When Does Setting Up an Entity for Your Investments Make Sense?

by | BiggerPockets.com

It seems that the question of whether or not to set up an entity for real estate comes up a lot, and the answer probably varies depending on who you ask.

If you ask an attorney, they’ll probably all tell you that you absolutely need one to own investment property in.

Usually, they’re thinking about liability protection, which is definitely a consideration, but whether or not setting up an entity makes sense really depends on your own situation and investment strategy.

At first, it seems like the perfect strategy for any real estate investor is to put each property in its own LLC, but the only problem is that we live in an imperfect world.

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When an Entity May Not Make Sense

There are many variables to consider when evaluating an entity to hold real estate. Sure, liability protection is an important one, but you need to put that in context, too. How much overall exposure does the investor really have? Can some of this exposure be reduced through things like an insurance umbrella or mortgage debt against the property?


You should also consider the financial implications. For example, if you’re just starting out in real estate, maybe it makes sense to buy properties in your own name in order to utilize residential loans, which have lower down payments, lower interest rates, and lower insurance premiums than commercial loans. This is a strategy that I utilized when starting out, and it enabled me to build up my real estate portfolio that much more quickly.

Once you’re past the bank limits for owning real estate in your own name, then it starts to make much more sense to start owning real estate going forward in an entity, like an LLC or trust.

Related: 5 Reasons I Do NOT Invest in Real Estate Using An LLC

Potential Alternatives

For me, I’ve kept those first few properties leveraged with mortgage debt. With a HELOC (Home Equity Line of Credit), I was able to quickly recapitalize and continue building my portfolio.

Another strategy of mine was how I took title to those properties with my spouse through “Tenants by the Entireties.” An advantage of taking title this way (in a state like Pennsylvania) is that if a judgement is obtained against one of the spouses, the sale of that piece of real estate can’t be forced.

Tax Implications

As one’s portfolio grows, it may be a good strategy to have more buckets or silos of assets. After a while, the number of entities I had quickly grew. From land, mobile homes, storage centers, office condos, apartments, and notes, the number of commercial entities seem to accumulate substantially. Of course, so do the number of tax returns you have to do.

Related: #AskBP 013: Should I Have Several LLCS For My Real Estate Business?

That being said, you could set them up as pass-through entities, which could enable the LLC or trust to be taxed at a lower rate. For example, LLCs are taxed at the owner’s rate, and trusts are taxed at the beneficiary’s rate. So, if you were to own an LLC with your son who’s in a lower tax bracket, half of the LLC would be taxed at his rate.


Control vs. Ownership

The other factor to think about as you accumulate more assets is how to preserve and then eventually pass them on to your heirs. Does it always make sense to own everything, or is control really the most important aspect? Maybe some entities could be owned with future heirs now. Estate planning trusts may be wise to consider as well.

You can also have your trust own your LLC to give you some additional anonymity and to limit some of the frivolous types of exposures. There can also be some disadvantages to owning assets in a trust, especially if you need to get financing or you encounter transfer tax.

As you can see, entity selection can quickly become a complex decision depending on the exposure, domicile, and exit strategies of the investor. This is where it really pays to have a good team of accountants, attorneys, and financial planners to really help you strategize. But for me, the decision to start using LLCs was mostly a financial one.

So, for those of you on BiggerPockets, when did it make the most sense for you to set up an entity for your investments?

Leave your comments below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. Jerry W.

    Very well written as usual. I only have 3 separate entities and I dread tax time as it is. I cannot imagine having an LLC for each property. I would have about a dozen or more companies. The cost of doing a dozen more tax returns, having a dozen more bank accounts, a dozen more sets of books, a dozen more yearly reports to file, more corporate minutes to keep, etc. I would estimate just at tax time it would cost another $3,000, and the added time would be horrible. I really need to start another company as my main one is getting a bit big and I would like to split the eggs up into different baskets a bit. The main reason I have not done so is the added layer of paperwork and accounting it will entail.

    • Dave Van Horn

      Thanks Jerry, I always appreciate the comments.

      As far as paperwork and accounting goes, I feel your pain…right now I have over 20 LLCs between me and my businesses! My advice is to keep it simple if you can, but if certain assets become too valuable it definitely makes sense to separate. When to do so is different for everyone though. For me, I start to divide any asset or group of assets exceeding $1,000,000 into separate buckets if possible.

      I certainly don’t think it’s necessary to have a different LLC for every property (especially ones that aren’t highly valued) but I do know some people with a lot of residential properties who set up a single LLC and utilize a commercial blanket mortgage (which they can add or subtract properties to pretty easily). So that eases the financing and may eliminate some of the paperwork, but the downside is it’s not as safe as multiple LLCs plus the bank controls the use of proceeds more than you would when making a sale.

      But hey, look at it this way, it’s a good problem. At least we have assets to protect!


  2. I wear a seatbelt because research shows me that there is a high probably of being protected “with” the seatbelt than “without.” It is the same thing with LLCs relative to asset protection. I place a high premium on my family’s financial well-being, which is why I use one (single member) LLC as a “holding company” for my real estate, and one LLC as an “operating company.” In addition, I have an umbrella policy on each property. Overkill? Perhaps, but any other strategy hinders a good night sleep, and I like to sleep soundly!

    • Dave Van Horn

      Hi Randy,

      Thanks for commenting.

      I agree with you on one thing, piece of mind is priceless. But I’m personally not a big fan of the single LLC due to the fact that in litigation, I’ve seen the opposing council attempt to pierce the corporate veil under the pretense of the owner operating not as a real company but as an individual. And when that happens they will then try to pursue the individual’s assets. That’s why I like to add other trusted members to my LLCs, which can be done at the outset or to existing LLCs.

      Also I don’t think I stressed it enough in my article, but owning assets as individual is just another bucket. If a person were to put minor protections in place (like insurance, leverage with debt, or if they utilized a personal property trust), it’s a relatively safe place in and of itself.


  3. PJ Muilenburg

    Thanks for the good thoughts. I will soon surpass the limits on owning properties in my own name and have been considering some of those options. In my state there is a ‘Series LLC’ where I can open one ‘master LLC’ with series within it. I would put each property in its own series and essentially have the protection of many different LLCs but the tax simplification and low cost of just one LLC. I would still need different bank accounts and records for each series. I just can’t decide if the headache (especially once I have 20+ properties) is worth the protection or if I should just get one simple LLC. Any recommendations?

    • Dave Van Horn

      Hi PJ,

      Good question. I guess it really depends on the value of your portfolio and your risk tolerance but personally speaking, I’ve only used Series LLC’s for larger commercial properties. Specifically high value properties (mobile home parks/storage centers) that were purchased utilizing a similar investment strategy – all managed by one managing entity.

      For residential property, I see more disadvantages than advantages for a Series LLC especially in the scenario of litigation. For example due to their size I’ve seen individual owners of Series LLCs have to defend themselves in lawsuits where they were treated as one company, this way the opposing council could go after all the assets in the LLC. Obviously, that could be very problematic.

      My recommendation would be to just set up regular LLCs (maybe managed by one managing entity) for a certain value then on top of that, if you want an added bit of security you can also make your managing entity owned by a trust. That way it gives you anonymity and gets your name out of the public record.

      Hope this answer helps.


      • PJ Muilenburg

        Thanks so much, that makes sense. Our Trust actually does own the properties now and would own the LLC(s). Actually I didn’t fully understand at the time but when my lawyer set up our trust he named it ‘(my name) and (spouse name) revocable family trust’, which I later realized kind of defeats the purpose, from a litigation standpoint, since there’s no anonymity there. I will probably need to change that before I start a LLC.

  4. A good article Dave covering the waterfront. I avoid LLCs for several reasons; public record of the creator, registered agent, cost to create, annual reports, annual fees etc. A two member LLC provides good asset protection and your plan to make the beneficiary of the revocable trust the LLC is very good. Only a lawsuit will unveil the LLC. Meanwhile the ownership of real estate is off the public records and the LLC is shown to own “beneficial interest of AXFBT Trust. No address or legal description included. I do all of my real estate and note deals in trust.

  5. Peter Mckernan

    Hello Dave,

    Good insight on the beast known of as entities! It really started for me when there were a few of my partners that got into the investing world together and when I wanted to open a business. It did not make my old tax advisor happy that I started two different entities, so I found a new one! Ha.

    Either way the hardest part is what entity, or holding strategy makes the most sense to that person. Thank you for the article!

  6. One HUGE issue concerning owning real estate and forming entities no ever talks about in depth or for that matter even slightly mentioning it.

    Transferability of real estate at death.

    Sure no one ever intends on dying but it happens and with some sudden and unexpecteded death and the realestate the person own it can hold the real estate in probate courts for YEARS. Not to mention the cost of legal fees and probate fees would have paid for years of accounting fees for all the entities combined.

    I have gone through this recently and had i known the legalities of eatate planning a bit more in depth i would have start and entitiy for my first foray into realestate. As such i am now in process of transfering these first few properties into an LLC owned by my trust.

    This will allow for a much easier transfer of assets in the LLC to heirs by way of ownership of shares in the LLC not by ownership of th properties.

    Something which is way to over looked when this question is contemplated but honestl in my oppion its the most important aspect.

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