead they work with the lawyer. The injury lawyer is going to work with your insurance company, who is going to either pay the claim or fight it. Maybe the bill is for some small amount of medical bills. The insurance company may just pay to avoid costly litigation. If the injury is worse and they became permanently disabled, the lawyer may fight for lost wages and a larger settlement. It could go to court in which case your insurance company is going to try to avoid paying as much of the $2M as possible. It could take years. Assuming they are successful and there is a settlement for less than $2M, then you are just fine. Let's say for some reason they get a settlement in an amount larger than your insurance. You may think they will take both houses in your LLC, but the problem is you don't own them. Or I should say the bank owns 80% of them, so they cannot take them. If the injury lawyer believes you have assets outside the LLC and wants to go after them, nothing will stop them from suing you personally. Assuming you are managing the property, they could easily claim your negligence caused the injury. An LLC doesn't protect the member owner from their own negligence. Most lawyers are going to push for settlement, so they can get paid and move on. For that reason it will likely never go past the insurance regardless of whether you have an LLC or not.
The point here is that for someone starting out, in a likely situation, insurance is really what you need. LLC are really best to protect people with multiple, sizeable assets. I cannot count how many times a first time investor asks if they should setup an LLC. Most of the time their net worth is close to nothing (no offense and that may not be the case with you). Just remember the lawyer is going to follow the money. They are not going to waste their time trying to take a house from you that you don't own. They are not going to go after your personal assets if there is sizeable insurance money. If they can prove their case, the insurance company will write a check. Why would they rather get a judgment against you? It would likely be hard to collect. If it is large enough, you may even file bankruptcy to escape payment.
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Ritesh Bagga
Investor · Dallas, TX · Member since 2016 · 5 posts · 2 votes
10y
@Joe Splitrock Very well explained. Thank you so much! Just like other newbies, I also had this question.
1 Reply
Corina Eufinger
Rental Property Investor · Oconomowoc, WI · Member since 2016 · 996 posts · 431 votes
10y
I have 2 LLCs for my 12 units now. I was told to average between 4 and 5 properties per LLC (assuming all duplexes and single family homes). If you have quads or larger i was told one LLC per.
The reason mine re split into 2 right now is because some of them are inherited from my patents so the thought of losing them all due to a lawsuit was too much. So I split them up and will do so again when I start my 3rd and 4th LLC later this year for a bulk 30 unit purchase.
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Ethan Painter
OP
Investor · St. Johns, MI · Member since 2016 · 72 posts · 20 votes
10y
@Joe Splitrock, thank you so much! This makes a lot of sense, and I appreciate the real-life example.
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Stephanie Hardy
Las Vegas, NV · Member since 2015 · 123 posts · 34 votes
10y
Listen to podcast #109 with @Scott Smith. It is about how to set your business up to avoid lawsuits and protect yourself in case of one happening. Scott talks about umbrella policies and, while I think they are important, insurance companies are meant to deny you - they are looking out for themselves, not you. Having an LLC (or a series LLC, if you are able to, which lets you put multiple LLCs under one main LLC, but each still being separate) is protecting your best interests. That podcast was really amazing.
https://www.biggerpockets.com/renewsblog/2015/02/12/bp-podcast-109/
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Account Closed
Real Estate Agent · Grand Rapids, MI · Member since 2014 · 493 posts · 200 votes
10y
Two thoughts: (1) Never own rental property in your own name. (2) The number of properties you hold in an LLC should be based upon the value of your investment property and the exposure to risk, e.g. are the properties free and clear or what is the neighborhood like? One can go too far regarding the asset protection thing but an LLC is a must. (Agreed, anyone can sue anytime--but if they win, do you want them to take everything you own--and your spouse's? As some have noted, the small dollars needed to set up an LLC and the small amount of bookkeeping/tax prep should not make you shy away from an LLC.) The only real negative--and it isn't that bad--is that most courts in Michigan will require you to hire an attorney to do an eviction. If you screen and manage well, there should be minimum risk in this area. (Note: I've been working on the LLC/Eviction issue for several years at the Statehouse and have another legislator ready to take up this issue again for our industry. Keep your eyes peeled for an update!)
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Kurt Bouma
Investor · Dorr, MI · Member since 2015 · 23 posts · 4 votes
10y
I own two rental properties in Grand Rapids (one 3 unit, one single family). I recently pulled them out of an LLC and into my personal name in order to refi down to a lower rate. The new mortgage companies both tell me that I'll activate the due on sale clause if I attempt to move them back into the LLC. Any thoughts?
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Mike S.
Rental Property Investor · Huntsville, AL · Member since 2013 · 419 posts · 323 votes
10y
Originally posted by @Stephanie Hardy:

Listen to podcast #109 with @Scott Smith. It is about how to set your business up to avoid lawsuits and protect yourself in case of one happening. Scott talks about umbrella policies and, while I think they are important, insurance companies are meant to deny you - they are looking out for themselves, not you. Having an LLC (or a series LLC, if you are able to, which lets you put multiple LLCs under one main LLC, but each still being separate) is protecting your best interests. That podcast was really amazing.
https://www.biggerpockets.com/renewsblog/2015/02/12/bp-podcast-109/
I remember when l listened to that podcast. Using series LLC to separate you from liabilities. I did some research at the time. It seems a series LLC can potentially add more risk than a regular LLC. The additional complexity absolutely requires an expert attorney IMO. My final assessment is that more than separating you from your liability, it'll separate you from your money and sanity.
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Account Closed
Real Estate Agent · Grand Rapids, MI · Member since 2014 · 493 posts · 200 votes
10y
If it is done correctly, you will NOT activate the due on sale clause. I can put you in touch with someone that knows how. (Mortgage broker should show caution in giving advice in an area they know nothing about.)
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