How many properties do you have in your LLC?
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.
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 have to be in the state where litigation would be brought. If you need to bring litigation, you can always file as a foreign entity.
I love insurance and I think it is a necessary for anyone who is getting into investing. But insurance will only cover so much, and it can choose to cover nothing at all if it can be shown that you knew or should have known of a problem and didnt do anything about it. For example, if the insurance can prove that you were in any way negligent or the act was “intentional”, they wont cover the incident. For example, if someone falls on your property because the tripped over a loose floor board, the insurance company will seek to prove you knew the board was loose and chose not to fix it. If they can prove this, they can choose to not cover some or all of the incident.
I cut my teeth in high stakes litigation and would often be in court with large insurance companies over these types of claims. It's important to remember that insurance companies are also businesses that need to make a profit to remain in operation. They are fantastic for dealing with small claims, but they will often work very hard to avoid the large claims. As an investor, you should have extra layers of defense for this type of situation, because it happens more than people realize. The last place you want to find yourself is being sued, then having to start a suit against your insurance company to get them to pay out - they have legal teams and deep pockets, it's a very challenging fight to undertake.
Protecting your assets is ideally about adding as many layers of protection as possible. While I think insurance is a necessity, I also see it as only one piece in the strategy.
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.
Generally how I work with people to deal with this issue is when the Series LLC is formed in Texas (a good article on the best states to form a Series LLC: https://www.biggerpockets.com/renewsblog/best-states-forming-llcs/,) then owning property using a land trust, so you get the benefits of the protection of the LLC without the double registration. If there is a law suit, then the trust would be revoked and you would need to file the foreign entity fee.
As far as the lack of case law against the Series LLC - generally there is a lot of case law regarding laws that have not been written clearly, or there is a lot of room for interpretation. In regards to the Series LLC, it is an entity that is formed from the same language of the LLC which is around 40 years old. I would argue that the lack of case law is actually a strength that expresses the strength of the language used in it's formation. @Brian Bradley may have some input on this, as well.
@Scott Smith I am no attorney although I have several in my family... what I can say is I have never had a client denied a legitimate claim. When you say “Intentional acts” It is just how you describe “intentionally” disregarding a “known” hazard or worse. For most investors here on BP I would hope they are responsible investors and do regular inspections of their properties? I should also point out that every company I write insurance with requires me to take pictures and “field inspect” the properties I write insurance on and then they send out a property inspector within 30-60 days after the policy is inforce to make sure the property is fit to insure. so I am worried about an insurance company denying any property claims I might have (I can’t speak for anyone else) but I also have an attorney on my team as an added hedge and I encourage everyone to have a good team and multifaceted approach to liability exposure/mitigation. Respectfully, I just haven’t ever heard of/or witnessed anything you describe in PA where I am licensed to sell insurance (in your response to my earlier post). Thanks for the dialogue and happy holidays.
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.
You can do that, but as I explained in another post you can actually avoid that fee until the occurrence of a law suit. This is accomplished by owning the property through a Land Trust, which would be owned by the Series LLC. Legally the series LLC would own the Land Trust, but isn't operating the operations of the property. If there is a law suit, then the Land Trust is revoked and the property would then be within the "child" or cell of the Series LLC and you would need to file as a foreign entity. But as long as it can be held in the Land Trust you are not required to file as a foreign entity.
This is still generalizing, as this transition takes more steps. But I would definitely recommend looking into this option as it can save you time/money while still offering the same protection.
@Scott Smith I am no attorney although I have several in my family... what I can say is I have never had a client denied a legitimate claim. When you say “Intentional acts” It is just how you describe “intentionally” disregarding a “known” hazard or worse. For most investors here on BP I would hope they are responsible investors and do regular inspections of their properties but I should also point out that every company I write insurance with requires me to take pictures and “field inspect” the properties I write insurance on and then they send out a property inspector within 30-60 days after the policy is inforce to make sure the property is fit to insure so I am not inclined to worry about an insurance company denying any property claims I might have (I can’t speak for anyone else) but I also have an attorney on my team as an added hedge and encourage everyone to have a good team and multifaceted approach to liability exposure/mitigation. Respectfully, I just haven’t ever heard of/or witnessed anything you describe in PA where I am licensed to sell insurance (in your response to my earlier post). Thanks for the dialogue and happy holidays.
I agree that the best thing you can do to prevent any legal proceedings would be to be a competent landowner and investor. I honestly encourage people in most situations to approach asset protection in these stages - (1) be smart and avoid liability through due diligence, (2) insurance, (3) compartmentalize assets, (4) separate operations from assets and (5) use of trusts within asset structure to provide anonymity. (4 and 5 are interchangeable)
I really don't mean to knock insurance companies, I honestly love them in my own strategy. But I don't rely on them. I place extra fail safes in place for the issues that they might not be willing to cover. I used to make my career off of these cases in which insurance companies wouldn't cover their clients. Just looking at how they structure the wording in their exclusions with the degrees of fraud:
I bring this up because for many investors, they don't consider that insurance might not cover them or even read through the exclusions to their policies. It often will. In the end it is up to each investor the level of risk they are willing to accept.
Thank you for you input @Brian Stennet Sr. I really do like insurance and have several different policies across my investments.
"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?"
Sorry for not responding sooner, I do not track posts.
I have to say I have no suggestions. I do not believe there is adequate protection for debt free real estate contrary to the many options suggested. Lawyers will find their way around any roadblock eventually.
I keep mine fully leveraged and, as I mentioned, pull the equity every few years to keep them that way. While growing I used it to put minimum DPs on more properties. I now reinvest it outside of real estate to generate better returns than dead equity. The reality is you do not need to use dead equity as a way to increase cash flow. Investing it else where will most likely produce even higher cash flow. The key is to not look at your investments as individual properties but rather as a over all investment income. I see no advantage in hoarding cash in a property when it can be generate higher returns elsewhere. Yes the return on the property is lower but who cares if your combined overall returns are higher.
@Morgan Klein For distribution, you can have one or more per LLC, and that depends on multiple factors:
- property class - you might not want to mix A class property with a D class property in the same LLC, due to different tenant level
- cash flow - you might want to keep your cash flow cow separate (and alone) from the ones that barely produce (and can be combined in one LLC till they start "producing")
- equity - you might want to keep the one with large equity in its own LLC while you can group the ones with little equity in another LLC (let's say you have one with 50K equity in its own LLC and 3 other each with only 10K in another LLC, till their equity grows to your risk threshold when you move them out in their own LLC).
- number of units (in the case of MF)
- location of real estate
The investor has to decide what mix is optimal for their situation.
@Morgan Klein @Scott Smith @Richard Sherman First there is a big misconception in what a Series LLC is. It is not a new LLC. The Series LLC is first and foremost an LLC. It is not an LLC until an actual child series is created. This is the first confusion people need to realize.
So, the Series LLC being an actual LLC means that the same LLC case law will generally apply regarding liability shields and piercing the veil. This is because the Series LLC is just a continuation of existing LLC statute and law. When a state legislature enacts a Series LLC, they are not creating an entirely new statute, they are just adding another clause to their existing LLC Statute. So for example they would just be adding section (c) of the existing statute that permits seriezing out of assets into individual compartments. The rest of the LLC statute is the same. Its just an add on.
What courts are going to look at if sued in any state is the existing LLC member liability shields and the "independent liability shield" laws of that particular state. That will be a state by state evaluation. And then that states charging orders will come into play. So when I client comes in, it is not relevant what state they are residence of. You can live in any state and incorporate a business in any other state or country.
But as of now the general consensus is that the courts will use those state independent liability shields of where the law suit was brought. This is from the ABA Journal and opinion letter form various state and federal courts and agencies. Since the existence of the LLC much case law exists piecing the corporate veil, and we still use traditional LLCs. The Series LLC is still a LLC and the way to attack the Series LLC will be the same, to first pierce its veil. Once the veil is pierced, the issue is then will the independent series hold up and stop the bleeding. That will be a case-by-case state by state evaluation into those states independent liability shields and charging orders. Every state has limited personal liability independent shields to one degree or another protecting its members, since every state has LLCs.
Clients should be comfortable that the Series LLC is an LLC and there is lots of existing case law for LLCs and piecing the veil standards that first must be meet.
The principle of separating out assets into compartmentalized series was established way before the existing of the Series LLC. The Tax Court has recognized that the several series of an investment fund may be considered distinct taxable entities. SeeNational Securities Series- Industrial Stock Series v. Commissioner, 13 T.C. 884 (1949), acq., 1950-1 C.B. 4. So has the IRS. Remember that Series LLCs were originally created for mutual funds and series mutual funds. Section 18(f)(2) of the Investment Company Act and SEC Rule 18f-2 (17 CFR § 270.18 f-2). These were then created typically under Business Trusts or Corporations.
PLR 200803004 (the separate portfolios of a series LLC will be individually classified as a partnership, disregarded entity, or association); PLR 200544018. (Separate portfolios of a series business trust are classified as business entities and not trusts; and each one with two or more members that does not elect association classification is a partnership); PLR 200303019; PLR 9847013 (if each series is treated as a separate trust and the creditors of one series of the trust may not reach the assets of any other series of the trust, each is a separate entity for tax purposes.) Rev. Rul. 55-39, 1955-1 C.B. 403, make it likely that the Service will take the same view in the case of an LLC series. Bishop and Kleinberger, Limited Liability Companies ¶ 2.11 (May 2006).
The point of the above cases, and rules is to show that the IRS, SEC, Tax Courts etc have been making rules and case law and guidelines for Series of assets and Series LLC. This is not new. The confusion is most don't understand the legal system, and the testing of the Series protection structure has not been tested in all state courts. But then go back above to what we talked about regarding LLCs and independent liability shields.
History
Just to put perspective of the misconception of the Series LLC being a new entity, it is not. It was first created in 1996 in Delaware. 22 years ago. The traditional LLC first became available in Wyoming in 1977, but most other states did not follow suit until the 1990s). The next state was Delaware in 1991 to enact the LLC. In 1994/5 CA. It was not until 1996 that all states had a LLC. The same year the Series LLC was statutorily created.So it's interesting how people quickly fall in love with the traditional LLC thinking it's been around forever but fairly after the creation of the LLC in most states, the series LLC immediately came in the game and was added into the existing LLC Statute. In fact just one year after CA codified the traditional LLC.
Just a quick timeline of history and the LLC relating to the misconception of the "novelty" of the Series LLC.
@Morgan Klein, one point that might give you a little more comfort is that nearly all types of retirement accounts are exempt property. This means they cannot be attached by creditors and are even exempt from being taken in bankruptcy court. So having large amounts of money in 401Ka or self directed IRAs makes them not able to be attached if a large lawsuit were taken against you. Many states also have protections for your primary home. Some states like Texas and Florida make the entire value of your house exempt. So if someone gets a $5 million settlement against you they cannot attach your $1 million house, or touch the $2 million you have in retirement accounts. Wyoming has a horrible homestead law, it only protects $10K of the values of your residence but it has a great tenants by the entirety protection. Creditors who sue you cannot touch any equity you own in real estate with your spouse ans tenants by the entireties unless your spouse also owes the debt. As my spouse doesn't do any work in the company all my personal real estate held jointly with my wife is exempt. The stuff I own personally is liable for my debts. There are some exceptions, but there are a lot liability protections out there.
@Brian Bradley That is awesome information on the series LLC. I appreciate all the detailed insight from both you and @Scott Smith on this topic. Thank you for sharing all your knowledge, I really appreciate it!
@Jerry W. No, I didn’t know that. I feel like a should have, though. Thanks for sharing that info, I’ll definitely look into those options more.
@Scott Smith is on the money about filing as a foreign entity for a suit. Keep in mind an eviction is also a law suit.
To answer the post, since I'm responding anyway, is going to depend on the equity owner's appetite for risk. For an investor that has a high tolerance, putting 50 houses in an entity may be fine for them. For one with a nervous disposition, 1-3 houses per entity may be their limit.