LLC as Rental Property Owner AND Manager

14 Replies

Hey all, currently own four Florida rental properties (one triplex and three SFHs). I created a sole-member LLC to own and manage the triplex, and then created a second LLC to own two of the SFHs. The last SFH deed remains in my name. First question, is making an LLC both owner AND manager of the triplex a solid strategy? Second, should the second LLC be both owner AND manager of the two SFHs, and for accounting and tax purposes, should the second LLC have its own bank account, credit card, etc.? Third, should I assign my LLCs a PO Box as primary address instead of using my home address as their primary address? Fourth, have I got it all wrong anyway?!

My goals are to limit liability and to minimize tax responsibility, although the latter I realize deserves its own thread.

Last, as it stands now, I'm very hands-on with property procurement, renovation, and management, which is to say, all my tenants know me.  I don't mind the occasional fix-it call, and it doesn't limit my ability to go out and find other deals.  I love what I do all the way around.

You are probably overprotecting yourself unless these properties are paid off. I'm not sure about FL but a CA LLC costs $800 per year so you could be spending $1,600 per year to protect your equity. If you are self managing I don't know if you could add another LLC, and if you did it might just be cheaper to hire a PM. You might want to talk to an attorney who isn't trying to sell you something and pay them for their time. Most LLCs that I've seen don't split until about $2M in value

I agree with Aaron that you're over-protecting a bit. It does not matter that your LLC is managing and owning. My properties are owned by my LLC. Rent is paid directly to my LLC. The name of the landlord/owner in the lease is my LLC. I used to self-manage, and they'd just call me with issues.

Each LLC does need its own bank account. You can't use the bank account of LLC #1 to fund/run LLC #2. They are separate and must act separate.

If you're wanting a little bit of privacy, yes, your LLC should *not* have your home address attached to it. It's not the end of the world. It's just that anyone can see where you live more easily.

I think personally you were fine with one LLC or just keeping it all in your own name and have an umbrella insurance policy.

Thanks for the good input, Aaron.  LLCs are in Georgia, so only 100/yr, and yes, I was advised by my closing attorney -- with whom I have a good relationship and who knows my property assets -- to create two LLCs.

@Avery Goodman no offense to your attorney, but I might talk to someone else a bit more objective, make it clear you will not use their services only their advice and pay them for their time otherwise by the time you get 100 rentals you could be filing 50 different tax returns if each LLC owns only 2 SFRs.

Thanks for the advice regarding separate bank accounts, Nicole -- makes perfect accounting sense.

Not too worried about privacy for its own sake...my main concern involving PO boxes was to obscure my address and assets in case some litigious tenant's attorney came looking to score.

Last, an umbrella was hard to find since I live in GA and invest in FL.

Originally posted by @Nicole A. :

I agree with Aaron that you're over-protecting a bit. It does not matter that your LLC is managing and owning. My properties are owned by my LLC. Rent is paid directly to my LLC. The name of the landlord/owner in the lease is my LLC. I used to self-manage, and they'd just call me with issues.

Each LLC does need its own bank account. You can't use the bank account of LLC #1 to fund/run LLC #2. They are separate and must act separate.

If you're wanting a little bit of privacy, yes, your LLC should *not* have your home address attached to it. It's not the end of the world. It's just that anyone can see where you live more easily.

I think personally you were fine with one LLC or just keeping it all in your own name and have an umbrella insurance policy.

I agree with @Aaron K. . If your attorney is telling you to form 2 LLCs at this point, and also to have the LLCs formed in a different state than the properties, he is costing you extra money in taxes and fees for no real reason.

When you have a LLC in one state, but operate in another, it's a "foreign entity" and you get to pay some extra fees for that. Also, when you decide to sell the LLC's property, you will possibly pay an extra fee/tax at closing due to that out of state LLC.

You may have a good relationship with him, but I don't feel he's giving you the best advice at this point.

Originally posted by @Aaron K. :

@Avery Goodman no offense to your attorney, but I might talk to someone else a bit more objective, make it clear you will not use their services only their advice and pay them for their time otherwise by the time you get 100 rentals you could be filing 50 different tax returns if each LLC owns only 2 SFRs.

My attorney's advice to create two LLCs was a long-term strategy, as in, if you continue to invest in real estate and eventually acquire 100 rentals, two LLCs will hold you for awhile.  He did my QCDs pro bono, incidentally. 

So should I have created the LLCs in Florida, since the rental properties are all in Florida?  I assumed that since I lived in Georgia, my LLCs would likewise have to be created in GA.

Originally posted by @Nicole A. :

I agree with @Aaron K. . If your attorney is telling you to form 2 LLCs at this point, and also to have the LLCs formed in a different state than the properties, he is costing you extra money in taxes and fees for no real reason.

When you have a LLC in one state, but operate in another, it's a "foreign entity" and you get to pay some extra fees for that. Also, when you decide to sell the LLC's property, you will possibly pay an extra fee/tax at closing due to that out of state LLC.

You may have a good relationship with him, but I don't feel he's giving you the best advice at this point.

Yes. Generally speaking (unless you listen to the latest "guru strategies"), you open the LLC in the same state that you are doing business. It has nothing to do with where you live. The fact that your attorney didn't make you aware of this is another sign that he is not the best. Sure, great for when you're at 100+ properties to have more than one and all.

But right now, besides the fact there was no need to form out of state, you likely have not a ton of equity, and there's no reason to spend so much extra money to protect assets that are mortgaged with lower equity.

Some people even purposely keep their equity low because then there isn't a lot of net worth to actually chase.

@Avery Goodman most likely yes, unless FL has no fees for foreign qualification which I doubt and/or you plan to do substantial investing in GA in the near future.  This is something your attorney should know.  

P.S. most attorneys will handle deed transfer for free when they create a new entity for you.

@Avery Goodman

You're fine to have 2 LLCs. Added protection so long as you treat them as separate entities and don't do anything to pierce the corporate veil. The decision of when to create multiple LLCs is different for each person depending on your risk tolerance, the type of property, value of property, condition of the property, types of tenants, neighborhood of property, what other assets you may have and your net worth, laws of the jurisdiction where it's created, your estate plan, property tax rules of your jurisdiction, etc. If you consulted a good attorney and you jointly came to the decision to create 2 LLCs then it might be the right decision. You can also try consulting with a second professional to confirm or get their take on your situation. Just because other people may think 2 LLCs is overkill does not mean that it is for you, based on YOUR situation (doesn't mean that they are wrong either). Maybe talk with a professional about what to do about that third property that isn't in your LLCs though to see if you need to create a new LLC for it, or if you are okay to hold it in your individual name. You'll also likely want to look into an estate plan if you have not already. I know a great attorney in Fort Lauderdale but I know Florida is a big state so I'm guessing that's pretty far from you. But you can send me a PM if you want her info - she and I did our masters of law together at Georgetown Law.

The single-member LLCs can be both owner and manager. Happens all the time. Your operating agreement probably mentions something about the LLCs being member-managed instead of manager-managed (if they don't it may be time to find a new attorney). You could have one of the LLCs be the manager for the other LLC if you really wanted, or hire an outside person to be the manager. If you wanted to hire a property manager, you could do so and run the expense through the LLC. Be sure to have contracts and such.

@Aaron K. Single member LLCs are disregarded entities for federal purposes and do not require a separate federal return. Many states aside from California are significantly more lenient and do not require returns for a disregarded entity. Florida also has no state income tax. He may not be filing that many returns for each of his entities. California is sort of its own beast when it comes to taxation. But, I agree with your comments about needing to register as a foreign LLC and that perhaps Avery should seek advice from a second attorney.

This all being said, I am NOT familiar with laws of any of the states that you mentioned.  Avery, you will do best to find a trusted advisor familiar with your situation and the laws of your jurisdiction(s).  The advice on these public forums is all great and often times helpful, but is no substitute for a competent professional who is familiar with your situation.

*This post is not to be relied upon and does not constitute legal advice and is provided for educational purposes only.  Readers are advised to seek professional advice.  This post does not create an attorney-client nor a CPA-client relationship.

No mortgages -- own all properties outright.  And I think my atty assumed I was creating FL LLCs, as one of the QCDs mistakenly says xyz, "a Florida LLC."

Originally posted by @Nicole A. :

Yes. Generally speaking (unless you listen to the latest "guru strategies"), you open the LLC in the same state that you are doing business. It has nothing to do with where you live. The fact that your attorney didn't make you aware of this is another sign that he is not the best. Sure, great for when you're at 100+ properties to have more than one and all.

But right now, besides the fact there was no need to form out of state, you likely have not a ton of equity, and there's no reason to spend so much extra money to protect assets that are mortgaged with lower equity.

Some people even purposely keep their equity low because then there isn't a lot of net worth to actually chase.

As explained above, it is usually better to have the LLCs owning the properties in the same state than the properties.

However be careful with single member LLC in Florida (see the Olmstead v. Federal Trade Commission case). You won't get the charging order as exclusive remedy for outside protection.

Look into having your single member FL LLCs owned by a WY holding LLC to keep that outside protection.