How Many Rentals Should I Have in My LLC?

Let's get one thing clear from the start...

YOU DON'T NEED AN LLC FOR EACH PROPERTY

I can't tell you how many times that I have heard other CPAs recommended this strategy. It's very expensive, time consuming, and adds very little benefit for the majority of real estate investors. This strategy normally benefits three parties 1) the State the LLC is registered in 2) the company preparing the LLC paperwork and 3) the tax preparer. The goal should be, what is in the best interest of the client.

In my experience, it comes down to equity not the number of the doors.

How many is too many?

First of all you can put as many properties as you want into an LLC. The question that needs to be answered is mainly related to risk. Let's look at the following 6 residential properties (assume all LLC are in the same state of Nevada):

Property # Cost FMV Loan Balance Equity Year Bought

1 $100,000 $110,000 $0 $110,000 2012

2 $150,000 $165,000 $10,000 $155,000 2012

3 $225,000 $220,000 $0 $220,000 2013

4 $135,000 $135,000 $130,000 $5,000 2014

5 $165,000 $175,000 $25,000 $150,000 2020

6 $180,000 $190,000 $175,000 $15,000 2020

Totals $955,000 $995,000 $340,000 $655,000

Example 1

Let's say that an investor has all 6 properties in one LLC.

Example 2

Let's say that an investor has properties 1 - 3 in one LLC and properties 4 - 6 in another LLC.

In the two examples above there is no materially difference in taxes (example 2 might have a few more immaterial deductions) and Example 2 is required to file and pay one more additional LLC filing fee each year.

Lets say a renter hired a litigator because of an accident that occurred on Property #5. Now everything has changed! In Example 1 the litigator can come after the $655,000 equity from in all 6 properties but in Example 2 the litigator is limited to the $170,000 equity from properties 4 - 6 only. Now PLEASE NOTE - you must "maintain" each LLC in order for this this work. This is often referred to "Piercing the Corporate Veil" and should be understood by all parties involved with your LLC structuring.

So how do you know what is right for you?

Consider the following 4 main issues to figure out what is right for you:

1. Risk - How much are willing to risk? Almost every financial decision comes down to some type risk? If you are in your 20-30s then you have more time to save for retirement and build up cash flow. If you are in your 50-60s and getting ready for retirement then you need to protect your nest egg.

2. Location - This issue also looks at risk but from a different lens. Some states are landlord friendly and other states are renter friendly. Some states like Nevada and Delaware are business/LLC friendly. Where you decide to purchase property and where you decide to file your LLC matters.

3. Type of Rental - Keep your high risk properties separate from your high equity properties. For example, if you own a two residential properties that had the same FMV and both paid off but one was on the 10th hole of golf course. I would have two separate LLCs just incase someone get hit with a golf ball playing in the back yard.

4. Equity - This is probably the most important. Remember it comes down to quality not quantity.

In Conclusion

If you Do own properties in several states, you can significantly improve your security at a relatively low expense. Reach out to discuss if the a Series LLC is accessible to you in the state that you own properties. It is recommended to discuss 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, then you have the wrong attorney. Finding the right lawyer is important and you will want to speak with a qualified and experienced lawyer. If you need help finding one please reach out to me here and I can help you locate one.

DO NOT rely on some "coach," online service, or real estate sales company for your legal advice on this topic!

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