Form a LLC for every rental property??

Real Estate Investing Apartments
1

Hello, my strategy is mostly long term investment, buy a property and rent it out long term. I am planning to own 3 to 5 multi family properties over time.

Some told me rental-property ownership will expose me to financial risks such as potential environmental-contamination claims, fire-related claims, slip-and-fall claims and other injury claims. If I put the rental investment under an LLC then my personal assets aren’t at risk if an accident or other incident occurs on premises.

My question is should I form a new LLC for each of the multi family property in order to limit my liability (as opposed to putting all 5 properties under one LLC)?

If I put all 5 multi family homes all under one LLC, then it kind of defeats the purpose of limiting my liability. If I lose in a claim, then judgement can be made against all my assets in the LLC, ie all 5 multi family homes.

If I form a LLC for EACH property, then my exposure will be restricted to the property where the claim arises. Does it make sense?

Any feedback would be appreciated.

Thanks

2

Before LLC consider…

  1. Some of the hazards that you site can be mitigated by good practices. For example slip and falls are often caused by poor property management, like not having hand railings, not shoveling the snow promptly. By running a good operation and taking care of issues when then occur, you can do much to prevent lawsuit type situations.

  2. You need to umbrella insurance coverage, which increases your liability coverage above yuor existing property insurance. Often times people will have $1 million, $2 million or more umbrella policy. If you have a large multi-unit complex, you would want even more to cover potential liability issues.

  3. Seperate LLCs may be a good idea, but it could depend on other issues such as size of the complex, costs of doing the LLCs, etc. If your multi units are 3 or 4 units per property, a seperate LLC might not be needed. But if your multi-units are 100+ units each, then most certainly you want seperate LLCs. Also the costs of more LLCs includes cost to set up, some states charge like $800 each, cost of different tax returns, and annual fees to the state for each LLC. More LLCs come at a cost, you need to find out what those costs are in your state and evaluated whether it is worth it to you.

  4. If you form LLCs make sure that you operate properly keeping seperate bank accounts, not co-mingleing funds, keeping seperate books, and all required documents such as meeting documentation and Resolutions for major decisions like selling a property, buying a property or major expenditures. If you flub up on this one, having multiple or even one single LLC could be “pierced” by opposing consul in a litagation. And then all your efforts will be for naught.

  5. You should also consult with an attorney/CPA on whether a single member LLC, or a multi-member LLC is best for YOUR circumstances.

3

In addition to what David said, you might consider how much equity each property has. If they have minimal equity, there’s not much for a creditor to pursue, IMO. I am not an attorney, and this is not legal advice.

–Natalie

4

You really should talk with an attorney about your exact situation. I can’t give legal advice, but there are pros and cons to having an LLC. There is also something called a series LLC. Again, for the best planning you should find a real estate attorney. They are not very expensive.

5

I agree with aristotle and that you should reach out to a real estate attorney. I know there are LLC’s that cover many properties especially when it comes to student housing. If they had multiple names based on the building then it would be difficult to differentiate from the competition in leasing apartments.