July 24, 2019

Should I form an LLC each rental property?

I’m a huge fan of diversification when it comes to our investment. Many of us are investing in real estate however we need to make sure that assets and your liabilities are protected before making big decisions.

Protecting your Investment

Story Time:

Let’s say that you have 3 houses. The first house (house #1) is owned by LLC #1, the second house is owned by LLC #2, and the third house is owned by LLC #3. If a tenant slips and falls at house #1 one and sues LLC #1, your properties owned by LLC #2 and LLC #3 are protected from that lawsuit.

Aside from the extra liability protection. Since each LLC that you form will have a new EIN and a separate bank account. I also like the idea of having separate books for each property keeping your finances extremely organized comes tax time.

That means all of my income and expenses for each property sits within its own bank account and therefore is very easy to see which property is more profitable that the others, pay bills, and manage finances.

Not only does this strategy of each property owned by a different LLC protect your personal assets, but it also separates each property from the others.

*Remember: you need to setup your LLC before you purchase your property!

Consider whether or not you will be financing with the LLC

If you are obtaining financing with the LLC you need to consider two things:

1. If you’re obtaining a loan in the LLC, mortgage rates are typically higher than for personal mortgages. The reason being is the loan is often considered a commercial loan with the bank.I don’t know why they call it “commercial” even when the property is a zoned residential, but most banks refer to loans made to LLCs as commercial loans commercial loans. Commercial loans are made in a different department at the bank and have different qualification requirements.I recommend making a number of phone calls to your mortgage brokers and bankers to make sure they even issues loans to LLCs. Not every bank does, but if you make enough phone calls, you’ll find one. Trust me, they do exist. Also ask around at your local REIA… you’ll find a few good referrals this way.

2. Also consider that most banks will require you to personally guarantee the loan. This means that if your LLC defaults on the payments, the bank can go after you and your personal assets to fulfill the judgment. Short lesson here: make your damn payments on time!

Added benefit of properties owned in LLCs

In Most states, if you have more than 4 mortgages in your personal name you cannot get any more mortgages. This is why owning your properties in LLCs is very beneficial. In theory you could have an infinite number of loans made out to all your LLCs… and you’d still be considered a first-time home buyer… meaning, you could qualify for a nice FHA, or other friendly-term financing. The reason for this is that those loans are “attached” to the LLC and they will not show up on your personal credit report (even if you personally guarantee them).

Cost versus benefit analysis

If you are a real estate boss and you own 50 Properties or more, you really need to consider the cost versus benefit analysis.

See the table above for all 50-state annual fees.

Also, if you have 50 properties each owned by a different LLC, you’ll have 50 different checking accounts… and you’re also be managing the paperwork for 50 different LLCs. This could cause somewhat of a headache, especially for those who are not organized. Remember, the purpose of real estate investing is to make money enjoy your life. If you’re spending all of your time managing your organizing paperwork, sorting through crazy amounts of bills and making sure you’re writing checks from the correct account, balancing dozens of checkbooks, life won’t be very fun.

Rule of thumb

10 properties or less, one LLC for each is a good setup. 11 properties or more: you’ll want to look at some more advanced real estate strategies, like Series LLCs.

Some states allow what is called Series LLCs, which can be an effective way to keep the chaos of multiple LLCs with multiple assets to a minimum if done right.  These are a little more complicated, and not an option in all states, so you’ll definitely want a lawyer’s guidance on that scenario.

Holding real estate in specific LLCs

Another strategy that many people use is setting up different LLCs for different asset classes. For example, if you’re wholesaling properties, you can run an entire business under one wholesaling LLC. If you own a lot of low-income houses you can put two to three of those in one LLC. If you own nicer, high-end income properties you can also put those under a different LLC. Etc., etc.

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