Rental Property Investor · Jefferson, GA · Member since 2017 · 95 posts · 145 votes
Hey BP - My wife and I started investing in real estate a little over two years ago. We currently have 4 SFRs in our portfolio. We both have good careers in sales (not real estate), with a combined 27 years of earning, saving, and cramming our 401k and IRA coffers. So we have a decent stash of personal assets.
This year I moved the properties into an LLC, primarily so I could separate our personal assets from our properties. Since then, we've made a commitment to increase our REI portfolio. Our 5 year plan includes paying off Our current properties and adding 4-5 additional properties. As the value of our portfolio goes up, so does my concern of risk associated with having all the properties in one LLC. So my question is, how much do you think is too much for one LLC? I set up two additional LLCs when I set up the one our properties are in, with the intention of having each property in its own LLC, before deciding I was ok with the risk of having them all in one LLC (and not wanting to deal with the additional paperwork). Any insight is appreciated!
One paid off property in a LLC is one too many. The cash value attracts law suites regardless of how many properties. To take maximum advantage of having a LLC ideally the assets in the LLC must have no value. You may be protecting your personal assets using a LLC, although not likely, but you are setting a target on your investment properties by paying them off. To maximise your protection you should be continually pulling the equity growth out and investing it in something other than real estate outside of a LLC.
Ideally anything inside a LLC should have very little cash value otherwise you undo the value of using the LLC.. The purpose of a LLC is to hide from not attract law suits.
If they are small balance properties, keeping them in one LLC is not a big deal. We have a mechanism called a series LLC, which allows for one LLC with branch LLCs. So each property can be separate. See if they have that in your state.
@Brian Ploszay Thanks Brian, I do not believe series LLCs are permitted in Georgia. When you say small balance, how much are you referring to? I have about $165k invested in down payments, closing costs, and CapEx. The value of the properties is around $800k.
Have you considered purchasing 1 or 2 properties with your IRA? This is a way to diversify your retirement portfolio and also to protect the properties. They type of IRA is called a Self-directed IRA. It allows you to purchase the property in the name of the IRA. All expenses are paid directly from the IRA and all income goes back to the IRA for you when you reach retirement. I would be happy to connect and chat if you are interested in learning more.
One paid off property in a LLC is one too many. The cash value attracts law suites regardless of how many properties. To take maximum advantage of having a LLC ideally the assets in the LLC must have no value. You may be protecting your personal assets using a LLC, although not likely, but you are setting a target on your investment properties by paying them off. To maximise your protection you should be continually pulling the equity growth out and investing it in something other than real estate outside of a LLC.
Ideally anything inside a LLC should have very little cash value otherwise you undo the value of using the LLC.. The purpose of a LLC is to hide from not attract law suits.
@Morgan Klein We try not to go more than 30-40 units per LLC, depending on the LTV of the properties. Ideally, want to keep it under 2 million or so. I do not believe in the utility of complex corporate structures (at least more complex than the parent LLC/Partnership that my wife and I jointly own which in turn owns multiple single-member LLCs (disregarded) as a risk mitigation practice AND allows for easy 1031 movement between entities as the end taxpayer is the same (the partnership.)
I would read the American BAR association commentary on Series LLCs (basically, too early to tell how useful they might be.) I also do not believe that endlessly refinancing and stipping out equity (and paying the associated fees) for asset protection makes sense. Invest in mitigating risk and in being properly insured. Removing equity might be a SIDE benefit of refinancing if you have other productive places for the money that makes the costs worth it, but I do not believe it should be your primary motivator. My 2 cents!
@Thomas S. - Thanks for the reply, that makes sense. My original goal when I got into real estate investing was to continually leverage properties for all the reasons you suggest, but I had no real end game in terms of how many properties I would try to acquire. A couple years in, I’m realizing I don’t want to have a ton of properties, I’d rather have fewer properties (10-12) and increase my cash flow by paying down the mortgages. That being said, do you have any recommendations on how to protect my RE investments if I were to pay down (or off) the mortgages? I should add that I also carry a $3M umbrella policy.
@Carl Fischer Most of our retirement investments are in 401k, I'm probably not to the point where I could purchase a property (at least the type of properties I like to invest in) with my IRA. That said, I'm always open to new ideas and would love to learn more. Thanks!
The Series LLC would be the ideal entity for what you are working on. Currently the Series LLC can be formed in 15 states, but they can hold property in any state with the US. This means the states that don't have their own Series LLC available allow for you to form the series in another state and have that entity own the properties in Georgia and "child" series within the LLC. You can hold each property legally separated from one another without the cost of forming a new entity for each investment you purchase. There are added benefits that will help simplify life, like a single EIN for all the investments within the Series LLC and the ability to keep them in the same bank account with the appropriate bookkeeping.
When dealing with my own investments I work to keep everything separated. The Series LLC costs a bit more to set up than a traditional LLC; however, with the properties you already have and plan on purchasing this will likely end up saving you money. The Series LLC can scale infinitely - there is no limit to how many "child" series can be formed. Even with an entity that compartmentalizes the liability between properties, I still aim to keep the overall holdings of a Series LLC to below $2 million and recommend this to all the clients I work with. At that point you are making enough money to not feel the sting of adding another entity, and should the worst case scenario happen, then you are still spreading out your assets on a even bigger scale. With a traditional LLC that number would be much lower - the goal is that the only liability attached to a property is what that property creates, no other strings are attached to it. If they are you can lose it for a totally unrelated issue. https://www.biggerpockets.com/renewsblog/asset-pro...
Hope this helps! Having worked with many investors who have dealt with the growing pains of scaling up - you are asking the right questions.
@Richard Sherman Thanks for that 2 cents! I’ll definitely read the BAR on series LLCs. From what little I’ve read it’s too soon to tell the extent of protections because of the lack of case law, I think that’s what you’re saying as well.
My LLC is in Georgia, the state I live in and have my properties in. Would you suggest rolling my current LLC into a series LLC in a different state? If so, any thoughts on how to best accomplish that? Thanks again!
@Scott Smith THANK YOU! I’ve read several of your blogs over the last couple days as I try to figure this out. Thanks for taking the time to share that info, I really appreciate it!
@Scott Smith THANK YOU! I’ve read several of your blogs over the last couple days as I try to figure this out. Thanks for taking the time to share that info, I really appreciate it!
I have between 5 and 10 units in a single LLC, all without debt. However here are the steps I took to minimize risk: each unit has maximum $1 million liability and then the LLC itself has a commercial umbrella liability policy of $3 million to protect other units from each unit. I pay about $800 for the umbrella policy and I sleep better at night with it.
Great job on building up your portfolio. I follow the rule of thumb of not exceeding 250K in my LLC.
In Georgia the LLC fee is fairly inexpensive for each. Check out Mark Kohler (CPA and Attorney) on you tube regarding asset protection and how much risk you should have in an LLC. He also has a weekly podcast with Mat Sorensen (Attorney -Expert on Self Directed Retirement Funds) "Refresh Your Wealth Radio Show".
If you truly want to protect your personal assets from your investment assets LLC is the way to go. I know people suggest umbrella policies, but a major incident on a property could exceed the insurance amount even at 3M or so.
In Illinois and about 15 states we can have a series LLC. Essentially one LLC with baby LLC's separating each one as if they were individual LLC's. Cost $400 for the series and $50 for each baby. Same EIN number for all. Unfortunately Georgia does not all this yet, but more and more states are going this route.
@Calvin Lin Thanks for sharing! That’s exactly what I have now, each unit with liability insurance (I believe for $1M, a little embarrassed I don’t know exactly) and then an umbrella for $3.5M.
@Terrell Garren Since this isn't my primary job, I'm all about keeping it easy! I hope all's well in Concord, I went to App State and lived in Charlotte from ‘06 to ‘10. My REI "career" started in 2009 when I bought a short sale on Lake Norman and sold it a year later for a $50k profit.
@Kenneth Garrett Awesome, thanks for the podcast recommendation! I'll definitely check that out. I have all my properties in one LLC, but the series LLC sounds promising. I spoke to my attorney about it yesterday, but as you mention it's not available in Georgia. I'm going to study up on it further and possibly consider setting it up in another state, per @Scott Smith.
Thanks for taking the time to reply guys, I really appreciate it!
@Morgan Klein the process for moving an LLC from one state to another is called domestication. While I have never done this, it appears as though you could domesticate to a state that allows series LLCs, then convert your LLC to a series. Obviously there would be a few filings involved and you’d have to amend your articles of organization and operating agreement, but all in all it seems straightforward.
Keep your LLC in the same state that where you have your properties as if you need to conduct any action in court (for instance an eviction or defending a lawsuit from a tenant) your LLC will need to be registered in that state.
The cost of an LLC is not that much in your state, and doing paperwork for 1 or multiple LLC is not that much more difficult.
Personally I would do a land trust for each property. That will add anonymity and make your life easier to transfer one property from one LLC to another without having to redo the title and pay recording fee and stamp.
How much property per LLC is a matter of personal choice and risk tolerance. If you question it right now it means that you are growing inconfortable with the risk of loosing all your properties at once. Then by all mean spread them in multiple entities to limit that risk. If it only cost you a few hundred dollars per year for that peace of mind it is worth it.
For each LLC there is a cost. If your state permits it, I would recommend owning each property in separate "Land Trusts". The LLC should own nothing but a check book. The LLC is your management company. It should lease each property from a land trust with a right to sublet.
A single member LLC can be reported on schedule C of your personal tax return.
A multi member LLC must file a separate tax return which is due by March 15th even if you did not make any money. The late filing penalty is $495.00 per month per member.
If you have a second LLC it could be your mortgage company and have loans on each of the land trusts.
@Morgan Klein great post! I am an insurance broker but got into real estate investing within the last 14 months to diversify my income and create a retirement portfolio and financial foundation for my kids. I bought 5 SF homes and they are all in one LLC. I have 1 million liability at each location and a 5 million umbrella that sits over all my properties so I am starting to inquire about options as well. Again, great post and great questions. 👍🏽
Keep your LLC in the same state that where you have your properties as if you need to conduct any action in court (for instance an eviction or defending a lawsuit from a tenant) your LLC will need to be registered in that state.
The cost of an LLC is not that much in your state, and doing paperwork for 1 or multiple LLC is not that much more difficult.
Personally I would do a land trust for each property. That will add anonymity and make your life easier to transfer one property from one LLC to another without having to redo the title and pay recording fee and stamp.
How much property per LLC is a matter of personal choice and risk tolerance. If you question it right now it means that you are growing inconfortable with the risk of loosing all your properties at once. Then by all mean spread them in multiple entities to limit that risk. If it only cost you a few hundred dollars per year for that peace of mind it is worth it.
The LLC doesn't need to be organized in the state in which the properties are located in order to use that state's court system. He would just file for an authorization to do business as a foreign entity in each non-domestic state in which the LLC owns properties. e.g., domesticate to Delaware, create series LLC, qualify them to do business in Georgia. I'm not advocating either way on doing that but it's a workable approach to addressing his objectives.
The LLC doesn't need to be organized in the state in which the properties are located in order to use that state's court system. He would just file for an authorization to do business as a foreign entity in each non-domestic state in which the LLC owns properties. e.g., domesticate to Delaware, create series LLC, qualify them to do business in Georgia. I'm not advocating either way on doing that but it's a workable approach to addressing his objectives.
I agree that you can use foreign registration, however the fee are almost the same as for a normal registration in the state; You will then incur twice the fee instead of paying only once.
There are some valid reasons to use foreign registration and incur these additional cost in some situations. One of them would be to use a state that has better charging order protection. For that situation, I prefer to use a holding LLC in WY that will give me these excellent asset protection charging order and also anonymity. This WY holding LLC will then own single member LLC in each state where I have a property.
Another reason may be to use series LLC in the state that offers them. I am still intrigued by them as they may become very good tools in the future when they would have been backed up by plenty of case law, but they appear to me a little bit to much untested for now to rely exclusively on them. If you only have a few LLCs, the additional cost to have different ones is not too much for the peace of mind. Now if you have tens of them, it may be worth it.
We use a corporate entity that manages a Texas series LLC, with houses in each cell of the series. I'd like to buy properties where we live in Florida. Our lawyer suggested doing as noted above, making a "filing of foreign entity" so that we can continue doing business with the same entity setup in Florida.