Got Rental Properties?

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August 24, 2023
Author: Cody Lawson

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            When it comes to rental properties and building out that portfolio there is one common question, what is the best structure? There are two old school strategies that have dominated the answers for decades. One is, have 1 LLC for every rental property you own. The other is, have a certain number of properties (usually 5) per LLC. Each one of those have their pros and each one has their cons.

            Let’s look at the 1 LLC per 1 rental property strategy. If a real estate investor (REI) has 10 rental properties, that means they would have 10 LLCs. From an asset protection standpoint, it’s a very strong play given the LLCs are in the proper state. Each property is held separate from the rest of the properties. Each LLC will have setup costs, foreign filing fees and state annual renewals. That means 10 of each not to mention each LLC will have its own bank account. Now the REI has to make sure the rent checks are going into the proper account, mortgage payments and maintenance/repairs are coming out of the proper account. Not to mention if there is a mortgage on a property and it gets quit claim deeded into a LLC the banks could invoke the due on sale clause. The biggest pro is that each property is protected from the other. The cons are the bookkeeping is very convoluted, the costs can exceed the cash flow and the mortgage is subject to the due on sale clause.

            They other strategy of multiple properties inside an LLC. If a REI has 10 rentals they would have 2 LLCs, each holding 5 rental properties. The bookkeeping becomes more manageable and the fees will now be taken down to only 2 LLCs and be much more reasonable. The banks can still call the note due using this strategy too. Now when it comes to the asset protection there really isn’t much. If someone sues they have access to 4 other rentals in that LLC. Some would they would rather lose 5 properties than all 10, which makes sense. How about not lose any properties? The pros are the bookkeeping and fees are more manageable. The cons are very limited asset protection and the banks can still invoke the due on sale clause.

            Wouldn’t it be great if there was a way to get the pros from both of these strategies without the cons? I know, sound too good to be true. Or is it? Our attorneys here at NCH put their heads together and did just that. Our recommended passive income structure is 1 LLC, taxed disregarded, and then each property be held in a real estate privacy trust (REPT). If a REI has 10 rental properties with this structure they would have 1 LLC and 10 REPTs. The REPT has a set up cost and no foreign filing fee, no bank account and no annual renewal fees. That means the investment into this structure is very reasonable and allows for good positive cash flow from the rentals. When a property is deeded into the REPT there is federal protection with the Garn St Germain Act of 1982 from the banks due on sale clause. In the event of a lawsuit the attorney will see that the property is held in a trust, the beneficiary of the trust is an LLC that owns nothing and incorporated in Wyoming. Since the LLC is the beneficiary, it does not own any of the trusts or properties and it won’t show up on public record that it is the beneficiary of 9 other trusts. The pros are max asset protection with properties being protected from each other, easy bookkeeping, protection from the due on sale clause and low fees. The con is that this structure only works in 48 states.

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            There is not a way to 100% say a REI will not be sued. The goal from the most savvy REI is to minimize the chance they will be sued and position themselves at the top of the fruit tree. Most attorneys go after the low hanging fruit after all. One thing is for sure, all 3 strategies are better than owning rentals in ones personal name.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH. Schedule a consultation with Cody Lawson today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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