When dealing with high value assets like real estate, it can be useful take on protective measures to assure safety in adverse situations. That is when an LLC might come in to play. In this article, we discuss scenarios that may prompt investors to seek out an LLC or legal guidance. Although Malcolm is not a legal expert, and we are not a law group, this is a representation of how we have seen LLCs interact with clients and his own personal experiences as a real estate professional. In this article, Malcolm answers commonly asked questions regarding the use of an LLC in real estate.
“Why do you need an LLC for real estate investments?”
The main reason why you would have a limited liability corporation, or LLC, is for asset protection. Let’s say you are just getting started on your investment journey and you have a family, and a bunch of money saved up for your kid’s college. You want to keep that money safe. If you own a piece of investment real estate and a tenant sues you, when you don’t have an LLC, they can come after your other assets if something really bad happens. You want to be protected. That’s the whole point in having an LLC.
“Is it more useful for larger or smaller scale investors?”
It is useful if you have anything you need to protect, regardless of size. Take my client for example, he has a retirement account that he wants to protect. Even though he did not purchase his duplex with an LLC because it gets tricky in that space, for his 5 and up purchase, he will be making that under an LLC. The 2-4 unit space becomes difficult because you must deed those purchases over to your LLC, rather than purchasing through the LLC directly. In situations where you transfer a 2-4 unit purchase to an LLC, you may have issues with your loan, like the payment becoming due, because it looks like you have sold the property. In that case, you would have to deed the property back over to yourself. It’s much easier to do with 5 and up because you can make that purchase as an entity.
“How do you manage your assets within the LLC?”
You can have an LLC per property, but some think that is overkill. For example, in situations where someone owns a lot of properties, a strategy could be to have a couple of properties within each LLC. For other people who may want to play it really safe and protect all of their money, then they could get 1 LLC per property. There are many different ways that you can manage everything. You can “hide” your assets through land trusts, owned by companies, that are owned by companies that are owned by you. You can really get creative with it, however the main problem is that you’re spending way more money upfront, which you might not even need to use. It can also complicate loan applications because it is hard to prove ownership and funds through multiple entities.
“Can you give me an example of how this may play out in a real world situation?”
Like I mentioned early, if you have a primary residence, a family, are trying to save up for your kid’s college, and you want to invest in other properties you may want to consider starting an LLC to split things up a bit. In the unfortunate case you get sued at one property, they could not come after everything else you have. The absolute safest way to purchase property would be to have one LLC per property. Again, it’s all about risk tolerance. If you have professional property management, then they typically take care of tenant issues as a first line of defense. Honestly, a tenant would most likely sue the property management first. If a major issue arises that is truly the landlord’s fault, that is when an LLC comes into play.