“Should I have multiple LLCs for real estate investing?”
Let’s talk about it. Of course, there are going to be some pros and cons of having multiple LLCs for real estate investing.
So in this post, we want to just briefly answer the question, do some math and calculations with you and try our best to help you make the best decision possible.
So do you need more than one LLC for your rental properties? Here are the factors we have to look at together.
3 Factors to Consider If You Want Multiple LLCs for Real Estate Investing
- The number of properties you want.
- The management of having multiple LLCs.
- The costs of having multiple LLCs.
Now, we’re not going to talk about how to buy rental properties with an LLC, or reasons why you should or should not because we already made a post on that.
Check out this post to learn more about the disadvantages of LLC and find out if it’s the best choice for you.
So in this post, we’ll be evaluating each of these factors by comparing each one side by side.
Let’s start off by quickly answering…
Why Would You Want Multiple LLCs for Real Estate Investing?
The biggest reason is going to be separation, right?
You separate one property completely from another property. So what does this mean?
Well, as a real estate investor, you are going to have limited liability protection for all your properties.
For example, if one property losses a lawsuit against a tenant then only that property or that LLC is going to be responsible for the legal damages.
On the other hand, if you had all your properties in one LLC then one bad lawsuit could put all your other properties at risk.
On top of that, having separation or multiple LLCs for each rental property means that it also separates the financials and taxes more.
So that leads us to our first factor.
Factor #1: How Many Properties Do You Want to Acquire?
And we say want because you should project out into the future and start with a solid process now.
This is so you don’t have to go back later and go through the hassle of “untangling everything.”
Now, of course, the more properties you own, the more LLCs you may need.
But there is a certain threshold where we would say, you should start highly considering having multiple LLCs for each property.
And we would say do this when you have more than 4 properties or over $1 million dollars in real estate assets.
Here’s why: When you have 4 properties or less, you are going to be dealing with fewer tenants, so there are going to be fewer transactions to deal with.
That’s why keeping track will be easier while at the same time exposing you to less legal risk.
And usually, almost any person with about 5 hours a week can easily manage 1-4 rental properties.
However, when you start to cross over to dealing with more than 5, 10, 25 properties then things start to get a little bit more chaotic.
So you’re going to want things a little bit more organized, right?
You’re going to want the transactions for property 1 to be separated from property 11.
This means each property should have its own LLC with its own EIN number, bank account, credit cards, etc.
And of course, dealing with 25 tenants instead of 2 is going to expose you to more legal risk, which means you need more limited liability protection.
So that was the first factor to consider if you want to have multiple LLCs for real estate investing.
These are important things to think about:
|Owning 1-4 Properties||Owning 5 or more properties|
|Less transactions||More transactions|
|Less legal risk||More legal risk|
|Less overall management||More overall management|
|Outcome: One LLC may be fine||Outcome: Multiple LLCs make sense|
Factor #2: The Management of Having Multiple LLCs
So while there are a lot of benefits of having multiple LLCs for real estate investing, you have to think about the management of that.
Having multiple LLCs mean that you have more documentation and multiple bank and credit accounts.
So again, a lot of things to juggle and to look at. Ultimately, this part is more mental than anything else.
Just trying to keep up in your mind different account balances, what document is for what property, and organizing it all can be a bit of a pain.
So if you can simplify your life, why not right?
|One LLC||Multiple LLCs|
|Less documentation||More documentation|
|One bank & credit accounts||Multiple bank & credit accounts|
Factor #3: Costs of Having Multiple LLCs
Most people don’t think about this part, but when you have multiple LLCs you also have separate fees for each one.
For example, LLCs have annual filings that are required for them to remain active. These filings can be expensive (up to $500 per year).
But perhaps, the biggest expense will come at tax time.
Most tax franchises and accountants will charge you for each LLC you have.
This means, if you have 8 LLCs and the account charges $1000 for each one, you’re going to have an $8,000 tax bill.
And if you do it yourself then you’re also going to spend a lot of hours filing each individual LLC return.
|Cost of having one LLC||Cost of having multiple LLCs|
|One annual registration fee||Multiple annual registration fees|
|A lower tax fee from accountants||A higher tax fee from accountants|
|Lower miscellaneous cost||Higher miscellaneous cost|
Lastly, you are going to have some minor costs that just come up with having multiple LLCs for your rental properties.
For example, if your bank has maintenance fees then you will be paying that each individual LLC or property.
Or if you sign up for a website to list your property, you may have to pay separate monthly fees for each account you set up, for each of your LLCs.
So overall, yes you have separate limited liability protection, but you also have separate fees that you must pay as well.
And this is why we say that you should consider having multiple LLCs if you own more than $1M in real estate assets…
…because at that point, you are probably crossing the threshold where you can actually afford to pay for the LLCs without it digging too much into your profits.
Now since you made it this far, we have additional bonus tips for you!
Bonus Tips If You Have Multiple LLCs for Real Estate Investing
Bonus tip 1: Protect yourself in your lease agreement.
However, there are some “tenant-friendly states” and there are some “landlord-friendly states.”
So, you also need to be aware of your state’s own laws around rental properties so that your lease terms are not negated by the state laws.
Bonus tip 2: Understand the impact on your track record.
Just like any person or business, your track records such as credit history, on-time payments, and income play a big role in you receiving funding.
So one of the biggest benefits of having one LLC is that the track record for that LLC will be much more expansive. This makes it more borrow-worthy and less of a risk for lenders.
So is raising capital one of your weak points? Then definitely keep this in mind as well.
The Bottom Line
Now should you have multiple LLCs for real estate investing? Well, of course, it depends.
There’s no way we can give you a direct answer to that because everyone’s financial situation is a little bit different.
Additionally, there are specific market conditions and property types that may play a factor as well.
You should weigh all the pros and cons, and consider the best option for you.