Should you hold all of your properties in your own name, put all of your properties under a single LLC, or create separate LLCs for each rental property?
Are there any other ways to set up your company structure?
When it comes to asset protection, there’s really no question: there are benefits of creating an LLC for each rental property you own. If you ever face issues with litigation, your entire portfolio is no longer at stake.
If you’re found liable for some property issue and all of your holdings are under your name, your life savings are potentially on the line. There’s no reason to stay up at night worrying about your kid’s college fund because you’re not sure about one of the basement stairs in your rental. Asset protection insurance doesn’t cover everything, but if you’re smart about the way you set up your structure, you can mitigate the chances of potential lawsuits.
If you’re interested in protecting your rental properties from litigation (and if you have a significant investment in those properties, or even just a positive net worth, you should be), the question isn’t whether or not you should create an LLC, but how many LLCs you should create.
In this article, we’ll go over the benefits of creating an LLC for your rentals, how many rental properties an LLC can legally have, and—of course—whether or not you should create multiple LLCs for each rental property.
In short, it’s all about asset protection.
The benefits of creating an LLC for your properties are essentially the opposite of the drawbacks of keeping it all in your name. Disasters happen, and insurance policies don’t always cover the full scope of those disasters. If a tenant makes a claim that your insurance doesn’t cover and you’re found liable for any damages, you could lose your life savings.
If you create an LLC for your rental, the only thing at stake is your equity in that rental—which, if you’re using a significant amount of leverage—might not even be that much money. On the flip side, if you’re personally sued, your LLCs are separate. They won’t be affected by the lawsuit.
Furthermore, LLCs allow you to preserve your anonymity. This is especially important if you’re investing in out-of-state properties and hiring a professional management company. You don’t want to be contacted in the event that things go south. When the transaction appears on the auditor card, instead of your full legal name showing up, you could use a fictitious name or copy the property address and add an “LLC” at the end.
Here are some of the benefits of creating LLCs, in a condensed format:
The only reason you wouldn’t create an LLC for rental properties is if you either 1) want to save a small amount of money now at the risk of losing your entire portfolio later; or if you 2) don’t understand the process. At Royal Legal Solutions, we specialize in asset protection, and we can help you find the best solution for your needs, particularly if you’re looking to protect your single-family home investments.
If one LLC is good, why not have multiple?
If you have only one rental, you can set up a secondary LLC in addition to your primary in what’s called a “two-company structure.” This allows for even more protection. The secondary LLC will carry out the day-to-day operations of managing the rental, much like a property management company, while the primary will act as a holding company. That way, the operating (secondary) LLC holds most of the responsibility. If you get sued, it’s likely that the secondary LLC will be the one at stake—and it doesn’t have any of the equity.
Furthermore, if you own more than one rental, you can either keep repeating the above process, incorporating each rental property separately, or set up a series LLC. One of the issues with multiple LLCs is the annual costs of maintenance. A series LLC essentially just adds separate secondary LLCs for each rental property.
Another option for asset protection could be individual trusts. These operate in a similar fashion to LLCs, but there are different benefits and drawbacks. For more information, check out our article, “Should Rental Property Be in an LLC or Trust?”
A trust might offer just as much protection as an LLC, and it can even help you cut back on estate taxes, but it might require more time and resources than setting up separate LLCs. Feel free to contact us to see if it’s an appropriate solution for your asset protection needs.
When it comes to creating LLCs for rental property, the objective is clear: asset protection.
If all of your rental properties are in your name and you’re found liable for damages, all of those rentals, as well as your personal assets, are on the line. Asset protection insurance doesn’t cover everything (and there’s a limit to how much each policy covers). Instead, setting up multiple LLCs offers an alternative effective insurance policy against litigation.
You can do this by creating multiple LLCs or by creating a Series LLC. Additionally, if you find it appropriate to your situation, you could put each rental property in its own trust.
There are lots of ways to bulletproof your rental property investments and protect your anonymity, and we’re here to help.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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