The majority of real estate investors do not need an LLC for every rental property…and yes, that sounds simple on the face of it, but it can certainly get tricky in practice.

Regrettably, a lot of workshop gurus and ‘coaches’ however, (working out of cubicles in Nevada supposedly under the guidance of an attorney) will recommend an LLC for EVERY rental. It’s expensive, cumbersome, and provides a nominal benefit when there isn’t a lot of equity in their rentals….yet!!

To add insult to injury, these same ‘experts’ will also recommend entities in Delaware or Nevada, and further exacerbate the cost and complexity with limited benefit, if any at all.

The goal 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. 

Bottom line, It’s an issue of quality, NOT quantity. Meaning, how much equity is in the property or LLC? Not, how many properties are IN the LLC.

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 when you put all of your rentals in one LLC, you’ve swung the pendulum to the other extreme.  I never want to see my clients with multiple properties that have equity and need protection all sitting in the same LLC and effectively ‘putting all of their eggs in one basket’.

If a client with 10 properties in one LLC has a problem with property #3, a litigator can go after the equity in property #7, OR all other 9 properties if they were to get a judgment against the LLC.

EXAMPLE: I once had a meeting with a client in the morning that literally had 42 properties in one Arizona LLC with 2M+ in equity, and later that afternoon I met with a client that had 4 properties with barely any equity in them held in 4 Nevada LLCs while they were a California resident. BOTH situations were terrible situations that needed fixing.

Conversely, if you have one LLC for each property and there’s a problem with property #3 (in it’s own LLC), then the plaintiff can only get at the assets in that particular LLC and can’t break out of that LLC to get other rentals (so long as they ‘maintain’ the LLC- See my other article “Piercing the Corporate Veil and Protecting Yourself“. 

But don’t forget the cost!! It sounds great having all of those LLCs, but where is the happy medium? As we also NEED to be balanced in most areas of our lives, the same thing applies to plotting out our asset protection.

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

Equity

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.

Type of Rental

But if 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 rental. Another way of saying it is to keep your “high equity properties” separate from your “high-risk properties”.

Location

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.

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.  (Click here for an article on the topic: Why a Series LLC Might be RIght for You)

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.

In Conclusion

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!! 🙂

 * To sign up for Mark’s weekly Free E-Newsletter and receive his Free E-Book “The Top 10 Best Tax Saving Secrets Everyone Should Know” visit www.markjkohler.com.

Mark J. Kohler is a CPA, Attorney, co-host of the PodCasts “The Main Street Business Podcast” and “The Directed IRA Podcast”, and the author of “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”, as well as several other well-known books. He is also the CFO of Directed IRA Trust Company, and a senior partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP, and the accounting firm K&E CPAs, LLP.