Man sitting on coins to represent real estate investmentsWhen you are getting started on your real estate investment journey, one of the first things you'll likely do is to create an LLC to own that first property. For some, it surprises them that it technically now makes them a business owner, with all the advantages and challenges that come with owning and operating a business. But as your real estate portfolio grows, as you own more properties, you'll want to make sure you're talking to your professional advisors to determine if you should own all the properties in 1 LLC or if you should consider multiple LLCs for the properties.

Why Should You Put Your Property into an LLC?

Whether you're reading it here in this blog for the first time, or on some other blog or podcast or book, or other resources, it's a common bit of advice for anyone who is purchasing rental property to put their rental property into an LLC. While many will blindly follow the advice, it's important that you understand the three main advantages available to you when you put your property into an LLC.

  1. Liability protection ~ if something happens with that property, if there's a lawsuit because somebody slips and falls on the property, your personal assets are not on the line, the limit of liability is going to be the value of the property that's in that LLC.
  2. Ease of Transferring Property ~ once the LLC owns the property, if you want to transfer the property to someone else, instead of having to file a new deed with your local property registrar, you can simply transfer the ownership of the LLC. It's a more simplified process than having to go through the registration of a new deed every time the property changes hands.
  3. Tax Advantages ~ by putting that property into an LLC, you can take tax advantages that you can take as with having any other business, and these tax advantages aren't necessarily there for you as a private owner of a property. So if you don't have an LLC owning your property, and you're renting the property out, that rental income will then show up on your income tax statements. Depending on where you are on the scale that could actually increase your tax burden for that tax year.

Why You Should Use Just 1 LLC

The biggest advantage is that it's going to be easy to manage just one LLC. You'll have the LLC set up a bank account, you'll have an EIN number and you'll be managing everything under the umbrella of one LLC. You may choose to create separate bank accounts for each property so that you can trace which funds are coming in from rent from which property and know how to allocate which funds for which property if there are repairs, but using the single LLC for all the properties would mean a little less paperwork for you, at least on the general corporate level.

If you're going to continue to buy properties, it's going to be easier down the road to simply move new properties into the LLC. You already own the LLC, so when you're purchasing a property, the LLC is the entity that purchases that property and just goes immediately into your portfolio. So these are kind of the main reasons that I see from my clients as to why they use a single LLC for the properties.

Why You Should Use Multiple LLCs

One of the biggest advantages, and actually the reason why most lawyers will tell you to do an LLC for each property, is that the limit on liability for each property is limited to the value of each property in the LLC. If you group 10 LLCs together in one entity and there's a lawsuit against one property, those other nine properties are available as assets of the LLC in case you lose the lawsuit. However, if there's a lawsuit and the other party wins when you do an individual LLC for each property, the liability is limited to just the value of that property. Those other nine properties are not available as an asset that could be levied upon from a judgment from a lawsuit.

Another advantage of multiple LLCs is that it makes it easier to transfer individual properties. Let's say you own 10 different properties and you want to transfer them among your three children. Your goal is to transfer three properties to each kid and keep one for yourself. If you own them all in one LLC, we've got to do some corporate work and do some redesigning of ownership maybe reassign shares in the LLC, whereas if they're each owned by an individual LLC, you can simply transfer the ownership in that LLC to the particular child that you'd like to own that property.

If you really want to dig deeper, you can actually still create a unified interest using an individual LLC. So if we have 10 properties each has its own LLC, and you still want some unified interest, you can create another LLC or a trust that can be the owner of the 10 sub-LLCs, so that way you can have essentially the overarching LLC owning 10 individual LLCs, you'll get the benefit of limited liability, but you also have the ability to have unified ownership.

What Do I Recommend?

For each client, the best LLC setup should be tailored to their specific situation. As a general recommendation, it's going to be to do one LLC for each property. The main objection I get from my clients is that it's expensive. We have to file for each LLC, and if you're just starting out and you're going to slowly add LLCs to your portfolio, this isn't as tough because you're just going one by one.

But if you're coming to me now and you own 20 properties, then you're looking at 20 LLCs that we're dealing with and with filing fees, that will be a lot to have on your plate. So if that seems like too much, the other option you can do is to group properties into an LLC. So let's say you own three properties in one town, three in another, and three more in a third town. One thing I've seen my clients do in the past is to group the three properties in a town into one LLC, and then town B gets three, and then town C has a group of 3, so you're not creating an individual LLC for each property. But you're at least divvying out the liability a bit so that even if something happens with town a in one of those properties, your properties in town B in town C are not going to be at risk.

So you can see the variety of ways we can try to do this and the wrong way to do it, when a lot of people come to my office after they've tried to do it, is they tried to do it themselves. They've gone to some real estate investing course, they think they understand this all, and so they tried to do this whole setup themselves and find that they're in a bit over their heads. A couple of years down the road, they're not sure what to do next.

So the smarter way to do this is to work with your attorney, and create those LLCs, whether it's one per property or grouping them together, but work with an attorney to make sure you get the LLC piece. Also work with your accountant, because your accountant needs to be involved in on this. They're going to help you with that income coming from the properties and how we're going to attribute it to them for tax purposes. The limitation on liability is very powerful for you, so you want to have your accountant involved so they understand what they're getting into.

Next Steps

If you're not sure where to get started, or you want to take those next steps, you can set up a Legal Strategy Session, a 15 or 20-minute phone call to discuss where you and your LLC are in the process and what's going to be the best structure for you to protect yourself down the road. You can choose to go with a single LLC owning all the property whichever way you do it, make sure you're working with professionals you know it's getting done correctly.

Andrew Ayers
Connect with me
I work with business and estate planning clients to craft legal solutions to protect their legacies.
Post A Comment