Utilizing LLCs for Individual Investment Properties: A Comprehensive Guide for Rental Owners

When it comes to managing a portfolio of investment properties, a common question arises: is it better to create an individual LLC for each property or to group them under a few LLCs? This article aims to provide a clear and detailed overview of the risks and benefits of each strategy, especially in the context of liability management.

The Traditional Approach: Grouping Properties by States

My standard advice is to sort your rental properties by state and group them by the largest equity, not the value, that you would want to put at risk—say, $200,000. For each group, create an LLC (or the nearest equivalent) and allocate that amount of equity into it. This approach helps 'fence off' large liabilities to each specific LLC, providing an added layer of protection.

Welcome to the world of "inside liability," where LLCs function as a barrier against harm that originates from within the entity itself. This can include lawsuits from tenants. These LLCs would be disregarded for tax purposes, meaning no tax returns need to be filed for them. They would be owned by a Wyoming holding LLC that is also disregarded, likely in a partnership between you and your spouse.

The Wyoming LLC: A Shield Against Liabilities

The Wyoming LLC can serve as a shield against both "inside" and "outside" liabilities. In the case of "inside liabilities," the owners are protected from harm that originates from within the LLC. In the case of "outside liabilities," the assets of the LLC are protected from harm caused by the LLC's owners, such as personal lawsuits against you. However, if you have a judgment against you, a creditor’s claim is limited to your "draws" from the LLC under a "charging order" granted by the court. The creditor cannot take your LLC from you or touch the assets of the LLC.

Under these circumstances, LLC owners often choose not to take draws but instead take loans or make other investments within the LLC, prompting creditors to settle for pennies on the dollar. This setup is not for beginners. It requires expertise and experience, making it ideal for property owners who are well-versed in real estate and asset protection strategies.

Expertise and Professional Advice

To achieve the best results, it is essential to work with an experienced law firm that specializes in these strategies. One such firm is Anderson Business Advisors out of Las Vegas, which has created a helpful YouTube video titled "Proper Use of LLC’s for Real Estate.

The Cost and Effort Involved

It's important to consider the cost and effort involved in setting up each LLC. This strategy is only worth the trouble if you face a high liability risk, beyond the norm. If your properties are relatively safe and the liability risk is moderate, grouping them under one LLC and purchasing a good umbrella policy for liability coverage may be a more cost-effective solution.

However, if you want to protect each property individually from lawsuits, you may want to consider creating an LLC for each. Each LLC would still require separate tax returns and state registration fees, making it a more complex and costly process. Given the complexity, the setup is not advisable for amateurs without significant property portfolios or high liability risks.

Conclusion

In summary, while the strategy of creating an individual LLC for each investment property offers maximum protection against liabilities, it also comes with a significant cost and complexity. Property owners should carefully weigh their options based on their specific risk profiles and consult with experts before making any decisions.

If you’re a beginner or your portfolio is not large, it may be more practical to group your properties under a few LLCs, with the primary focus being on your umbrella policy for additional liability coverage. As always, the right strategy depends on your specific circumstances and the level of liability risk you face.

Related Keywords

LLC for Real Estate Rental Property Protection Liability Management in Real Estate