Business Development Manager at Karla Dennis & Associates INC, overseeing the Sales Department in North America. Follow me @karltondennis.
Should I buy real estate in my name, or should I buy real estate in my LLC? What if I don’t have an LLC when I buy real estate? These are just two typical questions you may have asked yourself as a real estate investor. In this article, I am going to share with you why LLCs are a great vehicle for asset protection when purchasing real estate.
Why do real estate investors opt for forming LLCs?
When you purchase rental real estate without an LLC, your personal name typically goes on the title of the property. But you may not have known that when you invest in a rental property, individuals can view your property and its data by pulling it up through the county assessor’s office online. So if you purchased that property in your own name, the tenant who is living in your property could access the information about you, and to many of my real estate investors, that is a scary picture in the event of a lawsuit.
When you decide to invest with your LLC, your business name takes over the title of the property. This provides some ambiguity so that if anyone looks up your information online through the county’s assessor’s office, for example, and finds out the “Woodson Corporation” is the actual owner of a certain property, they may be more hesitant to file a lawsuit.
Why is that? They may feel daunted by the prospect of a legal battle against a company that may have more money and resources to leverage in a lawsuit. This is how an LLC investor is protected when investing with their LLC. An LLC separates the liability from an individual and a business so that in the worst-case scenario, if you were to get sued, your own personal possessions are not held liable, such as personal bank accounts, checking accounts, IRAs and more.
When investing with an LLC, you are only liable to the extent of the assets and debts which are contained inside of that LLC. This is a powerful, key difference.
Does it make sense to have an LLC for every individual investment property?
Sometimes it will make sense for you to think about forming an LLC for every single investment property. Here is the reason why: The more rental properties you place inside of an LLC, the more equity will be liable in the event of a lawsuit.
For example, if I have four or five rental properties sitting inside of my LLC, even though I’m being sued on one rental, my other three or four rental properties are susceptible to also being involved in this lawsuit case. I could lose money and possibly lose my other rental properties all simply due to not having set up an additional LLC. This is why we have to evaluate LLCs very strategically. If we place too many rental properties inside of just one LLC or if we have too much equity inside of one LLC, then everything can topple down in the event of a lawsuit.
When does it make sense to have multiple properties inside of one LLC?
In some cases, you may want to have multiple properties inside of one LLC. One scenario is if you’re dealing with extremely inexpensive properties. I’m talking about properties out in the Midwest that you can purchase for anywhere between $50 to $100,000. Another scenario is if you have a relationship with and know who your tenants are.
Alternatively, you may group all properties into one LLC because establishing one LLC may impede your cash flow from what you’re receiving on the property due to the fees you have to pay when you have an LLC. For example, in California, the state filing fee is $800 on average if you have a single-member LLC, and you’re going to pay anywhere between $600 and $1,500 to file your tax returns. You might want to group two or three properties into one LLC and wait until you develop more cash flow through more rental properties or if you’re in the realm where you can 1031 exchange into a bigger asset that you can place inside of one LLC.
LLCs may be the option for you.
Find out all the ways LLCs can protect your real estate purchases by speaking with a professional real estate tax strategist so you can continue to grow your real estate portfolio while protecting all your assets. If you are trying to leave a legacy for your future generations through real estate, take the correct steps to ensure that your assets get passed down to your heirs so you can continue growing your passive income strategically.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.