The Pros & Cons of Using a New LLC for Every Property Purchase

by | BiggerPockets.com

There is so much conversation on LLCs—from the basic stuff such as what are they and why should we use them to more complex topics like which state we should register in and the difference between a manager-managed LLC and a member-managed LLC.

Today, I am going to take a stab at one of the questions that goes around a lot. Should you get a new LLC every time you buy a property? There are pros and cons for doing this, and in today’s video, I go over them in detail.

Pros of Using a New LLC Every Deal

  1. Ownership structure: Perhaps you are working with several different owners on a new deal. It makes sense to have a new LLC as it will define the ownership percentages and the roles of each owner.
  2. Working in a new state: This could be argued either way, but to me, it makes sense to incorporate in the state where your investment property is.
  3. Doing a flip: Many investors do a new LLC every flip. This makes sense, as it separates that flip from other properties with respect to taxes and liability. More on this in the video.
  4. Asset protection: Holding each purchase in its own LLC will compartmentalize each property from the other. If there is a liability claim with one property, it won’t affect any others held by you. Some would say that this is the main reason to hold each deal individually. Watch the video for a deeper conversation on how valid this is.

Cons of Using a New LLC Every Deal

  1. Higher costs: You will pay a fee to set up each LLC and in most states another fee to file a return every year and a fee to your CPA.
  2. Growing portfolio: Depending on the size of your portfolio, it might be easier to get a loan if you lump several properties into one LLC. Holding each property individually could make it harder to get financing, especially if the values are less than $100k.
  3. Insurance: You can obtain a reasonably sized general liability policy on your properties and arguably have the same level of asset protection as you would if you held each address individually.

I go into way more detail on this in the video, so be sure to check it out.

I know there are schools of thought on both sides of this conversation, and I would like to her from both.

If you are a strong advocate for either, please leave a comment so we can get a good conversation going!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

36 Comments

  1. Jeff Copeland

    You mentioned financing briefly, but failed to mention that conventional mortgages and refis are not available on properties held in an LLC or corporation.

    In my experience, one of the biggest reasons to hold properties in one’s own name is to take advantage of conventional 30-year fixed rate mortgages at today’s historically low interest rates.

    I tend to take a blended approach… if I acquire a property with cash or otherwise own it free and clear, I typically hold it an LLC. But my buy and hold rental properties tend to go in my own name (at purchase, if purchased with a conventional mortgage…or when I refinance if a BRRR) to take advantage of conventional residential mortgage products.

    • Matt Faircloth

      Hey Jeff,

      You are correct, mortgages are at historically low rates. Locking in for a 30 year fixed at these rates is huge. You actually can get a mortgage in an LLC but they are not backed by Fannie or Freddie ad the 30 year fixed product you are using is. Small community banks can provide the loan, in the form of commercial mortgage. It’s not locked for 30 years, not like 5 to 10.
      The problem with putting the mortgages in your own name is that they will show up on your personal credit report, and you can only have around 10 of them before you max out.
      Matt

    • Vitaliy Volpov

      In my area in upstate New York, you can get a commercial mortgage at 80% LTV, amortized at 25 years, with 5-year rate adjustments starting at 5% interest rate. I think that’s a pretty reasonable trade-off to a 30-year fixed in your personal name for being able to hold the property in an LLC and getting the asset protection that comes with it.

      Vitaliy

      • Vitaliy Volpov

        No matter how you hold title to the property, insurance is an absolute must in my opinion. Banks won’t lend on a property unless it has insurance coverage. But even if you were to buy for all cash, you should still get good coverage. It doesn’t make sense not to.

        Vitaliy

        • Jeff Filali

          I agree 100% and do carry ins on all of my properties. But some of these responses make it sound like theyre separating each property into individual LLCs and just carrying an umbrella liability policy and taking the risk.

  2. Matt,
    Thanks for the video, it was everything that I have heard, read, or talk about with others in the know.

    One question about the video, you are talking about an LLC per deal. If I was assuming that each deal is say one property it all makes sense. But as you alluded too about multiple properties (or a portfolio) would you think it best to have an LLC per “group” of properties up to some level of dollars? In other words, if I had say eitght properties, all in the same state, value of say $50k per property. Should I maybe bundle them into two LLC’s with four each, total value of $200k. Then if I start buying more in that state, they may go into a third LLC (if I was limiting each LLC to $200k).

    • Matt Faircloth

      Hey John,

      Bundling houses and rhen doing a package refinance on all of them is a freat strategy. I’m glad that concept came across in the video. You don’t have to limit yourself at 200k or only do one package of houses though. If you end up with a large portfolio under one LLC just get more insurance to cover you.
      Matt

      • Noam Ofan

        Hi, matt.

        When bundling several properties and getting one loans against them, what kind of terms can one get for this type of financing? My understanding is that this would be a type of commercial loan.

        LTV?
        30 yr fixed?
        Interest rate?

        Thank you!

  3. Jeff Filali

    I currently own 7 properties free & clear, I’ve left them all in one LLC, my main holding co LLC since owned free & clear, because I’ve been told by doing this if I ever needed to borrow money, instead of doing an equity mortgage loan, I could start a business line of credit based on the total value of all the assets in my business and use what I needed for whatever business related, buy new property, flipping expenses, etc. and also only pay for the money used. Have you experienced anyone doing this approach & what’s your thoughts on it?

    • Matt Faircloth

      Hey Jeff,
      You are in a unique situation. You can definitely approach a small community bank for a business equity line of credit with those properties as collateral. They may try and push you to a refinance though, so be wary of that if you don’t want to lock into a mortgage. You may also try the portfolio lenders out there. Either will ask you to personally guarantee so so be prepared for that.
      Matt

      • Jeff Filali

        Thanks Matt. I’ve been considering approaching my bank that handles my real estate accounts, other business ventures and personal accounts. I felt like using the property portfolio to get a business line of credit would be a better deal then using HML to be able to do more rehabs & flips. Thanks again for your response.

      • Will F.

        Hey Matt Great post. i general how are those Business equity line of credit interest rates for a property portfolio versus interest rates on a regular home?
        ie. Business equity line of credit interest rate on a few duplexes vs interest rates on typical HELOC? Just ballpark?

        • Jeff Garrison

          I’ve been given sound advice by a tax attorney who also is a real estate investor. He recommended having each rental property (or maybe 2) in their own LLC specifically for the asset protection. You only need one bad slip and fall, or bad tenant who knows how to work the system to create a nightmare and potentially lose the property. He also noted that any attorney worth their salt will look at the value of assets under your own name and use that to determine whether to pursue with any lawsuit. By holding each property in a separate LLC, you compartmentalize those assets. You can’t overlook the risk associated with the litigious society we live in. Lastly, if you’re concerned about filing multiple tax returns for each property, structure it all so that it’s owned by a single holding company: Multiple revenue streams flowing into one big river AND only a single tax return (minus your individual 1040).

        • Matt Faircloth

          Hey Jeff,

          I do hear your point about asset protection. Believe me I know how litigious our society is because I’ve been sued quite a few times by tenants myself, LOL. That being said I have not seen attorneys bother with going any further than an insurance claim. I am wondering if anyone here on the forum has heard of something different, where a lawsuit went beyond the insurance liability umbrella and on to property liens or going after the owners personally.

          I have seen it only once but it was a case of blatant neglect. Has anyone else seen this and care to share?

          Matt

  4. Love the idea of having a sharper focus on the insurance than the multiple LLC structure. I have generally been comfortable with having no more in any one LLC than I would want to face in a single loss… similar to John, above; keeping a cap in mind for the amount of EQUITY within each LLC rather than the number of properties. My ‘veil’ becomes title > entity > insurance. Thanks for the new, improved perspective!

  5. Vitaliy Volpov

    Hi Matt,

    This is definitely a hot topic of discussion. I agree that insurance is important, but I think having that extra compartmentalization just adds another layer of protection which should help you sleep better at night. My experience with insurance companies in the legal world is that they will try to find any way they can to disclaim coverage on a significant claim. Insurance companies don’t stay in business by paying out large claims, they stay in business by making money on the premiums. Also, there are many types of claims that will simply not be covered by insurance.

    Most insurance policies contain numerous exclusions—e.g. toxic substances, gross negligence, intentional torts, housing discrimination complaints, etc. All of these are claims can carry huge potential liability. If you own all of your properties in one LLC and you are unlucky enough to be in a situation where you are facing a million dollar claim in one of those excluded categories, you are really putting your portfolio at risk. Do you think that a plaintiff’s attorney will drop the case just because the insurance company disclaimed coverage when he knows you have a million dollars worth of assets in the LLC? Not a chance.

    But if that LLC had only one property in it, and that property was worth only $100K, it would definitely be a significant roadblock to the plaintiff’s recovery. Having said that, in the scenario above, if the claim is large enough and the injury is significant enough, I am sure the attorney would also sue all of your other LLCs and try to pierce the corporate veil. In my home state of New York, while veil piercing is not easy, courts have the option of granting it if “justice” and “equity” favor piercing, which basically means that they’ll pierce if they feel really bad for the plaintiff (a very scary proposition indeed!).

    Anyway, great blog post and video to get the discussion going. But, I am still partial to the separate LLC for each property school of thought (and not just because I’m a lawyer and like to see my colleagues making money on LLC formation fees! ;-))

    Vitaliy

    • Matt Faircloth

      Hey Vitaliy,
      Great points. I agree with your list of potential suits that could cause a drop by your insurance company but think that breaking a discrimination law or gross negligence would be on the owner’s fault for doing bad business. Insurance can’t cover you for that stuff. One that I would add to the list, and one that keeps me up at night is lead-based paint poisoning. I know there are some major suits going on in that area these days. I’m sure insurance won’t cover that claim and a jury is sure to award a monster sized settlement.
      You alluded to another point that I didn’t make – if there is a case with a huge potential settlement like lead based paint or gross negligence, you can bet that the attorney representing the plaintiff will sue you personally and everyone else they can to drag them into it. I don’t see a way around that, including using individual LLC’s.
      The bottom line is that there is no one fix. Large insurance policies alone won’t offer 100% protection and neither will holding everything in an individual LLC. It takes good business practices and habits like removing contaminants from properties (mold, asbestos, lead based paint, etc…) along with asset protection strategies.
      I see the benefits of holding many properties in one LLC as greater than breaking them up, and also see the probability of a catastrophic law suit as so small that it’s not worth trying to avoid it.
      Thoughts?
      Matt

      • Vitaliy Volpov

        Matt,

        Right back at ya – excellent points! I agree that liability for gross negligence and housing discrimination is typically due to an owner’s own bad business practices. However, the issue is not always so clear.

        Take housing discrimination for example (this is also true of employment discrimination as the laws in each area similar), where there exists a legal theory called “disparate treatment” discrimination. This theory holds that the landlord (or employer) may be held liable for discrimination, even in the absence of discriminatory intent, when the demographic composition of the landlord’s tenants (or employees in the employment context) is mismatched with a representative cross-section in the particular locality.

        In other words, let’s say that you own 20 rental units and the racial makeup of your tenants (just using race as one example; this also works with gender, national origin, disability, military status, age (with exceptions for certain types of housing), and all other categories protected by state and federal law) is: 16 Caucasians, two African-Americans, and two Asian-Americans. If the demographics of the locality where your buildings are located are 70% Caucasian, 20% African-American and 10% Asian-American, you have a potential problem because the demographic composition of your African-American tenants is statistically out of line with the demographic composition of African-American residents in the locality. This, in itself, is sufficient to create a presumption of “disparate impact” discrimination. An unsuccessful African-American applicant for one of your apartments can sue you claiming that you are discriminating against African-Americans in your tenant selection process.

        You can argue all day long that you never intended to discriminate against any group and that your processes are completely race-neutral. However, this is not going to help you overcome the presumption because the disparate impact theory of discrimination does not care about intent, but rather looks only at adverse impact. About the only way to defeat this type of claim at the outset is to challenge the validity of the plaintiff’s statistical analysis using expert witnesses and argue that the plaintiff’s demographic estimates are inaccurate or that the plaintiff’s expert erred in selecting the representative community. If you are unable to do that, you can try to show that the your screening policies are “necessary to achieve a valid interest.” However, this is a difficult standard to meet and can easily be overcome if the plaintiff can show that there exists an available alternative practice that has less disparate impact on the protected group.

        The bottom line is that, despite not ever attempting to or intending to discriminate against anyone, you may still be found liable and, depending on the size and the length of the violation, the damages could be staggering. If this legal theory sounds a little heavy-handed, I feel your pain (my law firm is typically on the defense side of these types of lawsuits). But it is a legitimate theory that has been adopted by the United States Supreme Court and various state courts throughout the country.

        I fully acknowledge that you cannot stop someone from suing you if they want to, regardless of what types of protections and precautions you take. I also agree that catastrophic liability is rare. I see it more in my world because clients come to us with these types of issues. If I had to guess at what the odds are of losing this type of lawsuit, they are probably less than 1%.

        But I still think that, despite the additional transactional costs associated with multiple entities, the extra peace of mind is worth it. Again, this is just my opinion. I know investors who follow each approach and each works well for them. Investors should weigh all the pros and cons, consult with qualified professionals, and then make their decision.

        Vitaliy

        • Vitaliy Volpov

          Just to clarify, I don’t mean that you would lose a disparate impact lawsuit brought against you only 1% of the time. I mean that the odds of this type of lawsuit being brought against you as a real estate investor at some point in your career and then losing that lawsuit are very small.

  6. Rob Bucholdt

    Thanks Matt and everyone else for the help , I would like to add if you are using the brrrr strategy all your homes have mortgages and there is not much equity for someone to take .
    Also I live in Virginia and I’ll be buying houses here and in Ohio ,where should I set up my LLC I’ve heard Nevada is the strongest against “piercing the veil”

    • John Laabs

      Rob B.,
      Not a lawyer, but from everything I have read and researched that in general if you are doing business in multiple states, you need to form either a Domestic or Foreign business entity (in this case an LLC) in the state you are doing business. There are some exceptions. Basic definition of Domestic – formed in the state you are doing business. Basic definition of Foreign – is the business has been formed in another state but is requesting to do business in the current state under the name of the other state it was formed initially (example: Formed an LLC in Nevada but now wanting to do business in Ohio under the same name).

      Bottom line is check with a lawyer and or the Secretary of State website for the state you are going to do business in, they should have the requirements for you.

      • John Laabs

        All,
        I believe that no matter what an important part that goes with the article…an LLC or any other business entity formed in a state requires a Register Agent (RA) name and address, this is where any legal documents (i.e., lawsuits) will be delivered. You need to make sure this is someone that is able and willing to receive the documents but also tell you that something has been delivered. Otherwise if something is delivered and you don’t know about it, you could get sued and not show up and have a judgement against you.

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