Forming An LLC to protect Rental Properties

To follow up the original STARTright post with a quick synopsis here, the original question asked was of course:

“suppose I have four properties and I rent them out and I missed the bus and didn’t form an LLC and can be liable for anything that happens in them, do I form an LLC and group them all in the same LLC together?  Do I form enough LLCs to put each one in its own separate LLC?  And, how does an LLC “get” credit when its brand new?”

There are two questions in that paragraph. 

1. How many LLCs do I need to form for my rental portfolio,
2. How do I start getting the financing for new properties out of my name by getting the LLC qualified?

1. There are multiple ways that real estate can be vunerable.  How do I protect my real estate?

I get asked about the virtues of “putting a piece of real estate in an LLC” all the time.  Lets consider what the issues might be.  First lets look at the rental.  

The standard rental seems to look about like this beauty, and there is little wonder why landlords feel the need to protect themselves.  The question to understand here, is that if the house is the source of an injury that creates a legal cause of action, who is on the hook?  In a word, the owner of the property.  This is why people form an LLC and put their piece of property in the LLC.

The LLC was the first entity to offer the corporate veil protection without the corporate tax.  For more information about this, read the original post about forming an LLC for rental properties.

Ok, so now to the original question, what if you have two or three of the beauties that we see above? Do I need an LLC for each property?  Well, the sad reality is that there is no definitive answer. There are three options and each have their pros and cons.  The answers are as follows:

1. Put all the eggs in one basket: 

• Pro:  The pro of forming one LLC and deeding all rentals back to that LLC is that it is cheap, fast, and better than day dreaming about the massive scheme.  Get something in place.  
• Cons: The reality is that if one of the properties creates a law suit, you are protected personally, but all other properties in the LLC are exposed as loot to satisfy the claim.

2. Putting eggs in seperate baskets.

• Pro: This is always an exercise in strategic grouping.  If your investment portfolio gets larger than say two or three properties, it may be a good idea to create two or three LLCs, and divide assets between them.  Put quick-flip properties in a different LLC than rentals, and determine which rentals can safely be grouped, and which rentals may need to be isolated in a single LLC.
• Cons: Yes, a completely seperate LLC for each property ensures isolation, but as the portfolio grows, it becomes a management and tax headache.   If you are in california, you start paying the annual $800 FTB tax for each LLC.

3. The Third option is the Series LLC. To read more on this, read the original post.  forming an LLC for rental properties.

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