Create an individual LLC per investment property?

Question

Heard very mixed things about this topic. Thinking this is the way to go for easy accounting purposes. The idea I've seen and heard is that you create an individual LLC per investment property you own for a couple important reasons. 1.) Limited liability through the LLC owning the property rather than one entity owning several. 2.) easy accounting by creating a specific bank account for the LLC (property) where rents go in and specific mortgage and other expenses come out. 3.) I thought of was anonymity protection, however does this matter that much anymore with the new Fincen and reporting laws? any ideas or suggestions would be appreciated.

Account Closed · Answer

Hey @Joshua Bailey,

Checkout my asset protection tier list. Here it mentions how to use an LLC properly for asset protection:

Worst:

–  No coverage, held in your name.

Bad:

• Relying on insurance. This is the most basic level of protection and it is not very effective, but it is still better than nothing. Insurance companies have many exclusions and they may not cover everything, but they can help to pay for some of the costs of a lawsuit.

Good:

• Using one LLC for all of your rental properties. This is better than relying on insurance because it protects your personal assets from liability. However, if someone sues you and wins, they could take all of your rental properties.

Better:

• Using a separate LLC for each rental property. This is the best level of protection because it isolates each property from the others. If someone sues you and wins, they can only take the LLC that owns the property that was involved in the lawsuit.

Best:

• Using a combination of LLC and land trust to protect your rental properties. These are more complex legal structures that can provide even more protection than a traditional LLC alone.

Here are some of the key things to keep in mind when choosing an asset protection strategy for your rental properties:

• Your risk tolerance: If you are not very worried about being sued, you may not need the best level of protection. However, if you are worried about being sued, you should use the best level of protection that you can afford.
• Your state laws: The laws governing asset protection vary from state to state. You should consult with an attorney in your state to make sure that you are using the best asset protection strategy for your situation.
• Your budget: The cost of asset protection can vary depending on the type of protection that you choose. You should make sure that you can afford the cost of the protection that you choose.

Costin I. · Answer

@Joshua Bailey - If you are new to REI you should be primarily concerned with finding good deals and growing your business first. I would not suggest looking into establishing LLCs and asset protection strategies till you have at least $100-300K in equity(!) and only after you covered properly the "other" aspects of risk management (insurance, umbrella insurance, proper property management, etc.).

Here are some visual diagrams to help you in your quest:

Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement :   https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram

Asset Protection Onion Diagram - what, when and at what cost one should implement in terms of asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2

What is needed for a complete asset protection OR the domains that need to be intersected to find asset protection. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram

How a fully implemented asset protection layout might look. -  https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures

Jessie Dillon · Answer

- single-member LLCs don't provide that much protection legally, so if this is for asset protection purposes, it might not do what you think it's gonna do.

- creating an LLC for each property becomes a MESS as you're scaling up, and the annual filing fees plus a tax prep fee for each one are cutting into your cashflow.

- LLCs don't provide much anonymity. trusts do a better job at this.

- i've heard of investors with a LOT of single-family homes structuring it so they have a few similar properties in each LLC, balancing it every so often so there is about 1m of equity in each LLC.

Kevin Sobilo · Answer

@Joshua Bailey, there are many valid viewpoints on this and I don't want to try to give any exhaustive opinion.

However, I will make one comment about what you stated. The specific state can play a factor in your choice. In some states the cost to obtain and to maintain an LLC is negligible but in others its significantly more. If you are in an expensive state, having a separate LLC per property might be too expensive to justify unless the equity in a given property is sufficiently large.

I personally view it as a liability protection issue and base the decision on my costs to have the LLC versus the equity contained within. Having 10 low value properties within a single LLC might make sense while having a single LLC dedicated to an expensive asset may also make sense.

Tony Savage · Answer

I form LLC's base on the amount risk/exposure I'm willing to bear. Here is an example: If I have 2 rentals and they have 200K or less in equity,  I will put both in one LLC because I can bear the 400K exposure. If you have rentals that have 200K+ in equity, you can put them in their own LLC's.  As you grow your portfolio, your tolerance for exposure will increase.  This is the model that I follow for my rental portfolio.

If you want anonymity, start with forming a holding LLC in Wyoming. Your holding LLC will then own your rental LLC.  Makes it a challenge for people that want to sue you to find you.

Ryan Miller · Answer

Your inquiry brings up several valuable points. Here are some thoughts on the concerns you've raised:

1. Limited Liability and Cost Efficiency: The decision on whether to create an individual LLC for each investment property hinges on the cost of the property and the potential risk exposure. For lower-cost properties, such as a single-family house at $200K, the benefits of having a separate LLC might not outweigh the administrative and financial burdens it incurs. However, for higher-value investments, like a $4M multifamily property, the additional protection offered by separate LLCs could justify the costs. It's crucial to evaluate the cost-benefit ratio of this approach, as setting up and maintaining multiple LLCs can become expensive and complex.

2. Accounting Simplicity: Creating a specific bank account for each LLC can streamline accounting processes, making it easier to track income and expenses for each property. However, this level of organization can also be achieved with a single LLC and EIN number, provided that meticulous records are kept. By using separate accounts or detailed accounting practices within a single LLC, you can maintain clear financial records for each property, thus achieving the same goal without needing multiple entities.

3. Anonymity and Legal Considerations: The effectiveness of an LLC in providing anonymity depends significantly on the state in which the LLC is formed. Some states offer greater privacy protections for LLC owners than others. Despite new reporting requirements, such as those imposed by FinCEN, it's still possible to achieve a degree of anonymity with careful planning and the proper jurisdiction. However, the financial aspects, such as bank accounts and mortgages, might be separate from the LLC's ownership. It requires additional steps to maintain privacy.

Regardless of your approach, consulting with a knowledgeable CPA and an attorney specializing in real estate and LLCs is crucial. These professionals can provide tailored advice based on your situation, helping you more effectively navigate tax implications, legal protections, and potential litigation risks. While their services may represent an upfront cost, the long-term savings and protections they offer can be invaluable in ensuring the profitability and security of your investment.

Joseph Bui · Answer

Depending on the costs of the properties, I usually stick to 1 LLC, 1 million liability policy on each propety through property insurance and an umbrella policy of a few million (depending on the number of properties and totall estimated value).

David M. · Answer

@Joshua Bailey

You are doing LLC per property for accounting purposes.  Actually, you have it backward.  Your accounting, really bookkeeping, should done with your accounting/bookkeeping, not your LLC's.  This is almost like saying you open a restaurant and need to make separate bank accounts for payroll, utilities, customers, taxes, insurance, repairs, supplies, food, etc....

Learn to do some bookkeeping and it will make your life, and your accountant's/cpa's life much easier.  Its nice that information is electronic nowadays.  However, they still haven't yet removed the bookkeeping aspect.  Maybe with this advent of AI, but not yet.  we had another a short while ago post where OP said their accountant gave them back all their receipts and wanted them to sort it themselves.  It wasn't worth this time.

Look around BP.  This LLC comes up many times.  Also, some of it only matters with regards with what you are doing.  e.g. anonymity maybe nice, but I don't invest in areas where that is necessary...

I've done all my rentals under my personal name.  MUCH easier cash management and can leverage conforming loans (remember, legal entities such as LLC's are NOT eligible for conforming residentials loans, so no complaining about having to use commercial lending).  Even with a LLC, it still comes back to insurance to protect your assets, especially when it comes to legal fees otherwise you'll go broker defending your LLC.

Note:  I keep seeing comments about single member LLC's providing limited protection.  Sometimes they'll cite that it is a "disregarded entity."  That's a taxation status, nothing to do with its legal status.  Beyond that, I've never heard of a valid, legal reason.

Even with anonymity, its pretty hard to maintain.  Somebody has to sign documents.  So, you have to be able to avoid signing a publicly recorded doc, and should really avoid even non-publicly recorded docs.

LLC's have their place.  Not saying you shouldn't have them.  But, realize there is a cost to them (not just a state filing fee).

I think as mentioned, realize what/how much you are trying to protect with the LLC.  A bunch of properties leveraged to the hilt won't have that much equity to protect.  You are just protecting the lenders really at that point.

Hope that helps some.  Happy to chat.  Good luck.

Tony Savage · Answer

Chris if you have 200 properties and you had them all in LLC's the income that your properties make will fall onto your personal returns due to LLC's being disregarded entities.   This makes it very easy to prepare your year end taxes. Not to mention the asset protection you have especially with so many properties. I do invest in states where LLC's are beneficial.

LLC's are not eligible for conforming loans.  So I have my attorney take my property out of my LLC and quit claim it back into my name.  I make the mortgage payments for about six months or so then I have my attorney put the property back into my LLC.  I just did this two weeks ago.

I know that lenders can execute a due on sale clause.  They're not in the business of taking properties back but they are in the business of collecting your mortgage payment every month.  As long you do that you'll be fine.

To each their own.

Jake Baker · Answer

@Joshua Bailey

It depends on your
risk tolerance and ability to keep organized. It comes down to having
good insurance.

I keep around 5
rentals per LLC and I am in Jacksonville FL where my homes are worth around
$250k.

I believe that most
CPAs will tell you to create a new LLC for every property because that means
more tax returns for them :) Having to go to the bank to open up new business accounts for every rental is ridiculous.

Create an individual LLC per investment property?

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