Do I Need A Separate LLC For Each Investment Property

Do I Need A Separate LLC For Each Investment Property?

Advice is abundant on webinars and the internet from workshop coaches and self-proclaimed real estate investment ‘gurus’, many of whom recommend an LLC for EVERY rental. Remember the old adage? "You'll get what you pay for!" 

Many of these same self-styled real estate investment ‘experts’ also frequently recommend that these LLC entities be established in Delaware or Nevada further exacerbating the cost and complexity – these are not the only states in which the tax laws can favor small business. Check with your attorney or accountant for suggestions.

The goal for the investors accounting and legal team should be what is in the best interest of the client and finding a ‘balance’ in the legal structure for maximizing savings, efficiency AND protection of assets. 

Bottom line: The point here is that you should be looking toward quality and NOT quantity. How much equity is in the property or the LLC and not how many properties are in the LLC. The proper corporate structure should support your goals as an investor and provide you with sufficient asset protection while minimizing your administrative costs.

Is there a limit on how many properties you can put in an LLC?

As a direct answer, No. You can put as many properties as you want into an LLC…but by putting all of your rental properties into one LLC you may be swinging the pendulum to the other extreme.  Most attorneys we know advise against putting multiple properties that have substantial equity and need protection in the same LLC - effectively ‘putting all of their eggs in one basket.’

For instance, an example given by an attorney was of a client with 10 properties in one LLC. If there was a problem with property #3, a litigator might be able to go after the equity in property #7 or even reach all other 9 properties if they were to get a judgment against the LLC.

According to this attorney, conversely, if you have one LLC for each property and there’s a problem with property #3 for instance, then the complainant is restricted to the assets in that particular LLC. They cannot break out of that LLC for #3 and get to the equity in other rental properties; so long as you have not done something that would give them grounds to ‘pierce the corporate veil.’ 

These are not the only considerations! Don’t forget the cost!! It might sound great having all those LLCs, but where is the happy medium? We also NEED to be balanced in our lives; the same thing applies to plotting out our asset protection. 

..

The Three Main Considerations: Equity, Type of Rentals, and Location

Equity – here, I believe, is the heart of the issue - the amount of equity you have in each property, where they are located, and which properties have the most risk of a potential lawsuit. This is an important discussion to have with your Realtor and Attorney to discuss risk management and risk mitigation.

Remember, it’s about “quality,” not “quantity.”  A bunch of low-income housing rentals that cash flow, but don’t have a lot of equity you might consider putting 5-7 of these properties in the same LLC.  If there is a problem, YOU are protected, and very few plaintiff attorneys will want to chase down some measly equity in low-cost rentals – there’s too little ROI for the effort.

Type of Rental – Suppose you have a golf course rental, a multi-unit rental, or a commercial rental with some significant equity, that property may very well deserve its own LLC. Another way of saying it is to keep your “high equity properties” separate from your “high-risk properties.”

Location – It will likely be more affordable and simple to ‘group’ properties in LLCs by State with  separate LLCs for each bundle of properties in every State. This can make banking, foreign filings fees and Registered Agent fees more efficient to manage and save some administrative costs.

This ‘consideration’ and issue is the perfect topic to discuss in an annual ‘review and asset protection strategy session’ with your business attorney. Also, this is the time to inquire about a “Series LLC,” a special type of LLC that provides the same benefits as a traditional LLC, with the added feature of a type of "umbrella company" that can provide additional flexibility and protections for multiple companies or lines of business within your overall operation. If they don’t bring this topic up to you, or have the ability to help you in multiple states, you may have the wrong lawyer.

In Conclusion

This blog is intended to provide information to the first-time as well as experienced real estate investor; however, it is not intended to provide any legal, accounting or tax advice; or to suggest any structure for real estate investment. These questions should be answered by a professional with experience in these areas. The LLC is one form of corporation along with the C-Corp, S-Corp, partnership and sole proprietorship. Each of these have specific pros and cons and we recommend seeking advice from a legal and a tax professional. This blog relies upon much of the content provided in an article published by Mark J. Kohler, M.Pr.A., C.P.A., J.D., a personal and small business tax and legal expert who helps clients build and protect wealth through wealth management strategies.