Should You Put Your Rental Properties in an LLC?

231

Should You Put Your Rental Properties in an LLC?

The answer is- maybe. But maybe not.

My upfront disclaimer is that I am not a legal expert of any sort, nor am I a financial or tax expert. I can only tell you, as an owner of rental properties, my experience in researching LLCs as a potential entity structuring method and the results of that research. You should not make any decisions regarding the structuring of your properties without consulting an expert in the field.

Whether you should put your properties into an LLC or not depends on your situation and what your goal by doing so is. How many properties do you own, what states are they in, are you just wanting the legal protection from the LLC, would it benefit your financing options, or do you just want to sound cool and say you own a company?

I say that last one with all sincerity but in my experience, that last one is a big driver for investors. Maybe it’s not that you necessarily want to seem cool because you own a company but because you just assume that you should create a company to hold your properties. Shoot, I thought that at one time. We hear about it a lot, we hear the gurus talk about asset protection, so we assume we need it. No harm, but let’s get educated first.

The 20 Best Books for Aspiring Real Estate Investors!

Here at BiggerPockets, we believe that self-education is one of the most critical parts of long-term success, in business and in life, of course. This list, compiled by the real estate experts at BiggerPockets, contains 20 of the best books to help you jumpstart your real estate career.

Click Here For Your Free eBook!

Benefits of an LLC

Why pursue an LLC at all? An LLC can offer both asset protection and tax advantages.

  • Asset Protection. I think this is the big one that drives investors to pursue an LLC. The big liability with a rental property is if a tenant slips and falls and wants to sue you. You know as well as I do, people will sue for anything these days and as soon as someone knows you own properties, you are an immediate target. If you aren’t protected in some way against this, all of your personal assets may be at risk if you are sued.
  • Tax Advantages. Putting your properties in an LLC can offer options of pass-through taxation, avoidance of double-taxation, you can get taxed as a partnership, or if you have the LLC taxed as an S-Corp you may be able to use that to reduce self-employment and other taxes. All of those benefits would have to be tailored to your specific structure and situation, and not all of those options would apply to everyone, but those are some of the things that may be of benefit.
  • Seriously sounding cool. I mean, we all want that, right?

Disadvantages of an LLC

Whoa, wait, there are disadvantages? Ha, I didn’t even know that when I first started out. I’d like to also call these disadvantages- “realities”.

  • Cost. This issue will vary depending on where you live and how you do it, but an LLC can really dig into your cash flow. For instance, I live in California so there is absolutely no way I can avoid the $800/year fee that is required for all LLCs to pay. Even if the LLC is a Georgia LLC, for instance, because I live in California there is no way I can avoid it. Another beast of a fee is the cost of filing the separate tax return for the LLC if you use an accountant, which I absolutely recommend if you are dealing with rental properties. For me, that would be another $800-850 per year. Nevermind the fees it cost to set up the LLC in the first place. I don’t recommend using one of those cheap online deals where you do it yourself because one of the biggest financial benefits of rental properties are the tax advantages and if you aren’t set up correctly you’ll miss out on a lot of those. Moral of the story, investors often don’t realize the reality of the impact of entity fees against their bottom line.
  • Financing. Many, if not most, lenders won’t lend to LLCs. Even if they do, it will still be backed by your personal name anyway. In general, getting financing for properties under an LLC name can be very difficult if not impossible.
  • Non-Foolproof Asset Protection. There are situations where an LLC may not protect you from lawsuits. Be sure to understand what those are. Also, if a lawsuit were to happen, sometimes having an LLC can actually complicate the process making it difficult for resolutions to be reached quickly.
  • Triggering Due-on-Sale Clauses. This one only matters if you already own a financed property. Oftentimes investors will buy properties under their personal name and then quit claim it to an LLC. There is no problem in doing that, but there is a slight risk that doing so could trigger the “due-on-sale” clause in your loan agreement meaning you would owe the remainder of the loan immediately. That could be a lot of money to have to come up with out of pocket! I was told it is a small chance it could happen, but a small chance with that much money is worth considering.

To LLC or Not to LLC?

Again, it depends on your situation and what you want to accomplish by forming one. The two non-negotiables are:

  1. Consult a licensed professional who specializes in real estate investing to guide you on what you should do.
  2. Even if you don’t form the LLC, be sure you have asset protection of some kind.

An alternate to forming the LLC in terms of asset protection is getting an umbrella insurance policy. These policies are fairly inexpensive (mine is only $21/month for all my properties) and it gives you the same protection against lawsuits as LLCs will. This is a much cheaper option for the same protection benefit and having that policy will oftentimes make the litigation process easier in case of a suit than having the LLC to go through.

My Properties

My properties are not in an LLC. That doesn’t mean I’ll never have them in one, but for the time being I am not going that route. By the time I ever looked into putting them in one, I already had mortgages on them and risking the due-on-sale trigger was not something I wanted to tempt.

Then, adding up the expenses associated with me forming the LLC negated a good chunk of my cash flow that I’m not willing to part with. I instead put them all under the umbrella insurance policy and they are now as secure as if they were in an LLC. I will eventually move all my properties into an entity I’m sure, but that is later down the road when I own quite a few more and have a lot more cash flow margin to work with.

What are your experiences? Are your properties in LLCs or not, and why?

Photo Credit: CarbonNYC via Compfight cc

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

231 Comments

  1. Good one !!!!
    I am at the beginning stage of all this and comparing everything and I am inclining towards not having LLC’s even though I live in Florida and the cost is not as high as yours…

  2. I think you gave a good analysis but just to clarify. You and your properties are not just as secure as a properly structured rental ( or group of rentals) in an LLC. In a properly structured LLC, worst case scenario your LLC is forced into insolvancy and your properties owned in that LLC are lost. In you scenario in the worst case you could still lose everything personally in the worst case scenario as it is not a separate identify and is directly tied to you.

    As you stated in both cases this is unlikely with proper management but there definately is a difference in your protection.

    • Good point Kyle. I forgot to bring up the difference in what is at risk should something go haywire- your personal assets versus just the asset(s) in the LLC. Thanks for mentioning that! Very important in considering your best option.

  3. Not really, it depends, if you are a single member LLC with assets in an LLC it is easier to pierce the veil with charging orders granted by judgment, and in some states to foreclose on a member’s interest. With that ability you can manage distributions to pay a debt. I see an LLC as more protection than a SP holding assets, but not in all cases. If your LLC is insolvent you’re probably are in a CH 11 bankruptcy and assets you have in personal accounts can also be attached after the LLC is liquidated. For example, bank loans, or, if you slip and fall because you were found to be unknowingly at fault they cannot get to assets in the LLC they will go after you personally. It is more difficult and hyper complex to “manage an LLC properly”, your risk are higher at not knowing all the laws that link to LLCs vs SP, and many laws are still being written or challenged in many states based on case law, still a lot to define, LLC and RE law, contract law, etc. There is a lot of grey are in holding rentals in a LLC vs SP that has been done by many for centuries. LLCs are in sort a new fad, yes a way for ppl to look cool, a scare tactic….most don’t do their homework or simple can’t due to hyper complexity.

    An improperly managed LLC or SP stands no chance, and it is a myth that umbrella polies, liability, WC will defend violations of the policy holder(s) to the specific policy exclusions, state, fed laws, and case laws.

    Where I see REI’s benefiting from LLCs is first multimember, and in the case where they are managing subs in which case most REIs are basically managing a construction company and are not doing it properly acting as a GC, PM, employers, etc. The exposure to liability and WC goes up, if managed properly (whatever that may mean legally), and insured properly the risk goes down. I look at assets to include legal fees having to defend a law suits and a personal ability to make income for the rest of their lives, not just real property.
    Here is my favorite answer, there is none by Mr Reed: http://www.johntreed.com/entity.html

    • Brian Jones-Chance

      In my opinion, it is prudent to always hold investment properties in Nevada or Wyoming LLCs where there is charging order protection. The worst case scenario typically is the forfeiture of distributions. Because of this, attorneys don’t usually pursue suits with these types of entities. If you never make a distribution, they will never be paid.

      • William Morrison

        Brian, you only have half the equation solved by going to Nevada.
        If you have an LLC doing business in another state they will require you to file as a Foreign Entity. The assets within that entity are exposed from within.

        You will also be required to acquire the services of a register agent if you don’t have a permanent address in that state with regular business hours.

        The Nevada advantage is multiple Entities held by one over arching entity. The idea is to protect on entity from another. Or so the story goes.

        The rental or investment property you own outside of Nevada in a Nevada LLC is bound by the rules and laws of that state.

  4. Ali, I think a clarification is in order. You highlighted many of the key advantages and disadvantages of having a LLC for this purpose, and I agree that having umbrella insurance is a good idea. However, insurance is not the same as having a properly formed LLC when it comes to asset protection. Insurance provides you a funding source to resolve disputes over your liability, and possibly to settle and pay claims. To all of this, I would caution investors not to get suckered into expensive and complicated “hide the ball” asset protection schemes, where you are advised to form an entity in one state and then make it a member of an LLC in another state. Not only is this expensive, but of dubious effect. It is more likely that you will lose track of your entities and miss a filing deadline, exposing yourself to full liability because your entity is suspended. I advise my entity clients to “keep it simple.”

    • I agree, Jeffrey. It is really not an issue of “either/or” as an umbrella/liability insurance and an LLC are/could be created for different reasons. Think of the LLC and other work you may do with legal and financial advisers (such as attorneys and accountants) as your “castle walls and moat” around your assets, personal and otherwise. Think of the insurance you secure as an “archer in the watchtower”. In other words, the walls and moat should be your foundation as it pertains to protecting you/your assets. The archer (insurance) won’t pick off every bad guy that tries to get in, so having the walls and moat is vital. Think of them working together not in lieu of each other.

    • Paula R.

      Good advice, Jeffrey, to “keep it simple”. But my sis (who, perhaps importantly, lives in CA) and I (in New Mexico) want to buy a rental property here in NM. Since we both have other properties, I was thinking a NM LLC (which I’m told is even better than NV in terms of reporting and protecting the corporate veil) would be the best way to protect us in the event of a lawsuit. Now my insurance agent (Allstate) says he can’t insure an LLC or even list it as an additional insured–only the two of us personally. Anyone have any advice on how to set this up for best protection for the two of us? We’ll be paying cash. Thanks!

  5. When I wanted to do an LLC, it took my CPA and lawyer less then 2 minutes to talk me out of it for the exact same reasons you stated. Umbrella insurance is a lot more cost effective and easier to do. One- one million dollar policy covers everything I own, up until I use it (Murphy’s Law).

    • William Morrison

      Jim, I went to an attorney involved on the law suit side to see how much insurance to get.
      His response changed my mind.
      During his investigative stage he finds the value of asset and the amount of insurance. He adds them together as the absolute floor for his law suit plus legal cost.
      Then adds to that. During the legal process it’s rare to get back to the floor during the settlement.
      He was not talking about a frivolous law suit.
      But one with some basis. That changed my mind.
      Now I have both insurance and an LLC where I can (more of a loan issue).

  6. Jeff Brown

    RE: Financing. I’ve had to put the brakes on many 1031s over the years, before they sold, or closed a pending sale of property about to be exchanged, tax deferred. They had the property in an LLC, or family limited partnership, or any of the other ‘cool’ ways of holding property. If they’d closed the sale of what woulda been called the ‘relinquished’ property, the IRS wouldn’t of had a problem with them completing the 1031 as ‘123 LLC’.

    However, as you so rightly pointed out, the lenders simply won’t loan to the LLC. The investor, remembering they’ve gone in and out of their family trust for the same reason, lending that is, they transfer the property from the LLC to themselves. That’s the end of their tax deferred exchange. The rules require the exchange to begin/end with the same ownership. John Doe sold the relinquished property? John Doe will dang well acquire/close the new property(s), or ‘upleg’.

    Good stuff, Ali.

    • Thanks, Jeff. Great real-life practical example of when an LLC can hurt more than harm. Moral of the story, if you don’t really need one, don’t get one. But if you need it, just be aware of potential hurdles later. Thanks for sharing your experience!

    • Forgive me if I’m not following correctly Jeff (and chances are I’m not) but if one had their property in an LLC and wanted to do a 1031 are you saying they should transfer the property out of the LLC before even beginning a 1031?

      Or are they just screwed?

      Just curious. In my experience, asset protection has been the most confusing aspect of RE investing. I get a different answer from whoever I talk to.

      Thanks!

      • Not an expert at all, but I’m pretty sure the entity that is exchanging into the new place had to be the one that originally took title of the relinquished one.
        I don’t know if quit claiming in and out of entities during the hold time messes things up in the end.

        • Yes, the loan would have to be in the same name. Some lenders are willing to then do a second note in a new entity name, if need be. You and the lender would agree on that structure on the front end. Transferring the assets twice creates twice the paperwork and more credit risk for the bank in the interim (sometimes the new asset in the original LLC name for a month), so it would have to be worth it risk/return-wise for the bank. I have only seen this done with $500K plus loans to business clients that have $3M in loans with the same institution.

  7. John Thedford on

    In some states an LLC may not offer any protection contrary to what some people believe. In Florida, a single member LLC offers zero protection due to a supreme court ruling. When we did a LLC in Florida we set it up with multiple members for this reason. I like the benefits of the LLC and believe it offers better protection than a S-corp.

  8. John Thedford on

    p.s. –we recently had an attorney speak at our local REIA meeting and his suggestion was holding properties in land trusts. He tied those in to an LLC with the LLC being the beneficiary of the land trust. That is the current route I am exploring with my attorney who stated he prefers that land trusts as well for a few different reasons (it is easier to keep your name out of the public records which is often where people start looking to see your assets).

  9. Toby Johnston on

    Nice summary, including all the follow up comments. Just so that no one is lead astray, if you are using the LLC to hold long term passive investments, there are really no income tax advantages that you can’t get holding title in your own name or name of your living trust. I am a CPA and do a lot of work with real estate investors. The idea that you can get substantial tax savings from an LLC (again in the passive investment context) is sort of a myth that I have to educate many of my clients on. If it were the case, then the extra fees for tax filings and accountants would pay for themselves with tax savings. From a professional perspective, I love the extra fees I can charge for doing LLC tax returns but I only recommend clients use them for one or more of the following reasons:

    1) multi member ownership
    2) substantial personal net worth liability protection
    3) valuation discounts for transferring ownership in an estate planning context
    4) privacy / identity protection

    • William Morrison

      Toby, I like your post.
      I have a 5th unless you consider it to be within number 2.

      If you have multiple properties having them in several LLCs allows for one to run into legal issues and basically go to zero without affecting the others. This is assuming we are not talking negligence by the owner outside of the LLC which removes all barriers.

      Some think the value might be $250,000 to maybe $500,000. Not numbers for someone just starting out though. So lets say $100,000 rentals with 30% equity and a 5% reserve to start. You have 8 or 10 properties. Accounting cost and annual filing cost (NC is $200 per year) go down in relation to the total.

      Many in retirement have that in their 401k or IRA. A great source for real estate.
      You’ll need a Non Recourse Loan and a reserve.

      Some use number of properties, say 3 to 5 $100,000 (with debt) and expect them to grow over time with rental income and debt buy down. Generally a wealth building strategy, not income.

      As to any tax advantage, there is if you own an S-Corp to manage your properties (not those held in a 401k or IRA). The same expenses are handled differently as you know in an S-Corp.

    • d Decker

      If you decide to change the property from “own name” to “LLC” ownership, how do you make the change on Schedule E to get the property from page 1 (properties in own name) to page 2 (partnerships and LLCs)? Also, how do you make sure that the loss carryforwards continue?

  10. I’ve never had a problem with the due on sale clause. That hasn’t been an issue for years. I’ve used LLCs and they have been proven to be the safest way to asset protect your individual rental properties. It’s important that they separate out each rental property into its own LLC so that properties with equity are not attached to any kind of lawsuit that would happen on the one property getting sued. LLCs are a great way to go and most banks, if not all banks, will understand why you would quit claim your property into an LLC. It’s a very standard practice. Now, I’m not an attorney. But the five attorneys that I’ve met with on a constant basis would agree with me. At least, they are the ones that came up with this reasoning, And it’s worked for the multiple properties that I own… So far. And, I’ve also found a ton of protection there from the frivolous lawsuits that have hit me as a rental property owner. It’s just part of life. If you own property, you are going to get sued at one point. Tenants are notorious. No matter how good the landlord you are, it happens, so take a breath and get a good attorney.
    All the best – Jared

    • Jared, It sounds like you’ve got the best protection setup. So you have a seperate LLC established for each property? How much extra expense is that at tax time and have you run into trouble getting a loan with the LLC? Ali and all, this is some great information. Thanks.

    • William Morrison

      Jared I agree an LLC is the way to go.
      Although I have both.
      Like many when you start out it may be tough to get your property settled in an LLC.

      I have not had the same luck in the legal area when moving a property with the quit claim process. Your loan is still public record. So as I posted above, I checked with a lawyer on the law suit side. What’s he do, he notifies the mortgage company.

      I called the holder of my mortgages for three of my properties. They have a policy that they not lend to LLC under any circumstances. I did not borrow the money from them. My loans were sold within weeks of settlement. They would absolutely implement the due on sale clause if they found out. So your law suit could be the reason they find out.

  11. “p.s. –we recently had an attorney speak at our local REIA meeting and his suggestion was holding properties in land trusts. He tied those in to an LLC with the LLC being the beneficiary of the land trust. That is the current route I am exploring with my attorney who stated he prefers that land trusts as well for a few different reasons (it is easier to keep your name out of the public records which is often where people start looking to see your assets).”

    I read about this a little, seems like another myth. There’s no hiding from tenants, management companies, tax assessors, HOAs, mortgage companies, contractors, that record to the public, etc. Often a contract is not legal until it is public record. Perhaps if you are one to own free and clear properties and you want to make it a little more difficult for prosecuting attorney’s to find you, but a good one will find you and your assets make no mistake. Begs the question why hide? Also, having your assets go to an LLC after death may be too late if someone does find you, and difficult to manage and distribute in estate planning and probate. Sounds convoluted to me, having an LLC operating agreement, partners, contracts, as beneficiaries to a land trust. I’m about ready to place a mechanics lien on a rental of a client, name is on my contract, recorded public mortgages, etc, making it very difficult for a REI to conduct business and hide behind a land trust.

    Now series LLC’s are getting popular, my state just approved them. Seems like a way to make it more complicated legally and to insure, I imagine another attorney’s brilliant idea.

    I have a dead beat client right not I did some construction work for that is a REI inc, I am a LLC. I have to hire an attorney to collect the $6500 owed. I am contemplating going to small claims where the limit is $4K and take a $2K loss since I can rep myself. Attorneys want 40%, collection agencies 33%, if I were a SP I could represent myself in district court and with the contract I have a slam dunk!

    If you are an LLC and you fail to just put your title by your contract signature the court will see you acting as a SP and treat you as such, or use your business account for personal, etc, lots of dos and don’t around the LLC law, small details a prosecuting attorney will have a field day with if not managed properly, knowingly or unknowingly.

    • John Thedford on

      It is not about hiding from tax assessors, prosecuting attorneys, etc. It is about protecting assets as well as having your assets less exposed from public view. Ever heard of a nuisance suit? That is just one reason to use the land trust strategy. Nothing is foolproof but why increase odds of problems?

      • Well for one, a construction company will never sign a contract to do work to a land trust property if you want to hire a contractor, nor will a management company, lender, etc. When you talk about “having assets less exposed” what is that besides hiding? The only worries are from creditors, or judgments, that you either owe or are guilty of. In that case, a prosecuting attorney is coming after you, the plaintiff’s attorney can still do discovery and by law you have to disclose assets. All a land trust does is hide your name and you trustees, but it will not be hard to find unless you do your rental business in a closet, or try.

  12. “ I’ve used LLCs and they have been proven to be the safest way to asset protect your individual rental properties. It’s important that they separate out each rental property into its own LLC so that properties with equity are not attached to any kind of lawsuit that would happen on the one property getting sued. It’s a very standard practice. Now, I’m not an attorney. But the five attorneys that I’ve met with on a constant basis would agree with me. At least, they are the ones that came up with this reasoning, And it’s worked for the multiple properties that I own… So far. And, I’ve also found a ton of protection there from the frivolous lawsuits that have hit me as a rental property owner. It’s just part of life. If you own property, you are going to get sued at one point. Tenants are notorious. No matter how good the landlord you are, it happens, so take a breath and get a good attorney.
    All the best – Jared”

    Attorneys and legislators are notorious and commonly known for creating complex legal matrix’s that reap them the maximum amount of profits. I don’t even listen to 25, you really have no idea that what they are recommending is valid until you go to court and see how you make out. You would be better off looking at some case law, or have these attorney’s point you to some in your state, or a statue(s). Anything less is heresay. I did a search to find some cases where having properties in separate LLCs or series LLCs and found none in my state, please post some. The only time I found that a charging order and foreclosure was upheld to the plaintiff was in the case of fraud. You don’t need ten LLCs for ten properties, ridiculous! Lawyers making $ is all that is. I’d be interested in seeing proof otherwise as in a case.

    • I’ve heard the same thing over and over, Terry. Good note. Lawyers can be salespeople with the best of them.

      I’ve had some big investors tell me how it is very easy to “over protect”, i.e. spend a ton of complicated strategies because lawyers said so. They got caught in it themselves and have learned from it and were able to warn me off from it. Have to find that balance.

      • Ali, I have read most of the comments and have to say it looks easy to get confused. My situation is that that my wife and I own three rental houses outright in Oklahoma. We do have an LLC but have not moved the properties into the LLC as of yet. I think I will go ahead based on what I have learned and on the advice of our tax preparer. I would really like your opinion on my situation if you care to reply. Thank you very much.. Mark B

  13. When I bought my first rentals and started pursuing putting them into LLC’s I was pretty surprised at the advice I was given. After talking with my RE agent, insurance agent, property manager, CPA, and an attorney not a single one recommended it. These people all own their own personal rentals and deal day-in day-out with investors. All gave the same advice, purchase an Umbrella Policy.

    • You would have to be a fool to have an LLC and not insure it with a commercial liability policy as well as WC law suit protection should someone get injured on one of your properties and sue you for negligence. Some states have laws that if you have anything to do with roofing, rehab, you have to prove you have liability and WC insurance to the states Attorney General’s Office and register with them for a filing fee. This is what I meant by some REI’s acting as GC not knowing what they are doing and before you know it they are paying a $10,000 fine, and no an umbrella policy won’t cut the mustard here those are for homeowners.

        • Not, bad, I pay $1000/yr for a 100/500/100 accident and disease WC to manage subs..if I take on employees or insure myself to do work it sky rockets. Liability $1000 w/a general aggregate limit of 2 mil, I also have 2 mil products/complete operations aggregate limit. Note that my LLC is the ‘insured’, which helps prove that I am operating as an LLC, not an SP.

          My LLC is also listed on all my subs insurance policies as insured, and I require all my subs have liability and WC certificates in my file so I can show them to my annual auditor. If they find I am not, they will raise my rates. If one of my subs comes after me my insurance will kick in to handle legal fees, judgements, unless I am in violation of one of the listed exclusions which I am well aware of.

          As most, the policies are written vaguely and ambiguous, cross referencing, not all inclusive, even my agent with alot of experience struggles, hence my LLC. IMO this is the next area of insurance new laws are needed to mandate easy to understand policies as they did recently with medical. I also had a hard time getting preliminary policies to read before purchase, no law mandates I am entitle to that. I am able to cancel after purchase.

          The

  14. Ali,

    I am a Texas attorney and I have formed a number of series limited liability companies for my real estate investor clients (both residential and commercial). In addition, I have converted several limited liability companies to series limited liability companies. I have written and spoken on the series limited liability structure.

    For the unfamiliar, a series limited liability company is an LLC that, in essence, has a “master” LLC and one or more individual “series”. (More on this in the last section – below the dashed line.)

    The following states have a series limited liability statute: Delaware (since 1996), Texas (since 2009), Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah, Kansas, District of Columbia, and Puerto Rico. Each state is a bit different and your readers in these states should consult an attorney familiar with their state’s statute (and any relevant case law interpreting that statute).

    In Texas (under the Texas series limited liability statute), a series LLC is a great choice for real estate investors. It offers all the advantages you mentioned in your article (i.e., asset protection, tax advantages, and it sounds really cool). More importantly, however, it ameliorates many of the disadvantages you identified. Briefly, here’s why:

    (1) Cost:

    In Texas, the filing fee for a series LLC is $300 ($325 if expedited). Every time a new series is added to the series LLC the owner does not have an additional filing fee.

    (2) Financing:

    Many larger lenders in the states I identified above are becoming more comfortable with this choice of entity. Depending on the borrower, some lenders may want to cross-collateralize the assets (cross-collateralization is often required by lenders making a loan on multiple properties in the series LLC) and most still require a personal guarantee (which most of the time can be negotiated to include the so-called “bad-boy carve-outs”).

    (3) Non-foolproof asset protection:

    In a business friendly state like Texas (and Delaware), states are respecting the individual structure of each series. As long as the owner keeps a proper accounting among the assets there should not be any issues. Series “A” will only be liable for the debts and obligations of Series “A” and Series “B” will only be liable for the debts and obligations of Series “B”. In other words, a lawsuit against Series “A” won’t affect “Series “B”.

    (4) Triggering due-on-sale clauses.

    This is only a disadvantage if the respective loan is not personally guaranteed. If the loan is personally guaranteed then this shouldn’t be a problem (just be sure to get consent from each lender).

    ————-

    A typical series LLC structure for many of my real estate investor clients looks like this (I’ll use my last name in the example):

    Master LLC = Clark Holdings, LLC, a Texas series limited liability company.

    First series = Clark Property Management, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.

    Second series = 123 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.

    Third series = 456 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.

    I run my property management through the first series. The second and third series each hold their respective property and the respective debt.

    If, subsequently to setting up my series LLC, I buy another property, I simply add a fourth series (i.e., 789 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas limited liability company). If I subsequently sell the asset in the first series, I then can dissolve that individual series.

    I hope this gives you and your readers some valuable insight in to the structure of a series LLC.

    Yours truly,
    Bradley B. Clark

    • Have you ever tried any cases with a said series LLC in TX? If so please post a link? Here, KS case law continues to redefine LLCs with case law even recently where Davis, indemnification of attorney fees to a poorly written statue:

      http://www.llclawmonitor.com/2013/05/articles/indemnification-1/kansas-court-enforces-statutory-indemnification-and-awards-attorneys-fees-in-fiduciary-duty-lawsuit/
      You’ll also find a lot of other states challenging LLC statues on the internet making them in part vague and ambiguous, convoluted, as Reed points out. I’d be interested in your take on Reeds position.

      http://www.johntreed.com/entity.html

      Here is the statue for Series LLCs in my state of KS. http://www.kslegislature.org/li_2012/b2011_12/statute/017_000_0000_chapter/017_076_0000_article/017_076_0143_section/017_076_0143_k/

      Like TX if the operating agreement, Articles of Incorporation, series names @ our Secretary of State, are set up properly each series can be a separate legal entity. You don’t need an attorney to set up a LLC or an LLC it is simple to register them at the states website, and find the statues that govern them.

      http://www.kslegislature.org/li_2012/b2011_12/statute/017_000_0000_chapter/017_076_0000_article/017_076_0143_section/017_076_0143_k/

      Also, not too difficult to set up an Operating Agreement. Here it only cost $160 to register a LLC, series LLC $250 and $100 to add a series.

      I can see a lot of legal fees some would pay to have this set up without knowing the outcome in a court of law, case law that interprets statues, especially multimember LLCs. Also, series LLCs are difficult to insure my agent tells me so check it out. If it cost a fortune to insure them and/or creates legal or insurance, contract, ambiguity or complexity, maintain them, etc, then what is the point.

      Looks more cost effective then filing separate LLCs for each property but who really knows the difference. Begs the question why all states do not have this statue, also why all states do not allow foreclosure. I think Reed is correct what a legal mess and there is no answer.

      Looks like some flexibility tax wise which is good here they can be treated as a single entity or a series.

      • Terry,

        I’m not sure I understand what you are asking in the first paragraph. As for Reed, I do not know him and have no opinion on his opinions which appear to be based on his years of experience as an investor. That experience is, no doubt, very valuable, and everyone can learn form another’s experiences. Each state’s series LLc statute is different and each state’s corpus of case law interpreting their respective series LLC statute—not to mention their LLC statute—is different for a myriad of reasons. One issue with using DIY legal is the possibility of omissions which the non-lawyer isn’t necessarily going to realize. Finally, having an attorney prepare the documents also serves as an insurance policy.

        I’ve enjoyed this topic of discussion; thanks for replying to my comment.

        Yours truly,
        Bradley

        • Brad, thanks for the reply… In paragraph one of my first reply I was asking if you had represented any of your or another attorney’s clients in a court of law with a series LLC structured the way you posted? If so I’d like to review the case?

          I know attorney’s like to recommend using attorney’s, I mean why shouldn’t they are like everyone else who has to bring bread and butter home and I respect that. What I have found is at times it can become interesting to get two to agree in the same state practicing the same law. Seems they are entirely specialized now because law has become convoluted as Reed points out well. I think whether Reed is an REI, attorney, average laymen, or has consulted with many attorneys on the subject matter, it doesn’t matter his points are still hard to debate obviously.

          Here is an example the beginning of my states statue on series LLC that has this disclaimer,

          “Notwithstanding anything to the contrary set forth in this section or under other applicable law”

          Here is the statue: http://www.kslegislature.org/li_2012/b2011_12/statute/017_000_0000_chapter/017_076_0000_article/017_076_0143_section/017_076_0143_k/

          Illustrates Reeds point that law is convoluted and may pint to other law needing a “general contractor” of law if you will. Also, I always keep in mind that in a court of law there is always the plaintiffs and defendants attorney and what my attorney states as law may be challenged.

          LLCs are a relatively new entity and in some states like mine series LLC very new. The LLC statues are still being challenged; it is just a matter of time before the Series LLC is as related to contract and RE law.

          In the meantime, we now have all these internet services and attorney’s to set them up surrounding them, when in fact it takes about an hour to set up an LLC and register it. It is very simple, so is a series LLC, I did my own and there is no risk to that in a court of law. Where people may need some help is contracts, a contract attorney, mine has some issues in collecting attorney fees I have an attorney looking at one paragraph for free. Imagine that I get free advice when it comes to collecting attorney fees 😉 Setting up an Operating Agreement for multimember LLCs may require an attorney. I have also had numerous free advices from my states WC attorney and private personal injury attorney’s. There are also small business development resources from state programs and universities, attorneys, CPA’s, that helped me tremendously. So “DIY law” can be backed by legal advice for free. I’m no attorney but feel I have done enough research to know when I need help, and do not, and at least can talk on an educated level. I’m also continuing my education and have learned few things from this blog like how to sign my contracts, thanks Ali.

          By the time I was to get a series LLC (which I am considering) set up I could spend a considerable amount of money with all the operating agreements and articles of operations. Before I did that I would definitely ask an attorney to show me a case that he won where the corporate veil was being pierced by a charging order or foreclosure if my state allowed it (which mine does now from case law). I’d ask to see and understand all the details of the case and see if it related to my portfolio and business plan of rental properties to the best of my ability. Before I did that I consult my insurance agent as I have already to find out how this series LLC would be insured by a CL (commercial liability) and WC policies and review total cost. Other considerations would be accounting and books, taxes, labor (employees vs. subs). At that point if I felt like my layers of protection with respect to cost were adequate I’d hire an attorney, otherwise IMHO there is not difference to educated DIY, not at this point in time, further, whether old school sole proprietor landlord-tenant laws that have worked for centuries is the better solution, not only for asset protection, but in set up fees for that same protection.

          At the end of the day, the best defense against law suits is to make sure you understand the surrounding laws to your business model that you pay your debts, are not negligence, knowledge is the best legal defense and asset protection out there and it is free.

        • Bradley,

          Can you comment on liability limits that LLC can be sued for in Texas? Are there caps in place? Or is this one of those myths.

    • Jamie Addeo

      Bradley,
      Would you recommend a Series LLC when owning properties in Multiple states? My series LLC is set up in Delaware. I am about to add two additional series: First is; 123 Main Street in NEW JERSEY and the second is: 123 Main Street in CALIFORNIA.

      What are your thoughts on this?

  15. Also if your insured LLC manage subs in a rehab situation (where risk is high of personal injury) there is little chance they can file a claim and your premiums sky rocket. You really do not want claims against your policy either.

  16. useful tips here. Our estate attorney said said after 40years doing law that LLC’s are easy to penetrate and we went with a trust so the real estate is in the trusts name(more so for estate planning and taxes) and we have a large umbrella policy. Attorney said that as long as your are aren’t negligent then its hard for a landlord to be held liable. It does though depend on if you actively manage or outsource to a property manager. Also depends on if you are local or not to your properties to keep an eye out on property condition/maintenance.

  17. Ali’s original post has morphed into an interesting discussion about various asset protection strategies, some of which are truly “urban myths,” and others may be valid depending on which State you do business in. However, there continues to be a disturbing trend to confuse the role of insurance and entity, and some continue to confuse a trust as an entity. Tax considerations play a major role in determine the type of entity you want to use. No form of entity, nor any insurance policy will protect you against acts of fraud or willful or deliberate acts of negligence. Insurance is for catastrophic occurrences; they are not legal entities. Trusts are great for estate planning, but do not provide any asset protection. Land trusts and other “hide the ball” techniques promoted by some individuals (who make money setting them up), are not a form of asset protection – only delay, and in some cases – illegal. Setting up a LLC should be thought of as starting a business, not a hobby. It needs to be properly maintained, managed and operated like a business. If the costs are not justified, don’t do it. That is what Ali was saying. Consult with a legal and a tax professional; don’t rely on what “some guy at the REI Club” said worked for him.

    • Perfect comment Jeffrey. Great summary and clarification.

      All the options should not be considered as equal alternatives to each other, but rather different options that can cover similar goals. The first thing to be understood should be the goals (asset protection, taxes, etc) and then compare each of the options. None are replacements for the other and the professionals need to advise each individual situation. Just be careful what pros you talk to.

  18. Hi Ali,

    I currently have my properties in an LLC but it’s important to check the local laws regarding operations of an LLC for rental real estate. In my market, Washington, DC, LLC’s cannot represent themselves in court actions. This means hiring a lawyer for everything whether you can do it yourself or not. It can get costly, especially for beginners. Great topic and information. Thanks for the article.

  19. Great info thanks for the enlightening article!

    For the “umbrella” policy many have discussed here, is that putting all the rentals under one policy and what are the coverages/avg annual cost per # properties?

    I have 3 rentals currently all with separate policies.
    Thanks!

    • Hi Joe. It may vary some from different insurance companies, but all my properties are covered for $20-something per month. Very cheap. The umbrella policy though is on top of the normal individual property insurance policies. So each property has their own, like normal, and then the umbrella encompasses all of them together, and I even think it covers other assets I have too… can’t remember the details. I think it’s $1M coverage total.

  20. I have a question. Can you keep the property in your personal name (to avoid due-on-sale clause), but still utilize an LLC as the property management company?

    In other words, what if I am personally on the house’s title, but I use XYZ Rental Properties, LLC (my LLC) on the lease to “manage” the property. All the rent money, mortgage payment, repair expenses, etc would flow through XYZ Rental Properties, LLC checking account rather than my own personal account.

    Of course this wouldn’t be the same amount of protection as quit-claiming the entire title over to the LLC, but it seems like this would still offer at least SOME amount of protection. If the tenant slips on an icy driveway and paralyzes themselves, it was the property management company who didn’t properly salt it, right?

    I am just thinking out loud here, let me know if this is all nonsense.

    • Hmmmmmm. Not sure Scott, on the part about who would be liable. When setting up an LLC, you will have either a passive income LLC (rental properties) or an active income (a business, like property management). Or, at least you should have only one or another for tax purposes. So if you were to set up that property management company, that would be just like setting up another company, totally unrelated to your properties in terms of who gets what income and the responsibility should something happen.

      Don’t quote me, but I don’t think scooting the liability to the “property management company” would work. In thinking about my properties, should I get sued it will all be on me, not my management company. Unless it was negligence on their part and I sue them because I’m being sued. See what I mean? Not sure on that. Maybe some property managers out there can chime in on this one.

      • Ali is correct, a typical property management company has contracts with property owner’s that is different than what Scott is proposing. BTW liability insurance policies will typically not allow shifting liability contractually, if you do you are not insured and on your own.

        The vehicle for what Scott is proposing is called an LLC ‘Operating Agreement’ and ‘Articles of Organization’, along with other state registration requirements. The only way to make legal what you are proposing is an LLC has to hold title to protect the asset, that is why most QCD. Just go to your states legislature website and read the statues on LLCs and series LLCs, look for any sub chapters that prohibit holding title in your name or that state the LLC has to hold title or the asset, and having a separate company manage. Another good check is for case law in your state that interprets statues, goggle that or check a law library.

      • My understanding is that in most states property managers have to be licensed real estate agents.

        I do not understand the discussion of tax benefits. We were just audited by the IRS and we’re told we cant take business deductions for real estate investments because we are not licenses real estate agents who spend x amount of hours selling real estate.

    • Not an attorney but I’d expect the owner to get sued.
      I would not be surprised if they Sue the management company too.
      Might even try to Sue the manager if they say the cause was due to willful negligence.
      In all these cases they would be suing you.

      I wouldn’t expect any liability protection for you personally in this case.
      Maybe if you had all your cash in the LLC they might not get access to that if they don’t Sue management or don’t win if they do.

  21. I use an LLC for asset protection. I work with a regional bank and have no trouble with financing for my properties. My bank works in the mid-Atlantic area; they never once blinked an eye when lending to an LLC. I am not personally on the hook for any of the loans, but my LLC is, and as manager, I get a ‘courtesy’ call if any of my properties become nonperforming (aka: defaulting on the loan). I have signed a No-Contest agreement, meaning that if I decide to stop paying on my loans, there is no foreclosure process, I have simply forfeited the property to cover the loan.

    • That almost seems too good to be true Liam. If nothing else, when a mortgage is in an LLC’s name, it is still backed personally. I’d be curious how you’ve been able to avoid every complication and risk out there…

      • Canadian investors to sunshine states are advised on having the LLC for each of their properties in sunshine states FL, AZ , CA TX, GA etc
        but the point is it cuts into the cashflow if costs for liability and fire insurance are factored
        Anyone have a less than $50 monthly to cover all costs related to forming maintaining LLCs and insuring properties?
        Note other accounting costs and management fees are excluded here

        • Yash, things are totally different if we are talking about international investors. All international investors need the LLC (or proper equivalent) because they aren’t US citizens, so they need it for the income and taxes and all sorts of stuff. Totally different ballgame than US investors.

      • Some of the information is found below, but I chose to start an LLC for a few reasons including personal asset protection. I also wanted to be able to hire employees (as needed) and expand to additional LLC members. In addition, to reduce the potential loss from a law suit, my attorney recommends only keeping 8-12 properties in one LLC, therefore if someone is really hurt and sues me, they only have access to the one LLC’s worth of properties.

        I admit that my background is skewed towards protecting my personal assets: my father and grandfather were both lawyers and worked for the Federal gov, and my first job was with an environmental toxic tort law firm. I prefer to cut into my profit to make sure I am personally protected.

        As a few members mentioned below, the downside to loans for an LLC is that I only have access to commercial paper, which for me is structured as a 5-5-5 ARM, currently at 6.06% with 25% down. I also have to pay for my tax prep, but with excellent records, tax prep isn’t too bad; I spent $450 for prep last year but my tax guy ‘saved’ me $2,800 the feds ‘owed’ me (depreciation shelter).

        I have considered ‘going naked’ and purchasing one single family home to rent to a family member (not that that eliminates my liability), but even with a robust insurance policy, I’m still nervous purchasing a rental outside of my LLC.

    • Forfeiting foreclosure rights and equity may not be an option for most investors. Most banks regardless of how large your assets are will want you to personally back LLC loans. Makes you wonder what the point in building credit is. The reason is the legal process differs from SP in that a creditor has to obtain a charging order to collect a debt from an LLC, and in some states they are not allowed to foreclose on a member’s interest. The more members, more risk and if it goes public even more. The LLC can go into CH11 reorganize, and the court will in some cases allow assets to be kept allowing the business to run and not lay off employees, etc…It cost more, it is more difficult, the risk is higher for the banker, that is what I was told when I tired several anyway.

    • Liam are you getting “residential” loans, aka 30 year fixed at low rates?
      I assume they are doing commercial loans for you.

      Good option to have but most people will get sticker shock with higher rates, bigger downs, shot amortization schedules and balloon payments.

      • Shaun, No, I only have access to commercial paper: 5-5-5 ARMS, 25% down at 6.06% right now. I responded to Ali above with some of my background, but the short story is that I have a bunch of lawyers in my family, so my world view is jaded!

    • William Morrison

      Liam, I know I’m replying to a post that’s a couple years old but if you’re still around do you mind telling me who you are using?

      I get a blank look at the banks I’ve checked near me. I am using North American Saving Bank. I think they are out of Kansas. I’m buying in North Carolina and Maryland. It would nice to have more than one option.

      I have also been contact with B2R Finance but there rate are high and they are just getting into the lower end.

  22. I echo Liam’s experience. I formed an LLC and the bank was fine with financing under it. It was not a SFH so the loan was commercial anyway.

    One of the other reasons for forming an LLC that I don’t see mentioned was that we have property in one state but live in another. Other then asset protection it is better from a holding standpoint. Probate is different if you have properties in multiple states. Forming an LLC in RI also has some state specific advantages.

    • Colleen, yes commercial loans are completely different than residential. Commercial loans are designed to lend to entities.

      Can you elaborate on the point about the properties being in different states in terms of the benefit of the LLC?

      • Ali – I believe Colleen is referring to probate avoidance. If you own real estate in Texas and Oklahoma personally and you pass away your administrator will likely have to probate your estate in both states which can be very expensive. If the property is owned by an LLC, probate is avoided altogether.

        • Paula R.

          What if you add your share of the property (say, 50% held with a relative owning half) to your Revocable Living Trust, which is set up specifically to avoid probate? My sis lives in Cali and I and the potential purchase are in New Mexico and we are debating how to own the property for both liability shelter and to avoid probate as we are both in our 60s and it’ a buy and hold short-term (vacation) rental? Thanks!

      • States like Delaware, Nevada and Wyoming can offer you various benefits above and beyond what your state can offer you. Delaware is considered a corporate tax haven and capitol for one. A long history of case laws allows for much more timely resolution, their legal infrastructure allows. It depends on your business model, you may still have to register in your own state and be foreign to another state and have a resident agent and local address, or you have to register as foreign with the Secretary of State and in some cases of rehabbing properties you will under heavy scrutiny by the Attorney General’s office due to consumer protection laws. I looked into long ago and there is no benefit for my local business that caters primary to local clients anyway. The fine line between tax avoidance and tax evasion is a road I did not want to chance.

  23. Great article and comments! I did form an LLC for my one rental but from time to time when I read comments like these I am conflicted about having done it. Both my PM and my RE attorney (who is also a family friend) recommended it. My cost to maintain it is only $50 per year here in Wyoming and with just the one it’s easy to keep the recordkeeping separate from my personal accounts so no great loss, I guess!

  24. I think it all really just comes down to which state you are in.
    I’m in NY and I know a lot of investors who say 1 for PM and 1 for each property.
    You can do it online for only $200 each.

  25. Ali why would you have to pay the $800 fee to CA for the LLC?
    Usually you pay state fees in the state you set it up in and any state that it is registered to do business in (One reason getting the Delaware and Nevada et al LLCs isn’t that useful for owning rentals since you need to register it as a foreign entity in the state you own them).

    If you set up the LLC in Georgia and it is only doing business there then you should only be paying Georgia fees.

    Now without a doubt you would have to pay CA income tax on any money you make, but that is different.

    • The California Franchise Tax Board has recently changed the rules which define “doing business” in California. https://www.ftb.ca.gov/forms/misc/3556.pdf Here is an excerpt: You are considered to be “doing business” in California if:
      • It is a nonregistered foreign LLC that is a member of an LLC that does business in California.
      • It is a general partner in a partnership or limited partnership that does business in California.
      • Any of the LLC’s members, managers, or other agents conducts business in California on behalf of the LLC.
      The link above will take you to a document that includes examples. If you are a California resident and set up a Nevada LLC own property in Nevada, which hires a Nevada property management company, and you give directions to the management company and otherwise manage the LLC, you are considered to be “doing business” in California and mus file a California FTB Form 568.

      • WOW!!!!
        Man CA is a messed up state.

        How would they even know about this since NO business is actually being conducted in CA? They look at your return and see that there is income by an LLC, they figure out that it isn’t registered with the state, they audit you to see the OA and managing agreements, determine that it is single member or if not that the member that is making management decisions is the CA taxpayer?

        What is you had a multimember LLC with a local partner for you out of state investments and they were the named manager and signed everything in regards to running the business, would it still be considered doing business in CA if you happened to talk with this person on the phone occasionally while in CA?

        Could you nominally get around this foolishness by say having a Limited Partnership own the property of which you are a 99% owner and have a local partner own a management LLC that basically runs the place and serves as GP of the partnership. The CA resident would not own any portion of the LLC and would have no managing authority of the LP.
        Somewhat distasteful to give up that level of control but seems like you would be relatively safe if you owned 99% of the LP since you basically get all the distributed cash flow and equity if the place is sold or on a refi.

        • Yep Shaun, Jeffrey nailed it. It’s definitely bunk and annoying, but is it really a surprise with CA? This place is so expensive.

          The way it was explained to me is that no, there is no way around it. I asked the exact question because my investment partner doesn’t live in CA so if he was on it too, could I get out of it. They said no, CA will still consider you. They know because if my permanent address is in CA and my driver’s license and such, they know I’m ‘conducting business’ in CA. No way around it. As far your latter suggestion, I don’t know if it’s feasible but I doubt it and even so, is all that work worth $800? Not for me.

  26. I think you are drastically missing the point of an LLC is your main concern is registration fees and in some cases taxes . The reason over half of the fortune 500 companies register in Nevada, Delaware, Wyoming, is because of the corporate legal structure, DE gave birth to LLCS I read, lack of juries, making it very, very, difficult to pierce the corporate veil which if done could cost you thousands or in some case millions in assets.

    Other thing I am hearing is if a foreign entity owns property these states will revert it back to the jurisdiction it resides in, although I am thinking that probably depends on the law suit and what it is for. I am sure many of those 500 companies hold real property assets in their foreign LLCs, I’m just not smart enough to figure out how YET! 🙂 Well at least I admit when it’s over my head, 😉
    ,
    From what I can tell the local tax is not that bad here, and there is no state income tax or self employment tax in those states.Again, that is second to the asset protection there.

    I grew up in Cali the out-liar state of them all, but sounds like some of the same rules apply here it must be spreading like a plague, politics!

    • Comparing a Fortune 500 company with someone holding rental properties in an LLC (Even if they have massive holdings) is like comparing Apples and Steak, like there isn’t any relation.
      I’d be pretty surprised if any Fortune 500 was setup as an LLC. Since the vast majority of them are publicly traded companies (Hence Forbes can get their data) by definition they are C Corps. The more limited private companies are only ones that have government contracts and are required to make their financials publicly available, and I doubt any of those would be LLCs.
      (As a total tangent some of the biggest companies in the country are not on the Fortune 500 since they don’t have their official data. Both Cargill and Koch Industries are privately held but are >$100 BILLION a year in revenues. They would both rank in 15-20 range on the 500)

      C Corps function very differently (Public or not) than an LLC does and the corporate protections in those other states have very different ramifications if you are distributing goods and services national wide than if you are holding property.

      The long and short of it is if your tenant falls down on some ice and breaks their hip in your rental house in Kansas you are getting sued in Kansas even if the title of the property is held by a Nevada LLC. All the local statues and landlord tenant law will be what you are going to deal with in any dispute that comes up with your tenants.
      Nobody who wasn’t selling entities in one of these states has ever told me it made any sense to get one for rental property.

      As far as the point about not worrying about fees at the expense of asset protection, you have a point. However when the fees and taxes get excessive you have to weigh the risk vs. the costs. If you have a great single family rental making $400 of positive cash flow ever month and had the misfortune of living in CA then that $800 tax takes away 2 months of cash flow every year, and that before those other LLC fees I saw CA has. Then since there is usually at least some fees in the other state is in setup in as well you are probably at least close to $1,000 in the hole before any of the other costs of maintaining the LLC. That will eat away profits pretty fast. In my example you had a pretty lucrative income stream but if you back it down to a more easily attainable $200 a month and you will take half the profit for the year to do this.
      Now if you are in a cheap state where you can form one for like $100 and then pay $25 a year to maintain it would be kind of stupid NOT to put each property into it’s own LLC.

      • I been too busy to get back into the research on this, but the little I did on Nevada I think it was allows series LLC to have S and C corps in a series. Low registration and taxes, flexibility, and now Wyoming is in the competition with the DE and NV, and I read more small business are registering there. I was visiting with local BOA banker today who said she has set up some tier accounts for series LLC for businesses here that are not huge, and she sees a lot of KS accounts there in WY and NE.

        I’d love to see a case out of one of those states where land lord-tenant, a charging order from a debt/mortgage collector, or a foreclosure on a member’s interest was reverted back to the residential states civil court? On the contrary, what I have read so far is an LLC there is a save sell publically in a LLC, or for cash investors to become members with low risk titles an Operating Agreements, a save haven for cash investors and asset protection that I am sure far offset the cost of registering and help build portfolio’s.

        It is fun to debate on forums, but I got my money on a lack of knowledge here with little fact to back it up so I’ll continue digging.
        But yea if anyone finds a series LLC with a C or S corp case holding real property what has a charging order or foreclosure judgement from a tenant or creditor where the case was forced to be tried where the real property is located please post a link? I really enjoy reading facts and sample cases.

  27. I have a client with 12 investment properties, all of which have positive cash flow. They have a mortgage on most of the properties. Obviously, with that many mortgages they have hit a ceiling with typical lenders. What options are available to investors to acquire and finance more properties? Do they have to work with a commercial lender now or what?

    • I can’t speak for the commercial side Randy, but that is a bit of a big question for a lot of investors. How to finance if you can’t get a mortgage. Private financing, investor partners, paying all cash, loans from other sources, bundling and trying for commercial or blanket loans, etc. I know I’ve seen a lot of forum conversations that talk about this and I believe Brandon Turner has a blog or two that hits some of the options.

  28. Ali, I really like this article because I too was really looking into the LLC thing as so many books and gurus advised it. When I looked at all the pros and cons, I realized that an umbrella policy offered me financial protection that was easier and cheaper. Beyond that, there are cases where the LLC did offer protection because they were not recognized and in other cases thrown out because they weren’t managed completely separate. On top of that, there are not enough cases to prove the protection a LLC will hold.

  29. Pingback: Using the series LLC structure for holding your real estate investments. | Bradley B. Clark Law Group, P.C.

  30. Very helpful article, good to hear from someone that has experience of rentals that already have mortgages on them. I’m moving in the spring and plan to rent out current home. Deeding over the house into an LLC makes me nervous with the bank technically being able to call the loan due.

    Since you do not have an LLC, how dos that affect your accounting for it? I just got introduced to a CPA but most of our discussions were around using an LLC. If I don’t use an LLC, would you set up some time of sole proprietorship? I want to have separate bank account to keep everything in order, just curious how it works if you don’t have an LLC. Thanks!

    • Good question Jon, and sorry I’m just now getting back to you about it…somehow I didn’t see it come in!

      I keep it all under my personal name still and I keep track of all of the expenses and income for each house. All of the deductions are then just taken from your personal taxes, just like any write-off. The only difference, as far as tax accounting, if you have an LLC or no-LLC is when the deductions essentially happen. If you have an LLC, all of the expenses are deducted before your total taxable income is calculated. If no LLC, then your total taxable income, including income from the properties, is calculated and then you write-off all the expenses. Both ways produce the exact same outcome, so it doesn’t matter. Some people like to have everything completely separate just for organization, but if it’s all mixed in with your personal stuff there is nothing wrong with that at all. I’ve always had an Excel spreadsheet to track my expenses that I know I’ll be able to write off, and I also created a travel log. Then I add the expenses from travel plus the other expenses together and that’s what you’ll write off. I always send that full sheet to my accountants and they never have a problem.

      Hope that helps!

  31. We have two rentals-Condos in California. We plan on selling one but are concerned about the capital gains effecting our status with Obamacare. If we transfer the title to a LLC or some other corporation, can we personally avoid the capital gains? I know the Corporation will have to pay, I guess. How would it all pencil out? It is all so confusing
    Thank you, Jason

    • Good question Jason, and unfortunately I don’t have an answer for it. I’ve never sold a property so have no knowledge on that side of things. I think your question needs to be asked to an experienced CPA who deals with real estate a good bit. I think they will be the only ones who can give you accurate advice, plus they would know your current income and such to know how it will be affected with Obamacare and such.

    • Jason, LLCs are set up as a ‘pass through’ tax entity, so any profits are only taxed once, when they arrive on your tax return. If you have losses in an LLC, any profits from a sale would be offset by the losses and the net amount would get reported on your taxes.

  32. What if one can’t get an umbrella policy b/c there is no mortgage on personal housing or auto insurance, which is generally how umbrella’s are formed?

    Is there other insurance policies available that provide asset protection without going with an LLC?

    • Not that I know of David, but that doesn’t mean there isn’t one. Not sure I understand though about the lack of mortgage or auto insurance. I don’t know that either of those are required to get an umbrella policy? Maybe, but I’ve never been told that. I recently heard that a lot of companies require you to have your homeowner’s insurance policy through them in order to issue the umbrella. That’s the only thing I’ve heard of.

  33. Hello,
    I have obtain a great deal on an multy family income property and have owned it for a couple of years. Now I am looking to grow within the Real Estate business and possibly aquire more properties to rent and possibly flip and sell. Based on your achievements what would you suggest would be the safest and easiest route to take, if I want to form an entity with the goal of obtaining financing for mutliple properties and possibly some sort of tax break.
    Thanks,

    • Ali Boone

      Jose, it depends on how you want to obtain the financing. If you want individual mortgages, an LLC will make it harder to get financing. If you want a lot of properties, you would need to look and see if you can find a commercial umbrella loan of some sort and see if they can lend to LLCs. I don’t know enough about that route to advise on how to do it or where to find one of those. The tax breaks you don’t need to worry about as much… you can get the same tax breaks (just in reverse order) whether the properties are in an LLC or not.

  34. I own 10 rental properties without any mortgages, and I have been debating the LLC / umbrella policy for a couple of years now. When I attempted to get an umbrella policy and read the fine print, it was basically a $$ extension of my primary policy on the properties, with a ton of extra exclusions. I can’t recall them all now, but it was enough for me to not pay the extra money since it did not cover all the things that I thought was appropriate. My real estate lawyer said that an LLC would not protect me from lawsuits in the state of Virginia. Is the truth out there anywhere?

    Has anyone with an LLC been sued? Can you share your experience and recommendations?

    Has anyone with an umbrella policy been sued and actually used it? Can you share your experience and recommendations?

  35. Ali,

    I’ve talked to my CA attorney and the answer received is the entity “doing business in CA” will be subject to CA franchise tax. She stated that if there is no connection at all between the foreign entity to the state of CA, you will NOT be subject to CA franchise tax. To avoid the issue, your LLC location, your bank account, property management, etc. MUST be in the foreign state. Nothing linking the entity to CA.

    Note: Please don’t quote me on this. If you need advise, consult your CPA and attorney.

    Thank you,

    Tony

    • Interesting Tony. I was told the opposite. The reason they would get me for the CA tax is because I am a California resident, so there would be “no way” (theory) that I could avoid working on it from CA, and because I’d be “doing business in CA”, they would charge the tax. I was told the only way to avoid the tax would be if I “wasn’t a CA resident”, which would mean I’d have to change my driver’s license, car registration, etc.

      The reason my location would matter is because I would be the owner of the LLC.

      You’re the first person to say they were advised they wouldn’t have to pay the tax. Your person may be right, but I would definitely get a second opinion first. If you do get a second one and they say the same thing, definitely let me know.

      • Ali
        I think both you and Tony are correct, but your respective descriptions are different. Tony does not say he is a California resident, if he was, there would be a “connection” between his LLC and California, and the advice he received might be subject to further analysis and interpretation by the Franchise Tax Board. The FTB does not address the issue where a California resident is merely a passive Member of a foreign (out of state) LLC that does no business in California, has no bank accounts in California, and the Member’s only connection is to get a distribution – if there is one. In your example, you are a California resident, you “own” the LLC, and possibly make decisions concerning the LLC. The FTB has made it clear that they consider this to be “doing business” and would require you to file a Form 568. Again, you’ll need to consult with your own tax and legal advisor, and keep in mind that this is relatively new and has not been fleshed out by a lot of decisions.

    • You certainly don’t have to Gary. That is up to you. If you want to keep all the finances separate, it would help in doing that for sure. If you don’t though, there is no harm in combining them.

  36. Hi. My sister and I formed an LLC for commercial property that we inherited. There are three structures on the land. One is being rented by a company. The other two are; the family home and a mobile home. My problem here is that my sister asked to live in the family home and does not pay rent. I agreed to this during a moment of weakness when my mother passed. I pay half the property tax on the land and she pays the other half. How can I prevent her children from taking over this Home which is in the LLC bringing no profit to myself or my children when they inherit this property? I wanted the LLC to benefit tax wise from this land and to protect my personal assists. The home has a pool and her children and guests ride four-wheelers all over the property. One guest has broken an ankle, but not sued. I am so stressed with paying property tax and only receiving 1/2 income from the rental building and no profit from the home. I am wondering what I can state in the LLC that would prevent her children from just using the property in the same manner without my say or (if I die) my children to whom the 50 percent interest would pass.
    Thank you,
    Christy

    • Hmmm Christy, that is a tough situation. And an important one! There is a lot of liability going on, a lot of potential family mess confusion, and a strain on the income. I wish I could give you exact advice, but I would definitely talk to an entity lawyer on this one. This one sounds serious enough where you want to absolutely make sure all points are covered properly, and I think only a lawyer can do that. But look for one, maybe a referral for other people? Don’t just go with any random lawyer. Maybe ask in the BP forums for recommendations?

      It sounds like you are losing out with your sister living in that house. If you are paying 50% of the taxes, as is she, but she is getting the benefit of living free there, sounds like that isn’t a fair split. I’d think you should be paying less in taxes, or collecting rent from her. Or better yet, whatever the property would be bringing in, split that in half and her pay that amount in rent each month. Because you are losing out on income by letting her live there and she’s making out like a bandit by living there for free. Just my thoughts.

  37. I have a residential property that’s free and clear and will be working on property myself with lots of other contractors, carpenters, etc, and I’m concerned about liability due to possible injuries. Would you advise the umbrella ins for that concern? Also, I want to sell the property inside a year of the purchase, so to avoid capital gains from a potential large profit, and I’m told I should pay myself through the LLC, monthly, and leave remaining amt of profit in the LLC for future acquisitions. If I DON’T have an LLC, would the profit be taxed at capital gain’s rate no matter if I re-invested the money in another property quickly? So confused. Thanks for any assist!!!!

    • Hi Pamela. Thanks for writing! As for the contractors, that liability all needs to be handled under their own insurance. Any contractor or repair guy or whoever ever works on your property should always have their own insurance. As for the selling and capital gains and such, you’ll really need to talk to a CPA about that, and preferably one who specializes in real estate investing so they can tell you exactly how that will play out. I’ve never sold a property so I don’t know much of anything about dealing with capital gains and such, and I don’t have the LLC either so can’t speak to that. Definitely only get advice from a professional on this one as doing it the wrong way could cost quite a bit of money.

      Good luck!

    • Joel Corley

      If you sell the property, then you would first have to recapture the depreciation you have taken with the property at a 25% rate. Note that this rate does not depend on your tax bracket, it’s the same for everyone. Then you would pay any capital gains taxes and medicare taxes.

      Example.
      Property purchased in 1990 at $200K with $125K depreciation, sold for $400K.
      Recapture = $125K * 25% = $31,250
      Capital gains = ($400K – $200K) * 15% = $30,000
      Medicare taxes = ($400K – $200K) * 3.8% = $7,600

      A better way to do this is do a 1031 exchange. This is also known as a like-kind or Starker exchange. Essentially what you do is transfer the the entire cost basis from the old property to the new property or properties and defer any taxation.

      Also under current tax law, if you defer selling until it passes to your estate, the property will be stepped up to the current fair market value and no taxes will ever be paid. This could change to having your heirs inherit the property.

      The trade off is that you really need to deal with companies who specialize in this; this is not a DYI thing at all. There are tons of restrictions and gotchas 1031 exchanges and the IRS is quite strict on meeting all the rules.

      Sources:
      IRS Residential Renal Property:
      http://www.irs.gov/pub/irs-pdf/p527.pdf

      Ten Things to Know About 1031 Exchanges
      http://www.forbes.com/2010/01/26/capital-gains-tax-1031-vacation-home-personal-finance-robert-wood.html

      Unearned income taxes
      http://health.burgess.house.gov/uploadedfiles/one_page_on_unearned_medicare_tax.pdf

  38. Fantastic thread Ali!! Thank you for starting it and thanks to all the contributors for their input. This has turned out to be quite an educational night for me!! I am new to this game, so its all a little overwhelming. Have a condo that I owned and lived in for several years while I was in training…..i am now done and bought a nice house which I love, leaving the condo sitting empty. I’ve been on the leasing list for 6+ years and am still not high enough to be “awarded” a leasing permit by the HOA to rent out the unit. I finally reached a point where I was tired of just throwing money down the toilet on the property and had decided to sell it when someone mentioned the idea of forming an LLC and transferring ownership to the LLC as a means of getting around the “leasing permit” issue. In fact, it was the property manager for the building that suggested it to me. Has anyone ever had any experience with this sort of thing? Now that I know this is an option, I am seriously considering keeping the place, forming the LLC and using it as a rental property. Your thread has really helped me educate myself about the whole process and feel much more comfortable about possibly going this route…..so thank you all for your contributions!

    Another question: the property manager gave me the contact info of an attorney that has done this process for other people in the past (I will be contacting him tomorrow), but the cost he quotes on his pamphlet is $2500. This seems a little steep to me for setting up the LLC and arranging things. I would never dream of doing all this on my own, and certainly would hire an attorney to do it, but from everything I have read online about this process, it doesnt seem like it should cost that much. Anyone have any thoughts or previous experiences similar to this?

    Thanks!

    • I won’t be able to help much Avi as I don’t have experience with any of this, but why would the LLC allow you to avoid the wait for trying to lease? Is that just per the HOA or is that a real thing? I’ve never heard of that but I have no experience with condos either, sorry.

      Just make sure that if you do end up leasing it out that you will actually profit. Usually condos’ association fees and other expenses knock out any cash flow you would receive. If you won’t profit each month from the cash flow if you rent it, it’s definitely not worth paying the $2500.

  39. I was suspicious of this initially as well, and while I don’t have independent confirmation of this fact, the property manager at my building is the one who introduced me to this idea. She said there is a loophole in the HOA by-laws that would allow me to convert the unit over to an LLC and designate any tenants as “beneficiaries” who just happen to live there. By doing it this way, It gets me around the leasing permit issue, or so that’s how she explained it. Obviously I need to gather more info and will speak to the attorney tomorrow for more details, but I was just curious if anyone else had ever utilized this “trick” before. Right now I would stand to make at least $500 per month in rental income after the mortgage and HOA fees are taken care of, if I was able to rent it out based on the rental market here in Atlanta; this is the only reason I am even considering it, but $2500 is a bit of a deterrent.

  40. The cash flow definitely sounds good. What is that $2500 for exactly? You can technically set up a plain ‘ole LLC for way cheaper than that, even if you do it the expensive way.

    And do you have a mortgage out on the condo? Moving it to the LLC can trigger the due on sale clause.

  41. Candace Norvell on

    In the process of having rental property in Florida deeded over to me. The trust has been using a property management company to oversee and collect rent for all of our properties. I am expected to receive a duplex with four apartments and three houses. None of these have been insured while in the hands of the property management company whom I assume is a LLC. And the reason I don’t know for sure is that my sister has been the executor of my mom’s trust and I have not been privy to such issues. Basically as the baby of the family I was to be seen and not heard. My question is it seems as if perhaps they are costly to insure and many are not in good condition, but I believe they are pretty solid structurally. I am in Colorado and haven’t been home to view said properties. What if I can’t get insurance or its unbelievably high (due to hurricanes, etc) should I put it in an LLC? I want to be covered if a tenant gets hurt in one of my properties or will the PM company take that liability in their LLC? The reason the PM agreed to take on the properties uninsured is I believe my sister worked out a first to list first to sell etc… agreement with them. But they have been willing to do the management without insurance. I May keep them on if they are willing to continue to manage mine uninsured. Does that mean that if they do I won’t be sued as long as I have them continue to manage them, and they take that on through their LLC? Super confused and am going to eventually set it up in a trust for my grandchildren but need help! Thanks Candy

    • Hi Candy, I’m not sure I can help for sure on this one as I don’t completely understand how any of that is working. All I can think of though is that I would never be comfortable if I owned a property that is uninsured (and not sure it’s legal?). I also don’t think that putting it in an LLC allows you an escape from having to have insurance on it (LLC asset protection deals more with liability, not general like fires and such).

      I would say you need to insure it. If it’s that high and the building isn’t profitable, I would say sell it and if you want the grandkids to benefit, put that money in a trust for them. OR, better yet since you would get taxed on the income, 1031 exchange the properties into other properties that actually do profit.

      Not sure I helped? I don’t think having that PM company as any part of it is a good idea if it’s in your name. Need insurance.

      • Candy, your next action item should be to consult with an estate planning attorney. You indicate that you are about to receive what sounds like a distribution from a trust, and you mention you want to continue to keep the assets in a trust for the benefit of your grandchildren. This seems to indicate that you are or will be acting the position of a Trustee of the Trust. If so – this is IMPORTANT – you will be subject to very strict and well-established rules and responsibilities which are often referred to generally as your “fiduciary duties.” This includes accounting and reporting requirements, and making certain that the property(ies) are correctly managed, insured, maintained, etc., and you could be held personally liable for any damages for your failure to fulfill your fiduciary duties. Whether you form a LLC or purchase hazard insurance or hire a PM company is all secondary to fulfilling your role as a Trustee. Many individuals who suddenly find themselves in the position of being a Trustee or Successor Trustee have no clue what their duties and responsibilities are. There are several excellent articles and blogs (like this one) on this topic.

  42. I spent the last 2hrs reading all the comments. Great education, and it was free!. I am a “Keep it simple” person, but I also want to do things the right way from the beginning. So instead of just buying a rental property in my name, I too had formed several LLCs (one under another) with the hopes of acquiring properties under the LLCs, and for asset protection, etc. The info share here has been really great to say the least. So my active LLC is a property mgmt which is up and running effectively. My other LLC was established to purchased the rental properties. However, going this route means borrowing at a higher interst rate and putting more money down. To have the property deeded in the LLC, but the mortgage in my name kinda defeats the purpose of asset protection. As mentioned, if they want to find you, they will. (not that I have anything to hide). I think I may just go the regular route and acquire rental properties in my personal name, manage it throught my property mgmt company and just make sure I have adequate insurance. In the future I will want to deed the properties over into a trust for estate planning purposes for my kids. Does this sound, sound?

    • Haha Nalo, it does sound sound! Yes, I think it’s perfect and exactly the reasons you mention are huge arguments against forming LLCs for rentals (quantity-dependent sometimes, arguably). They are just complications people don’t realize can come with going the LLC route and more so when the LLC route doesn’t offer 100% security anyway.

      I’m glad you shared your experience because it puts into light the repercussions of forming the LLC. Which isn’t bad for everyone, but people in similar situations to you can get a lot from what you said. So thank you!

    • Nalo:

      The downside to your future approach is the risk of a judgment not covered by insurance or where there is a judgment in excess of insurance. As far as your current structure: it sounds to burdensome and expensive. The series LLC (if it’s available in your state) might be the better option for you.

      Bradley

  43. Marlow M. Taylor on

    Great post Ali! I have four properties and was looking into LLC as an option. Once you mentioned umbrella insurance as your option I felt I was good because that’s the route I took. Thanks for relevant information.

  44. This is an amazing read! I’ve learned a ton from the article and from the comments. I too am trying to decide which route will be better for me with buy and hold properties and agree this issue should be analyzed on a cost vs. benefit analysis which in my mind boils down to a state by state decision. However, I do have an insurance question. Here’s a hypothetical scenario: An LLC company is holding 4 properties, each with property insurance, and the LLC has the necessary liability and worker’s comp insurance. The owner also has an umbrella policy. The LLC company was sued and the veil was pierced. Because the veil was pierced, does this negate all property insurance on the rentals and LLC liability insurance and fall straight on the owners umbrella policy because the business and the person were considered one in the same? I ask this because I wanted to know if the layers of insurance would be different in a SP vs. a pierced veil LLC suit.

    Thanks
    Scott

    • Scott, my first question here would be to find out why the veil was pierced. My second question would be who or what was covered under the insurance policy. The hypothetical you describe assumes that something fairly unusual and drastic occurred that resulted in a court ruling that the LLC was merely an alter ego of the individual owner, and to get to that point in the legal process would require a substantial amount of time, money, and perhaps even a trial. If the entity was insured, it would be the responsibility of the insurance company to at least provide a defense to the policyholder, which in most cases results in an early settlement. If the act or omission that triggered the action in the first place was something that was not covered or was excepted under the policy (such as a deliberate or grossly negligent act), the insurance company may provide a defense, but no coverage. It is also this type of act or omission (among others) that may trigger the effort to pierce the veil of the LLC. This type of hypothetical, by the way, helps promote elaborate and expensive asset protection schemes, but in reality they rarely occur.

  45. I’ve opted so far to forego an LLC and carry umbrella policy for $2m. But when I did the research on LLCs insurances and lenders said they wouldn’t have a problem with LLC. I was advised by attorneys to hold all properties in living trust and have LLC has beneficiary of said trust, for best asset protection and estate planning.

    Also, I haven’t seen this mentioned, but CPAs like RE LLC for cost that are not connected to any single property. I.E. cost of looking for new properties which could involve travel, can be written off as a general loss by the LLC, whereas it couldn’t be “connected” to any existing property. I can think of many thinks that apply, such as mailbox services, attorney fees, umbrella insurance, computer and office cost etc.

    -Thomas

    • Ali Boone

      Great input Thomas, thank you. Yes, you bring up great points on all. What triggered you to stick with the umbrella insurance rather than the LLC or living trust if your research said it wouldn’t be a problem?

      • While it wouldn’t be a problem, there’s not all that much to gain from it. Liability protection in a single member LLC is far from guaranteed; all of the properties are financed, so at this point the asset exposure is the bank’s, not mine anyway; there are no other tax savings except the “catch-all” non-attributable expenses which aren’t very high at this point; the paperwork requirements for a LLC are substantial, and the cost of starting the LLC and porting properties into the trust/LLC setup play a part as well.

        As I move to commercial loans I will get input from commercial lenders as to whether they prefer LLCs. But it seems like I can get 30fix for another dozen properties or so, hence I don’t see the need to go for c-loans yet.

        I’m also looking at international property, so the LLC expenses deduction becomes more and more interesting. A trip to Italy is easily $5,000 which I couldn’t to any of the existing properties.

        I guess I don’t think asset or liability protection is the reason to get an LLC as a single member/owner. If you do something bad, you’re going to be held liable either way. With biz partners, it’s a different story as you don’t want to be held responsible for their actions.

        • Thomas:

          Just don’t get a judgment against you while you have any equity in any of your properties; otherwise, you will wish you had them in a LLC or, better yet, a series LLC.

          Bradley

        • Thomas:

          Just don’t get a judgment against you (for which insurance doesn’t apply) while you have any equity in any of your properties; otherwise, you will wish you had them in a LLC or, better yet, a series LLC.

          Bradley

    • Bradley,

      it wouldn’t let me reply directly to you. I’m no expert, and this might be off, but from what my lawyers tell me, it doesn’t matter. You’ll own the LLC, so that is an asset that a lien can be put against. The LLC really only protects against negligence from business partners in the same LLC, and your share of the LLC from claims against them. If you are negligent as a private person all your assets are on the line, and your ownership in the LLC is one. Vice versa, if someone sues the LLC and you actually were negligent and it’s single member, then the judges here in CA have caselaw that pierces the veil and still hold you personally liable.

      Just like a Corp which limits the liability of the stockholders, the person making the decisions for the corp (CEO, Prez, any officer) is still liable for his actions. The same applies to LLC, members are not necessarily liable, but if they are actively involved in decisions they become liable.

      That said, it definitely serves as a higher barrier to sue, cuz of legal cost for plaintiffs etc. In a small claims court, i.e., the veil would never be pierced. Againm this is only my understanding based on research and conversations with attorneys. What do they know!

      • Thomas:

        D&O insurance will help protect the officers and directors of the company (but that’s yet another expense to mounting expenses).

        In Texas, our Business Organizations Code (“BOC”) specifically provides that “[e]xcept as and to the extent the company agreement specifically provides otherwise, a member of manager is not liable for a debt, obligation, or liability under a judgment, decree, or order of a court.” BOC sec. 101.114. Texas law makes it VERY clear that even a court order or a judgment isn’t going to touch you personally as a member or manager of the company (as long as your company agreement doesn’t say otherwise).

        But Texas law goes even further. The BOC also provides that an owner can’t be held liable under an “alter ego” theory (BOC sec. 21.223(a)(2)), actual or constructive fraud (same), a sham to perpetrate a fraud (same), “any other similar theory” (same), or the failure to follow corporate formalities (BOC sec. 21.223(a)(3)). HOWEVER, BOC 21.223 does permit “piercing the corporate veil” only when it is demonstrated that the owner “caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee [e.g., a creditor of the company] primarily for the direct personal benefit of the owner.”

        While it may be easy to get personal liability on an owner of an LLC in California it is very, very hard to do so here in Texas. All the common law supporting piercing the corporate veil was swept away by the Texas legislature (and the Texas Supreme Court has consistently upheld this statutory framework).

        Take care,
        Bradley

  46. I have always put my rental properties in a separate LLC for each property. The reason I do this is because of the liability risk that comes with owning rental properties. If you own a rental property in your own name and someone decides to sue you for injuries or a loss resulting from that rental property. That lawsuit can not only affect your rental property, but your personal assets as well. If you have your rental property in a LLC with a separate checking account, then there is a better chance only that rental property will be affected by a lawsuit.

    • That’s true Faran, but an umbrella insurance policy can give you the same protection and it’s a lot cheaper than an LLC (especially multiple LLCs!). And it’s not a 100% guarantee than an LLC will protect you.

      Nothing wrong with going the LLC route if that’s your preference, but everyone should know it’s not the only route.

  47. I have one that goes along with this but I still can’t figure out the good and the bad. So I have a friend purchasing a condo, he is from another country and this will be an all cash purchase. What’s the advantage and disadvantage of the LLC in this case?

    • Sofia, definitely in that case the investor needs an entity. If he is an international buyer, he has to have one as a way to have a US account. It may be an LLC or it may be something else, depends on the country. An international buyer should never buy here unless they’ve talked to a specialist about what structuring they need, because if it’s done wrong, there could be severe tax consequences and lack of protection. Totally different story than US buyers.

  48. Ali:
    My family in South America want to invest here. I looked at alternatives ways and i am thinking of the following
    Get their money as a family loan paying IRS published interest rates and witholding the 30 or 35% % as requiered
    Puting the proprties at my name with a 1mm umbrella policy
    Documenting the loan so in case of my death they can recover the investment without the state tax of 40% for non resident aliens.

    What am i missing?

    • Juan, all of that is possible. Most of it will depend on the details of the setup. I would speak with a professional regarding it all and confirm it will all work as planned.

  49. Thoughtful article w/ a boatload of useful comments and wise responses. I’m an “accidental” remote landlord (hung on to former Oregon residences as rentals) not keen to pay setup costs and then $800/yr to state of for what seems way more complicated and a bit more expensive protection than my $2 million umbrella liability policy.
    That policy, setting a pretty high bar to qualify tenants, a lease that requires tenants to have renters insurance, a reliable handyman, and a living trust set up in part to keep the properties out of probate together add up in my small brain to something better than LLC.

  50. Great discussion. I’m in the same boat. My lawyer recommended each property in an LLC, but my insurance agent told me that I would need a separate commercial liability policy for each (assuming I want extra liability like I do today). This will cost me much much more, and basically is a deal killer for me. i.e. to get 1M liability for each property, I would need to spend $650 per policy. Today I spend $179 per property for 1M liability.

    So I’m thinking to combine properties in one LLC, and have one LLC per state where I have properties. Just to protect against the extremely unlikely scenario of a judgement that either exceeds or is not covered by my insurer. Seems highly unlikely, especially, as I don’t manage my own properties. My lawyer recommended single member LLCs, owned by a master LLC which is muli-menber (myself and wife or our trusts).

    I’m a bit concerned that people said Florida single member LLCs weren’t that good, since that is what I would have, although the single member is a holding LLC which is multi-member.

    I’m also concerned about filing a tax return for the holding LLC using F-1120. Anyone do that on their own?

  51. Ali Boone

    Ron, have you talked to an entity specialist about all of this? Something in there sounds off. I think it would be worth it to talk to a couple different people (ones who also know the tax side of it too) as I think there may be alternatives to that solution.

  52. Mary Vanderford on

    I live in Florida and me and my two brothers inherited my mom and dads house. Because of the way the real estate market is right now we decided to rent it out instead of selling it. It’s just one property and me and my two brothers. Our main goal was to rent it out to keep it occupied, until we decided to sell it. We have rented it out for one year now and have $300k of liability coverage on the dwelling/fire ins. policy. Do you think it would be in our best interest to get an umbrella policy for our situation. I think to try and form an LLC just for one property could be very expensive and costly and we are not doing this for a financial gain. What are your thoughts on this?

  53. Hi Mary, I can’t give concrete advice on what you should or shouldn’t do because I’m not a professional any of the fields (entities, tax, etc). But I do agree with you that it could be overkill to form the LLC just for one property. A lot of it would depend on how FL structures their LLCs. If it’s not expensive or intensive, it might be okay. I’ve personally always just used the umbrella policies on mine and it’s worked out fine.

    • Mary Vanderford on

      Thanks Ali. That was my first thought too getting an umbrella policy, but because the income from the rental property is shown under my social security number it looks like I am the one benefiting from this (tax wise). The housing authority (section eight) would only use one of our social security numbers and since I filled out all the paperwork with them they used mine. I guess I will have to get with a small business attorney to see about setting up an LLC. This is such a pain in the rear!

      • Oh I know. Welcome to real estate 🙂 As far as the tax thing… if that is the only reason you are thinking you need the LLC, you can actually have the tax side split with everyone. I have an investment partner on some properties and his name is nowhere on them, yet since we both receive 50% of the net, we both file tax returns on it. I couldn’t tell you the exact logistics on how to do that, since my accountant handles it, but I know we do it. So definitely something to consider if that’s the only reason you might need the LLC.

  54. Hi Ali, great discussion here. Since there are advantages and disadvantages to forming an LLC, what about a sole proprietorship for the rental properties? Yes, no liability protection but would this resolve the coolness factor of owning your own company? Would love to hear some comments on this. Thanks in advance!

  55. Hi, Ali,
    I’ve just started to dig into this some, but I noticed a big factor for you is the $800+ annual LLC fees in CA, as it is for me. I also noticed you mentioned you use USAA, so perhaps you or a relative served? I’m active duty military with domicile/home base in FL (have driver license, registration, and an address there). However, I was stationed in CA several years back and bought a property that we’ve rented ever since (never bothered to put it under an LLC). Now, I’m incidentally stationed again in CA (we own our personal residence in CA as well). Do you think from your research that we could have our CA rental property under a FL LLC in order to avoid the outrageous CA fees? (FL’s about $150 I think). We do file CA state tax forms each year due to having the rental property, but have never owed taxes as there’s never been any significant profit (after PITI & other expenses). Thanks!

    • Thomas Richter

      TP,

      it will cost you even more with a Florida LLC owning CA property. You would need to register the Florida LLC as a “foreign entity” in CA and would still be liable for the minimum Franchise Tax of $800. For a single property it’s not worth doing the LLC unless you are a professional landlord. Then you can take tax deductions etc through the LLC. Just increase your liability coverage. There won’t be any asset protection through the LLC as in CA the case law has many instances of a pierced corporate veil in single-member LLCs set up for the sole purpose of asset shielding.

      best
      -tr

    • Ali Boone

      Hey TP! My dad was an AF pilot so that’s where my USAA access comes in. Since you are military as well, I highly recommend them! I wouldn’t use any other company for myself. I use them for evvvverything I can. Absolutely amazing company!

      Sorry to tell you, you won’t avoid the CA fees if you live in CA. I tried every way possible to argue it, and to have my properties in an LLC from a different state, and the verdict was- nope. CA will still tax you since you live there. If you can find a way around that, definitely let me know! But I wasn’t able to find one when I was looking.

  56. Unfortunately, my father passed away. He left income producing properties to me. To make matters more elaborate, I’m getting married this year. My concerns having an LLC is in regards to estate planning, divorce protection, lawsuit protection and tax advantages. From what I’ve read, & I haven’t spoken to a real estate lawyer about this yet, the structure of an LLC allows transfer of portions of the LLC to anyone of your choosing without expense. It’s a very easy process to do, apparently. This interests me because if I want to leave part of the properties to my daughter and part to my wife I can do this relatively easily. But again, this is my working theory, I must run this by an estate planning attorney first. Can anyone chime in on this angle of LLCs?

  57. Fascinating post, particularly the comments at the end. It sounds like there is no “silver-bullet” answer to solve the asset protection challenge. I own multiple LLCs and deed the properties so their equity is spread out; these LLCs act as a holding company for my properties. I then use a separate LLC as an “operating company” that is used to sign leases and conduct general management business on behalf of my holding companies. I keep separate bookkeeping for each LLC and don’t comingle any funds between them or with my personal funds. Each real estate LLC collects income and pays direct costs for each property respectively. The leases have to show the title owner on the deed as landlord, so they are structured as follows:

    Holding Company, LLC
    BY: Operating Company, LLC, its Manager.

    This seems to add an additional layer of protection. I must stress that (1) this is NOT legal advice, and (2) I am NOT an attorney. I don’t even play one on TV. Asset protection is unique to one’s situation and location, so by all means consult legal and accounting advice that is tailored to your unique situation.

  58. Christopher Block

    I have been wondering about this for awhile and have a couple questions I would love if someone could answer to me. If you choose not to purchase these rentals in a LLC how do you get business funding? Dunn & Brad street type stuff, large lines of credit from banks, working with portfolio lenders, etc…

    For you say that banks won’t lend to LLC’s, but my experience has been the exact opposite. It is challenging for my client’s to get financing because of their DTI situation, and since they are just regularly people the banks don’t see them as a “business” but just a regular ole person. Are there not more creative financing options afforded to business owners than individuals?

    The flip-to-rental-refinance is very popular and hard money lenders won’t lend to anyone who is not an LLC. Contract for Deed financing is hot and you need an LLC for that pretty much. My point is that I would argue that an LLC actually gives you more flexibility on the financing front than not having one. I would think most real estate investors don’t want to box themselves with only 1 tactic, so having that flexibility is important long-term.

    It would be nice to hear from rental owners who choose not to use an LLC on how this effects business funding. To me, if you can get access to the same type of business funding regardless of having an LLC or not is a huge question that would sway this argument one way or the other.

    • Thomas Richter

      I’ve responded earlier in this post before, but now have some real world facts after refinancing our rental portfolio. This only pertains to us and I’m not implying this is standard.

      In our situation, the bank required us to start an LLC in order to get a commercial loan and credit line. Nevertheless, they still looked at DTI and private finances in order to approve it.

      This is a disregarded LLC so ultimately it doesn’t matter much either way. My guess is, things would be different if there were partners. But for our purposes it was simply a requirement by the bank because they do not lend to individuals (they won’t even come to your house for signing, because they are only allowed to go to business locations).

      It should be noted that this type of commercial loan is not “commercial bank” loan stuff. In my experience there is a $10m segment of bank lenders with little options for in between. That is to say that it is fairly simple to qualify below $2m and above $10m, but much harder in that dead space in between when it comes to commercial loans. Don’t ask me why.

      Anyway, I’ve said before that for asset protection purposes an LLC is pretty much useless in CA unless you have partners and would like to be protected from their misdeeds; accounting is still done per property with some general cost running under the LLC.

      You can freely transfer a property between yourself and your LLC if you set it up correctly (and if they’re free and clear or you refinance in the process), so it seems it’s more about meeting requirements of the lender.

      As to your clients, if they cannot qualify for financing based on their DTI a bank might still give them a commercial loan. My friend just went through that. But they don’t have a business so they simply start one for the purpose of the loan.

      Long story, short answer: use an LLC if you have to. Do whatever is required to get your financing.

  59. Craig Pfeffer

    Having all your properties titled in your personal name sets you up as an easy target for a lawsuit. I recommend an LLC, land trust , or other legal entity to hold your properties in or you’re likely to lose the properties you have before buying any others. You should get every asset you own out of your personal name.

  60. My wife and I had a 6 unit building in our names when we first started shopping for an umbrella policy. I called ALL the big companies and heard the same story over and over: No umbrella if we own more than 4 units in our names. Not at any price! This is a pretty clear signal to me that using an LLC is the right move from a liability perspective. We transferred everything over to an LLC and have been buying units in them since.

    I have the following liability protections now:
    1) 1 million liability policy on each property ($75 / property / year)
    2) LLC around each property
    3) 1 million umbrella policy on us personally (protecting us from LLC and LLC from us?)

    If there’s some way to make things better without being much more complex. I don’t know it yet.

    FWIW: Our PA LLCs have no annual filing fees or upkeep BS. $800 and legal upkeep crap might make me think about this differently.

  61. Matt McGaffey

    I have quit-claimed two properties without any recourse from my bank — that said, both of my properties were with the same bank (a big bank), and I filed one at a time to lower the risk that both would fall under the due-on-sale clause.

    Overall, I think it depends on the bank, but also the real estate and regulatory environment. Currently, we are in a fairly low-risk and still low-regulation environment (according to banks and relative to a few years ago), so when I filed my quit claim deeds, I felt more confident that it wouldn’t trigger that due-on-sale clause. If banks were taking heavy losses, I would feel less comfortable filing.

    • William Morrison

      Matt I commented to someone above about my experience with the due on sale clause.
      My lender does not allow LLCs ever. I called them.
      My loans (have three with this lender) were sold within days of settlement.

      The due on sale will be triggered when sued.
      Your loan is still on public record.
      I talked to a lawyer from the “other side” .
      First thing he will do during the discovery phase is notify the lender.
      Changed my mind.

      Most comments recommend talking to a real estate attorney and a CPA.
      Talk to a tenant’s rights attorney and check their track record.
      If it has merit they win. Even if it’s frivolous your lender will have been put on notice.

  62. Joel Linburg

    Some of the questions I have had regarding having each property in an individual LLC are related to how to manage them so everything is seen by the courts as separate. Does every property require it’s own bank account? Will the expenses for each property need to be paid from a separate checking account? Does the tenant need to pay rent to that LLC? How and at what time does the income transfer to my personal accounts without being considered commingled? Do all utilities need to be in the LLC? This seems like a tremendous amount to manage if you have a bunch of properties. Should you use your personal address as the address of record for each LLC?
    Another question relating to this topic: If you have a commercial LOC encompassing all of your properties with a line amount close to the value of the properties does that discourage lawsuits because of the lack of equity? Does it make a difference whether the line is fully utilized or not?

  63. Thomas Richter

    Does every property require it’s own bank account? —- No. The LLC needs a separate account. If you have one LLC per property then yes. You still have to do accounting per property, though, for tax reasons.

    Will the expenses for each property need to be paid from a separate checking account? —- Same as above. No if one LLC, yes if one LLC per property.

    Does the tenant need to pay rent to that LLC? —- Yes. LLC is the landlord.

    How and at what time does the income transfer to my personal accounts without being considered commingled? —- LLC is a pass-through entity. If it’s single member (SM) then it goes on your personal tax return (no separate LLC return). If it’s multi-member it has its own return and you get a K-1 for your personal return. You can make owner draws at anytime which is an accounting process only. You pay taxes on the full income of your LLC whether you draw from it or not, through your personal tax return (either direct or through K-1). The more you keep it separate and follow bookkeeping rules, the better. It’s all about “see? I’m not commingling!”

    Do all utilities need to be in the LLC? —- Should be, but if it’s single member it sometimes easier not to. Just account for it in your LLC books. Insurances will often be in your name with LLC as co-insured. Commercial insurance policies are prohibitively expensive for anything below 5 units.

    Should you use your personal address as the address of record for each LLC? —- Yes, if you want to take home office deduction for LLC. You can still use an agent so if it’s looked up online the agent’s address appears. But for everyday business it sure is easier. Also consider local taxes.

    If you have a commercial LOC encompassing all of your properties with a line amount close to the value of the properties does that discourage lawsuits because of the lack of equity? Does it make a difference whether the line is fully utilized or not? —- I have heard attorneys state as much. If you don’t own the property outright, they can’t sue for it.

  64. gary li

    From the first day post this article till today, I believe many readers already have owned many properties, it is time to plan the Estate, does anybody want to share your experience on how to prevent the Probate, how to protect your Real Estate Asset, and how to transfer those Asset to your beneficiaries and how to prevent the Estate Tax etc.? where do you put your Properties now? what structure are you using now?
    Thanks!

  65. William Morrison

    ALI, thanks for the thread.
    I enjoyed reading through it today. Interesting it spans several years.

    I’m your out of state partner type in a California investment.
    We chose not to LLC based on costs to return.
    We went Partnership.
    One partner is a CA resident.

    I have Maryland and North Carolina rentals as well.
    The Doing Business rules apply in both states and many others which limits the Nevada and others advantage. The rental itself has to be registered in the state either foreign or local.

    Anyway I have both personal ownership and LLC involvement.
    Found it was hard to move property to an LLC without refinancing and that at commercial rates.

    The tricks I heard about that would allow me of move property without telling the mortgage company disappear when the suing attorney notifies the mortgage company. And isn’t that the very time you wished you had the veil.

    I did find having an S-Corp to provide real estate services to include repair review and bill paying had some tax advantage. I still have a property manager do placement and day to day management.

    Common theme above that seems misguided is the idea that you can do business in another state without registering there.
    Just look up the states that require a registered agent. Even some of those so called hide and seek states.

    Great thread.

    • This has been a great thread and interesting it has spanned many years. I was thinking of forming a S-Corp for a property we have, but now am not sure? When I married my wife, she had a house of her own and the note is with her mother. We are now renting her house (in FL) and we have moved out-of-state. We put in the lease that the renter should get Renters Insurance, but did not require it. My worry is that my wife gets sued and our personal assets are hit (she is on the deed here in TN, but not the mortgage). Would I be better off with an Umbrella Policy?

  66. Have 7 properties in Calif. ALL of these properties need work. Need to move money around for repairs. Don’t want to trigger a due on sale clause, creating an LLC?
    1. If I create an LLC, can I sell one property and avoid the capital gain, as the money will need to go into the other properties.
    2. What will it cost to create an LLC?
    3. Any advise from anyone, moving forward.

    Respectfully, What to do?

    • Due sale clause does not apply cuz you’re not selling into LLC. You would have to look out for transfer tax and that depends on county. Most counties in CA let you move property into and out of an LLC without transfer tax as long as the percentage of ownership does not change. Call your county’s tax assessor. There is a long list of exemptions (37 or so).
      If you sell one you cannot avoid capital gain. It’s a sale. Unless you 1031 exchange it or it’s in an IRA.
      Cost depends on bells and whistles – legalzoom or nolo you can do as cheaply as $300. And you will always have $800 minimum tax per year. Through lawyer it can be $1,000, but might be easier since you can include LLC transfer ($250 per property at legalzoom). You can DIY, too, it’s not hard, small filing fee.
      If LLC is single-member no tax implications, it’s a pass through. If LLC is Multi-Member you have a separate return (~$1,000-1,5000 for CPA).
      Not sure what you mean by moving money around. You can always write off losses on one towards profits on another anyways.

      • Thank you for your help.

        Each property could use $20,000.00 in work? Don’t have the working funds required for these problems? 1031 wont work, as I wanted to use the money from the sale of one of the 7 properties to fix required problems in the other properties. If I put the properties under LLC and sold one property, could I use the money from the sale to fix the other properties.

        Again, Thank you

        • Yes, of course you can use the money for the other properties, it’s your money! Doesn’t matter if they’re under LLC or not. It all gets tallied up on your tax return anyways. LLC does NOT pay its own taxes, it always comes back to you, either directly on tax return or through Schedule K (?).

          Even in the LLC you have to do accounting for each property separately on tax return.

          Simplified:

          Prop A loses 2,000, Prop B gains 4,000. Total taxable profit = 2,000

          Prop A loses 20,0000 (repairs), Prop B sold for gain of 100,000 ( profit taxable). Total taxable profit = 80,000 (minus cap gains tax coming out of 100K).

          Repair cost are part of expenses, just make sure you declare yourself a real estate professional to get 100% deductible expenses.

          LLC is CA is good for separation of private and business accounts, etc Some commercial lenders require it. Asset protection is minimal, particularly in single member LLCs. Helps against lawsuits from inexperienced people (small claims) but not against real lawyers.

          To do what you describe there is no need for a LLC.

  67. Curtis Guilbot

    I agree with commenters Terry P & Tim Norris (and love John T. Reed!): Don’t presume absolute liability protection from either insurance or business entity structure (LLC or otherwise). If someone wants to sue you, they will. And even if you are not liable, that doesn’t stop them from naming you in a suit, and costing you time, money, and aggravation to fight it (been there). To Ali’s original point, weigh the costs vs. benefits. We have 3 doors, will likely add 1 or 2 more; all held personally (no LLC), with umbrella policy.

  68. I had a question about an umbrella policy vs. an LLC. If the amount of the umbrella policy (e.g. $1 million) is maxed out, can’t the injured person then go after your personal assets? But in theory, at least, shouldn’t a LLC prevent this from happening? If your property insurance and umbrella policy (if you have one, in addition to a LLC) are maxed out, an injured person can’t sue for more money? Thanks for the informative comments!

    • Jeffrey Hare

      Take a deep breath, Rachel. Lots of people make lots of money trying to scare good folks like you into trying to protect yourself from doomsday scenarios like this. In reality, such scenarios are extremely rare, and only get that way if they are allowed to get that bad through inadvertence, neglect, or poor decision-making. Even if we assume a seriously injured but still surviving person manages to get a money judgment that exceeds the total value of your assets held in a LLC and the policy limits of your insurance coverage, and manages to “pierce the corporate veil” and go after you personally, and for some reason you are ineligible for bankruptcy protection, at some point the chase has to stop. Principles of equity and the law allow you to live, and you are entitled to make a living. But long before you would find yourself in such a predicament, there would be multiple opportunities to negotiate a reasonable and realistic settlement to prevent that occurrence from happening. And long before that, you would have taken prudent steps to make sure the apartment balcony was safe and the electrical wiring in your rented property was up to code, the tenant had renter’s insurance, and you made certain your property manager was not featured on Megan’s List.

  69. not a single story from a landlord that has been sued.
    All these strategies are heresay. folks we need some people to step up with real info.
    I own 6 properties in my name. All my leases are done under a PA LLC I have formed. I have a 1M umbrella personally that lists all my properties.
    I am hoping that if I ever get sued my umbrella lawyers will fight tooth and nail…………….but who knows.
    I am asking for info from people that have been sued.
    Thanks.
    Jon

    • Jeffrey Hare

      Jon, you bring up a good point. (See my reply to Rachel posted above). However, asking others to share what happened to them as a means to develop a strategy is risky. I would caution people not to base their asset protection strategy on what happened to someone else, but instead to consult with their own legal, tax and estate planning advisors who can tailor the recommendations to your unique and specific set of circumstances. There are just too many variables involved that could make a huge difference in the outcome of your situation.

      • Fair enough.
        However I think it would be interesting to hear maybe a slip and fall case where a landlord was sued who had an LLC vs a landlord that deeded everything in his name and had an umbrella for liability.
        I know I would be interested in this sort of information.
        Jon

  70. No one can plan for every eventuality relative to REI property, but I still think the following structure is the best way to go relative to LLC’s:

    I own multiple LLCs and deed the properties so their equity is spread out. These LLCs act as a holding company for my properties. I then use a separate LLC as an “operating company” that is used to sign leases and conduct general management business on behalf of my holding companies. I keep separate bookkeeping for each LLC and don’t comingle any funds between them or with my personal funds. Each real estate LLC collects income and pays direct costs for each property respectively. The leases have to show the title owner on the deed as landlord, so they are structured as follows:

    Holding Company, LLC
    BY: Operating Company, LLC, its Manager.

    This seems to add an additional layer of protection. I also have a million-dollar umbrella policy on each property. None of this is ABSOLUTLEY full proof against litigation, but doing the “right things” w/your tenants along with adequate legal protection sways the odds in your favor.

    • I have been following this for awhile and have not noticed any investor buying for-closer property .I have 1 commercial rental and 3 other residential properties. commercial property is in an LLC but not the residential properties. Commercial as a tipple net and they have there own insurance which the LLC is named in the policy so i don’t need separate insurance on that, but i do have separate policy’s on my residential properties. Depending on the for-closer, some are in very poor condition that need improvements before they can be rented. I live in NY. I can not get regular insurance on these fore-closer while they are under construction ( because they are not inhabitable) or until they are ready to rent., I did find out there is construction insurance which is crazy expensive so i figured that i would have to form another LLC for the residential for-closer .I feel that I’m a little unprotected on the for closer. As in my and i think most umbrellas my 1.5m dollars umbrella policy is secondary to the primary which i need the primary to have at least 300,000 liability on each of my rentals. Other than buying expensive construction insurance has any one been involved in for-closers rehab for rentals and what is there input on protecting your assets

  71. Lee Hinton

    Okay, i have a couple of investment rental all in Florida and i would like to place them under my LLC but, i’m not sure how or who do i contact to make this happen. Also, if the umbrella insurance is a better choice, what are some good ones to choose from? Thanks!

  72. Antonio Hopkins

    am looking at buying an investment property. I have talked to a couple of different lenders, and they quoted me 25% down and a fixed interest rate for 15 years at 3.75%, but here’s the catch, this is only if I put the property under my name. If I don’t and put it into an LLC or S-Corp, I am looking at 25% down and then a variable interest rate starting at 3.75%-7% with a 3-year balloon that is re-assessed and is changed depending on the market. My question is should I put it in an S-Corp or LLC or just put it under my name? I am not worried about the liability implications because I have landlord insurance along with an umbrella policy. My worry is the tax implications. Can someone provide some advice?
    The reason I ask is because if the interest rate stays at 3.75%, I can make a pretty good return on my investment, but if the interest rate goes up to 7%, there is not much left for profit, especially if the three-year assessment rises more than 7%. The only issue I am wondering about is how much will I be taxed if I left it under my name, rather than an S-Corp/ LLC? I am sure someone has faced a similar dilemma before.

    • Tony Johnson

      It doesn’t really matter, get the best rate, go for 30 years, and then get a CPL liability policy for everything you own, read my post below, always go for best terms, if you end up doing this you will own some, and your entities will own some, just keep buying!

  73. Tony Johnson

    Ali, I am a Real Estate Broker & Owner, and owner of a RE Holding Company and I invest in Re related partnerships & I am getting into notes. I started my path by paying hourly rates to the big attorneys,even the attorney that my broker used and they owned most of the Keller Williams Florida operations. I now consult with a rock star CPA that is on the board of directors for my SREIA in Tampa Fl and he represents dozens of local, national, and int investors, and he managed many of his own, and has told me many stories of his and his clients lawsuits. So on my journey here is what I find to be the best was to hold rentals long term. I own 17 SFR all pretty houses, some luxury.

    So first of all, you open a MM LLC, that is your Opco, operating company, property manager, banking, credit lines, mortgages, portfolio loans, you need the llc to get the BLOC and commercial loans. this LLC is your company, it is who your tenant writes the checks to, it is on all of your leases, vendor invoices, it is the only LLC name anyone usually sees.

    Now you open a SM LLC (holdco) put 5 rentals in it, then open another one put 5 etc, the sm llc is 100% owned by the MM LLC. So this way you only do one tax return a year, for 20 houses that is 4 sm llc’s and the one mm so $750 tax return plus about $1000 to file annual report and meeting, so $1750 a year for 20 houses and 5 LLC’s. Now some houses I own, and the rest are spread out in the sm llc’s. The homes I own all have a 200,000 xpl policy, tied to a 2 million umbrella and 500k auto insurance at Safeco. To get the Umbrella Safeco requires 300k liability, the first 100k is in my DP3 hazard policy, so I buy the extra 200k that is the XPL. The home owned by the several Sm llc’s are all on the same Cl liability 2mil also. The MM owns nothing it is the OpCo. This is teh Opco/Holdco method used by big biz.

    I used to do land trusts, just make your sm llc the beneficiary, but why? When your insurance agent gets subpoenaed they will find you. My CPA does scream at me to transfer everything into land trusts, I just do not think they are necessary. And in Florida they just passed a new law I am not even sure you can hide anymore with that. If you can buy the house from day 1 in a trust, then go for it. Use the LLC as beneficiary and I am too conservative to do that with a real bank lien, I do know of one due on sale clause and i do not want to be the one person a decade to get one, the risk reward is not worth it, I hope this helped. BTW set up LLC business acct at Wells Fargo, they will give you BLOC bus line of credit for 25% of deposits and cards, work it, and use that cash to fund deals!

  74. Tony Johnson

    ps I forgot to mention that I also have a business attorney and he does my annual report and keeps my books in order that is just as important as insurance. I spent $1800 last dec for him to “go thru” my black binders and update the meetings minutes all of it, also never do a deed yourself or use a title co. only use an attorney, and he opens each LLC, does the annual reports, this is a business not a hobby. My cpa used to do the annual reports, but then I leaned about the minutes and the books having to be 100% perfect or you might lose LLC protections if you do get sued. having an attorney keep your books is the difference between being a business person and a landlord. Those binders are the first thing they ask for.

  75. I am new this this area and I am in processing to quit claim my rental properties into to be established LLC. A question I have is that I have 3 properties in Florida, but I am Michigan resident. Can I put Florida properties in my Michigan LLC or I have to set up a LLC in Florida?
    If I can use my Michigan LLC to own Florida properties, do I have to file Florida annual report?
    Thanks!

  76. I am working with my attorney on my estate planning. For liability protection purpose, i am also transferring my personal name owned rental properties to LLCs, one LLC per property. To avoid taxes and annual filing fees, such as $800 per year in CA, my attorney suggests that I can just sign my name on the deed for transfer it to established LLC, but I do not need to record the transfer in the County office. To public, it has no change. In future, just in case tenant sued me for whatever reason, then I can show the deed that the property is owned by LLC, not me personally, so I cannot be sued. He also said the transfer date is the date of signed on the deed, not the date of Country recording. So no matter when in the future, a law suite happens to me, I can be protected by this.

    Does this sound right?

    • Thomas Richter

      Doesn’t make sense.

      I think you misunderstand a few concepts. LLC does not offer liability protection if you do something wrong. You are liable for whatever you do, as an individual or as a business owner. It might offer a certain amount of asset protection. It offers some liability protection from wrongdoings of other members of your LLC, but I assume your LLC is single member.

      Next, each LLC is going to cost you, it doesn’t matter what you do with the deed (and the deed filing fee is $23, once). Each LLC is going to cost you $800 minimum tax, agent fees if applicable, business tax if applicable, and you need a separate tax return at ~$500 each (if it goes on your personal return as a non-K-1 passthrough you’re screwed for asset protection). Also, if you ever need to go to court (exempt small claims) you need to hire a lawyer (you cannot represent your LLC) – every eviction doubles in cost. Something to keep in mind.

      Believe me, an attorney will sue the LLC and you as an individual if you are the only member.

      I’m not an attorney and this is not legal advise, but rather experience of owning 35+ units in an LLC in CA.

      • Thank you Thomas for sharing your experience on the cost for each LLC in CA.
        My main inquiry actually concerns that my attorney told me that I can transfer my wife and I owned properties DEEDS to a LLC (of Michigan) during my estate planning process, but do not record the transfer in the County where the properties are located at. In this way, there is not a fees or cost change from what I have now.
        And, he also told me that in case a tenant sued me in future, then I can show the DEEDS signed to a LLC so that my wife and I personally get protected since they can only sue the LLC.
        Does this make sense?

        • Thomas Richter

          Yes, you can transfer the deeds into the LLC. Did he tell you, though, that now the LLC has “nexus” in CA? This means that the LLC now has to be registered with the CA sec of State, because it’s doing business in CA. And it is liable for CA state tax as well as Michigan state tax.

          And, now you have to pay an agent in CA, so that if someone wants to sue you, they can mail the agent. That’s about 150/year.

          I don’t know whether the deeds have to be recorded or not. If you have a loan on the properties it probably matters. And if you get sued and the recorders office has your personal name on it, a judge would probably hold you responsible, especially if you own the LLC into which you secretly transferred.

          As to a lawsuit, a savvy attorney would still sue the LLC and the LLCs owner if it is single member (husband and wife counts as single member in many states). The corporate veil might well be lifted as in CA an LLCs sole purpose should not be asset protection. And it sounds like that is why you are doing it.

          Again, you will certainly be sued and you have liability whether as an individual or as a business owner. You might gain some asset protection from it, but if the judgment is high and your LLC doesn’t have enough any good attorney would come after you personally. The trial would be in CA, so consider that too.

        • Jeffrey Hare

          Thomas addresses several of the issues raised by Ben’s questionable and risky strategy, but allow me to add a couple more. Since you claim the properties are owned by the LLC, but you presumably have not registered the LLC in California, not only would you have to hire an attorney to represent the LLC, but you would have to register the LLC and pay all back taxes and fees before your attorney could even appear on behalf of the LLC. If the LLC is not currently “Active” it may not do business, which includes appear in court to defend itself. The tenant could simply take a default judgment. As for misrepresenting the true nature of the property ownership as a way to avoid liability for your responsibilities as a landlord — what could possibly go wrong with that strategy?

  77. Thank you Jeffery for your comment. I think it would a risky strategy and does not really offer me a peace of mind as it supposes to be.
    I have another question: does anyone know for a LLC in Michigan owns a Florida rental property. What’s the registration fee, annual report fees, and taxes?

  78. Karen R.

    All of these posts are making my head spin. I live in Ohio. My husband and I own 4 SFH as rentals. We have an umbrella policy that covers the rentals, and our primary residence, and also our auto policies are part of it too. Do any of you live in Ohio and have Ohio rental properties? Did you go ahead with setting up an LLC or not? Just looking for some Ohio-based input. Thank you.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php