My wife and I were driving down the road on the way to the beach a few months ago when out of the blue she popped the question that made my accountant’s heartbeat fast: “What is the difference between an LLC and an Inc?”
When I picked my jaw up from the car floor and stopped smiling like an idiot, I regaled her with a 10 minute diatribe on the intricacies of the various legal and tax difference between the two. I think she regretted asking the question but she did have a follow upon LLCs: “Do we need a new LLC for each property we purchase?”
And it stumped me at the time. I had to sit down and think through the pros and cons of creating a new LLC vs lumping everything in together. Here’s what I came up with:
Pros
Ownership - should we ever partner with someone else on deals, the equity split is much more manageable with a new LLC as opposed to having to integrate a new investor into an existing portfolio that they may not even wish to be involved in to begin with
Flip vs buy & hold - I think for flips it makes sense to have a new LLC for each one. While the administrative cost may be slightly more, it makes the disposition cleaner in my mind. Buy and holds make more sense to lump together.
Asset protection - separating each property into its own entity provides a greater level of legal liability protection. A claim on one property won’t affect another if they are in separate entities. Now, many will claim a good lawyer can get around this but I think adding another roadblock is a good thing,
Cons
Higher costs - as alluded to above, a cost-benefit analysis should be performed to ensure the cost of each LLC does not exceed the benefit (looking at you California). Insurance could also be higher insuring each individual address as opposed to simply increasing the general liability policy to provide a higher level of coverage.
Lending - investors may be able to secure better lending arrangements by aggregating multiple properties in an entity and borrowing against the portfolio as opposed to separating everything individually. Particularly in markets where the average home value is on the lower end, aggregating may make better sense.
Complexity - managing 25 LLCs and that 25 single-family homes takes more time than managing a single entity that holds all 25 homes. 25 sets of book, 25 bank account - more moving parts increases complexity exponentially.
Many clever real estate pros are hyping the series LLC strategy but that’s a discussion for another week. I remain a bit skeptical over the overall efficacy of this strategy but it seems to work in certain situations.
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