is an LLC necessary?

is an LLC necessary?

Brandon MorganPro Member
Member since 2023 · 124 posts · 132 votes

hi all, I am new to real estate investing and recently bought my first property a few months ago and got it rented out! I am thinking about the future and how I will purchase properties in the future. I often hear you should get an LLC to protect yourself in case something goes wrong. is that only useful if you have a large portfolio? is that worth looking into right now as I am only in the beginning of my journey? open to any suggestions, insights or past experiences.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
1y

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

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  • Upland, CA · Member since 2015 · 31 posts · 13 votes
    9mo

    It's my understanding that a bank will not refinance a property that's under an LLC. But they will if it's under an individual's name. Has anyone heard of this?

  • Sam TatoPro Member
    Investor · Buffalo, NY · Member since 2026 · 42 posts · 19 votes
    7mo

    I wonder about this as well.  The major thing is transferring ownership from personal to llc with a traditional mortgage in play.  I wonder if anyone here has successfully done this and received permission from the bank to avoid the due on sale clause, and whatever else comes with this.

  • Real Estate Coach · Austin, TX · Member since 2026 · 70 posts · 26 votes
    5mo

    might be worth rebuilding the numbers from scratch. pull actual rent comps, get the real tax number from the county, get an insurance quote, and run debt service at current rates plus 0.5% as a stress test. if it still works after all that then you've got a real deal

  • Real Estate Coach · Austin, TX · Member since 2026 · 70 posts · 26 votes
    5mo

    couple things I'd double check — what vacancy rate matches this actual submarket (not metro average)? are PM fees in there at 8% even if self-managing? and if expense ratio is under 35% of gross rent there's probably something missing

  • Real Estate Broker · Cleveland, OH · Member since 2023 · 218 posts · 83 votes
    4mo

    How many of you keyboard advisors have had your operating agreement, sales records subpoenaed or sat in a deposition? Unless you've been through that or you're an attorney, you don't know.

  • Danielle DalyPro Member
    Rental Property Investor · Denver, CO · Member since 2021 · 54 posts · 77 votes
    1mo

    Congrats on purchasing your first property, Brandon! That's a huge accomplishment and you should be really proud!

    I'm 3 properties in and have decided to hold off on an LLC for now. I have great insurance and an umbrella policy, plus I require al of my tenants to have renter's insurance, which makes me feel safe in my earlier stages of investing. I'll likely get one down the road once I have a few more properties, but I feel comfortable with this setup for now.

    To each their own!

  • Member since 2026 · 1 post · 2 votes
    1mo
    I started my LLC the very first thing!
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