The majority of real estate investors do not need an LLC for every rental property. Yes, that sounds simple on the face of it, but it can certainly get tricky in practice.
Regrettably, many 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 equity in their rentals….yet!!
To add insult to injury, these same ‘experts’ will also recommend entities in Delaware or Nevada. This will 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. Along with 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. However, 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 in the same LLC. This is 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. They could also go after 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 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 and 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.
Three Main Considerations: Equity, Type of Rentals, and Location
In my opinion, the issue is the amount of equity you have in each one of your properties. Along with 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. Will a plaintiff want to chase down some measly equity in some low-cost rentals- not usually…in fact, VERY rarely.
Type of Rental
If you have a golf course rental, a multi-unit rental, or a commercial rental with some significant equity, that property may 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 to ‘group’ properties in LLCs by State. Also with that to 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.
You can dramatically increase your protection and nominal cost if you DO have properties in multiple states. The Series LLC also needs to be is available in that state. 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. Finding the right lawyer is important, if you want to speak with a qualified and experienced lawyer, reach out to our office KKOS Lawyers.
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!! 🙂