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What’s the Best Way to Structure Multiple Real Estate Investments?

If you’re like most real estate investors, you probably own more than one property. Or, maybe you’ve gotten your start with your first investment and you’re ready to expand.

One of the most common questions from real estate investors is about how to structure multiple investment properties: Is it better to form separate LLCs (Limited Liability Company) for each property or to house them all under one LLC?

My answer is simple: Typically speaking, it’s best to create a separate LLC for each property. Each LLC should own only one property and not engage in any other business activity. This is the best way to contain your liability and maximize your protection.

To understand the reasoning, let’s get back to the basics and think about why a real estate investor forms an LLC in the first place. It’s all about minimizing personal liability.

Worst Case Scenario

lawsuit form

Real estate is a BIG target. Protect yourself!

You don’t want to lose your life savings because a worst-case scenario happens at your rental or investment property and someone decides to sue.

Hopefully, you don’t spend too many sleepless nights worrying about the “what ifs,” but things can happen with rental/investment properties… a water heater could explode or the balcony railing might break.

It could even be something as simple as a tenant slips on a patch of ice on the driveway and decides to sue.

Your Personal Assets Are At Risk

If you hold the property title in your name, you are the defendant in any lawsuit. And, if the judgment exceeds your insurance coverage, your life savings and personal assets can be at risk.

By contrast, if the property is structured in an LLC, the LLC is the defendant in the lawsuit, and you won’t be liable personally (unless your own personal actions caused the problem).

Contain the Liability

It’s easy to understand the importance of forming an LLC for a property, but why go through the trouble of creating separate LLCs for each place? The goal here is to contain the liability as much as possible.

For example, let’s say you purchased a few rental properties and put them under one LLC (named Three Properties, LLC). An unfortunate incident occurred at one of the properties, your tenant sued and was awarded a large settlement.
watch your step
The LLC protects your personal assets from being used in the settlement. However, the judgment can be collected from any of the assets owned by Three Properties, LLC – and that includes the assets of all the other properties.

So, if you had $100,000 of equity in each of the three properties, you risk losing $300,000 from an incident that occurred on just one of the properties.

You can eliminate this risk by having a separate LLC for each property. In this case, the assets from Property B and Property C would be shielded from any judgment against Property A.

In other words, only $100,000 equity is at risk instead of $300,000. Think of it as diversifying your assets and containing the risk.

What’s the Downside?

Is there a downside to forming multiple LLCs? Not really. There’s a relatively small fee associated with forming an LLC, and the paperwork can be done in the amount of time it takes to finish your coffee.

Most states do require LLCs to file an annual report and pay a fee each year. This means you’ll need to file separate paperwork and fees for each property’s LLC. However, the time and money you’ll need to spend maintaining the LLCs are a fraction of the amount you’re investing in the property and the potential risk of not protecting your equity.

Consider the small effort to form and maintain separate LLCs an important form of insurance to minimize risk and protect your equity for years to come.

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About the Author...

Phil Akalp is an attorney and pioneer of online "Legal Self Help" with an unrivaled passion for providing small business owners with legal assistance they can afford.

Phil's previous "Legal Self Help" business was acquired by Intuit. Today, he's co-founder of Corpnet.com where he helps entrepreneurs and business owners incorporate, form LLCs, file DBAs, and more across all 50 United States.

Comments

  1. Stephen scott says:

    Is the LLC a single owner or multiple invesrptors?
    What if my long term goals include selling this property to take my profit and trying to put off capital gain taxes by structuring a 1031 tax deferred exchange? Anything special,about this I need to know?
    Should my LLC be member managed or should I appoint/elect a manager?
    Can I be my own statutory agent? Is it a sound practice?

    • Phil Akalp says:

      Hi Stephen –
      Thanks so much for reading and commenting. In order to properly answer all of your questions and go over in depth how we can help you, please give my office a call at (888) 449-2638. Talia, one of my Business Filing Specialists can go over all these questions and any further ones you may have. Thanks again and we look forward to hearing from you!

  2. Adam Betts says:

    If you own multiplie properties under different llc.. would it be wise to have a corp own the llc for an extra layer of protection ?

    • Phil Akalp says:

      Hi Adam – Thanks for reading and commenting. Generally speaking, LLCs on their own provide liability protections for the owners personal assets. If you are looking for any additional layers of liability protection, you can absolutely have a holding company but that is entirely up to you. Please feel free to call my office at (888) 449-2638 and ask for Talia if you have any additional questions. Thanks so much!

  3. In California, the state requires an $800 annual LLC fee due regardless if you are doing any business or making any money with your LLC. I have a income property that is a long term hold because of it’s cash flow, but I have had to pay $800 per year for 12 years in state LLC fees. So if you are doing business in the people’s republic of California, be careful with running out and creating a bunch of LLCs. Plus, accountants like to charge extra for K-1’s or schedule C (depending on single or multi-member LLC) when you file taxes.

  4. Joseph says:

    Great topic on LLCs. How should I hold rental property, i e under a trust?

    • Phil Akalp says:

      Hi,
      Thanks so much for reading and commenting. I am unable to provide legal, tax or financial advice but generally speaking there are many options as to how one should hold a rental property. Some people choose trusts while others create an LLC or Corporation as a holding company. Which one is best for you would have to be decided by you with the help of an attorney or CPA. If you have any questions or need recommendations, please do not hesitate to reach out to my office at (888) 449-2638.

  5. Forming a LLC is not a must. Any competent lawyer can see through and get to the source in the event of a lawsuit. Having enough insurance should suffice and save lots of headaches come tax time.

    • The whole point of corporations of any kind is to limit liability. It does not matter that you are the sole owner. It does not matter that you have other LLCs. Assuming you don’t screw the pooch come tax time they will unable to “pierce the veil”.

      Mandatory “I-am-not-a-lawyer-don’t-take-this-as-legal-advice” disclaimer.

  6. Laura Ludwig says:

    very good information keep it up!

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