I am new to the reiclub and recently after reading a real estate investing book, I feel that my assets are not securely protected eventhough I have purchase significant amount of personal liabilities from my insurances companies and $1million umbrella liabilities on top of it.
My current situation is … my husband and I owned 4 properties (1 primary residence, 2 rental properties and 1 is tenancy in common 50/50 with a relative and we are about to acquire our 5th properties which is a multi-units apartment building. Due to appreciation, each of these properties have pretty good amount of equities in them. We realized that our liabilties will increase tremendously with the multi-units in our portfolio and after doing research, we realized that LLC is probably the best entities for our situation.
My question is … Do you think I need to setup LLC (s)? If so, do you think I should setup 1 LLC per rental properties or put all rental properties into 1 LLC?
Is it necessary to put primary residence into an LLC as well?
I just read an article in this forum about LLC will not protect one’s asset within the LLC if that person is for example involved in a car accident and paralyse a pedestrian from neck down. How can that person be protected in such event?
Thanks so much in advance. Looking forward to hear from you.
LLCs do not protect equity. They only create a barrier between business liability and personal assets. However, owning the LLC and running the LLC create a way around the barrier.
The one LLC per property strategy is pierced when there are common managers and/or common owners. There is also a significant increase in costs of maintenance and tax reporting.
An LLC cannot own a personal residence or any personal assets. It is a business entity that uses business assets to conduct business activity. Business entities that own personal assets are ignored.
There’s the charging order protection of the LLC that prevents liquidation of the LLC due to a member’s personal creditor. However, the judgment prevents the debtor from getting any money out of the LLC. There is also the possibility the creditor can take the member’s interest. In that case, he becomes the owner of the LLC and can vote to liquidate the LLC assets. The easiest way to avoid this is situation is to own non-exempt assets in some kind of self-settled, spendthrift trust (if your state allows it) or hold the interests in trust for your children. You can also place UCC liens on the membership interest.