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Rocco E. Cozza • Jan 28, 2020

I have helped tons of clients set up an LLC for rental property over the years, and have quite a few set up for myself.  In working with real estate investors, the common question always seems to come up:  how many properties should I put in my LLC?

First, before we get to answering this question, let me make a point.  An LLC for each property is not always the right answer.  There are certain things you have to consider before spending the money to set up an LLC for rental property.  The most important thing to consider is the amount of equity you have in the property or properties.

When I work with clients, we look at the amount of equity they have in their rentals, not the number of rentals they have.  This is an asset protection strategy.  We create a plan to protect a certain amount of equity in each LLC, not a certain number of houses.  An LLC could have 1 property or 10, depending on the equity each one contains.

How many properties you can put in an LLC?

Another question that seems to come up is this.  There is not a limit on how many properties you can place in an LLC, but your asset protection strategy will dictate what you do.  I have had clients with a single LLC for each property and clients with multiple properties in on LLC.  In any event, I don’t like to see more than 4-6 properties in any one LLC.  But what about cross liability you might be thinking?

Well, yes, if you have one LLC for each rental, a problem at one will not risk the others (pending the LLC is maintained properly).  But having one LLC for each property can get cumbersome and expensive, especially if there is not a lot of equity to protect in each rental.

But on the contrary, if you have a lot of rentals in one LLC, a problem at one creates a problem for them all.  Every rental is an asset of the LLC and can be used to satisfy claims against the LLC.  This is why it is extremely important to actually create an asset protection plan for your rental properties.

LLC for Rental Property:  Remember L.E.T.

A thorough asset protection strategy looks at Location, Equity, and Type, hence the acronym L.E.T.  You have to look at the entire picture when deciding your strategy.  Where are your properties located?  In the same state or multiple states?  This will impact the strategy significantly.  Creating an LLC for rental property in one state may not work for other states.  You may have to register as a foreign entity, set up a registered agent, and deal with a host of other issues when you cross state lines.

How much equity do you have in the properties?  Remember, we want to segregate value and not load too much “paper” value in a signal entity.  You will need to understand the current and future anticipated appreciated value of your rentals and segregate them accordingly.

What about the quality of properties?  Do you own high-end rentals or high-risk, low-quality ones?   Residential or commercial?   You definitely want to keep the high-risk properties aways from your high-end ones.  Too many things can go wrong in high-risk rentals.

Yes, an LLC for Rental Property is still a great idea

As you can see, there are quite a few considerations to make when deciding how many properties to put in an LLC.  And this isn’t something you just set and forget.  You should be discussing this with your business lawyer annually.  Do not take this advice lightly and do not try to do it yourself.

 

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