Every week, if not every DAY, one of the attorneys in my office is asked this question in a consultation.
We take this seriously and have to think….Do we want to rip off our client, or give them the answer that is in THEIR BEST interest?
A lot of workshop gurus and ‘coaches’ working out of cubicles in Nevada (supposedly under the guidance of an attorney) will recommend an LLC for EVERY rental. I truly believe this is NOT needed for the far majority of real estate investors. It’s expensive, cumbersome and provides nominal benefit to many clients that just don’t have a lot of equity in their rentals….yet!!
Is there a limit on how many properties you can put in an LLC?
No. You can put as many properties as you want into an LLC…but then we have gone to the other extreme. I don’t want to see my clients with 10 or more properties sitting in an LLC and effectively ‘putting all of their eggs in one basket’.
Yes, if you have one LLC for each property, if there is a problem with tenant or contractor, they can’t break out of that LLC and get to other rentals (so long as they ‘maintain’ the LLC- See my article: http://markjkohler.com/piercing-the-corporate-veil-and-protecting-yourself/)
But don’t forget the cost!!
However, on the flip side with a bunch of rentals in one LLC, if there is a problem with one rental, they can get at the other 9. So much cheaper…but where is the happy medium and we NEED to be balanced…as in most areas of our lives.
It comes down to Equity, Location and Types of Rentals
In my opinion, the heart of the issue is the amount of equity you have in each one of your properties, where they are located and which properties have the most risk of a potential lawsuit
I’ve always said it comes down to “quality”, not “quantity”. If you have a bunch of low-income housing rentals that cash flow, but don’t have a lot of equity, throw 5-7 of these properties in the same LLC. If there is a problem, YOU are protected, and will a plaintiff want to chase down some measly equity in some low-cost rentals- not usually…in fact, VERY rarely.
But if you have a golf course rental, a multi-unit rental, or commercial rental with some significant equity, that property may very well deserve its own rental. Another way of saying it is to keep your “high equity properties” separate from your “high-risk properties”.
Next, we often find it more affordable and simple ‘group’ properties in LLCs by State, and potentially have a separate LLC 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.
Finally, if you DO have properties in multiple states, if the Series LLC is available in that State, it can dramatically increase your protection for a nominal cost. (See here for article on the topic: http://markjkohler.com/what-are-the-benefits-of-a-series-llc/)
Finally, this ‘consideration’ and issue is the perfect topic to discuss in an annual ‘asset protection review and strategy session’ with your business attorney. If they don’t bring this topic up to you, or have the ability to help you in multiple states, you have the wrong lawyer.
But no matter what you do…DO NOT rely on some ‘coach’, online service, or real estate sales company for your legal advice on this topic! Oh….but that’s right, if you get into a lawsuit I’m sure they carry malpractice insurance and will stand behind their advice if there is a problem – NOT!! 🙂
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.