The gurus all tell real estate investors to hold their properties in land trusts or LLCs. That raises two questions.
- Do you use an LLC or land trust?
- How many properties do you put into each LLC or land trust?
In this article, I will discuss the “how many” issue and assume you will be using an LLC. If you are using land trusts, you will have a separate trust for each property, because there aren’t any fees or “maintenance” requirements for a land trust. You simply have to set up the trust, and each trust will be identical to the other. There are many downside issues for a land trust, so don’t assume you should use the trust just because it is cheap, easy, and some guru told you to.
LLCs have many issues that restrict how many LLCs you can establish and maintain. All states have a fee that has to be paid to set up an LLC. Most states are in the range of $150 – $350, but some states are expensive. For example, California has an $850 fee to establish an LLC and then $850 per year. New York and New Jersey are also very expensive states to have LLCs.
Deciding which state to form your LLC in is a topic for another article. BUT, if you form an LLC to hold a piece of real estate, the LLC must be formed in the state where the property is located or the LLC will have to at least be registered in that state. That means two filings, two state fees, and paying a registered agent to handle your LLC in the state you do not reside in.
Because LLCs require state paperwork and fees, usually annually, there is a cost to operating an LLC. That’s a monetary cost and a time cost. LLCs have to be “maintained.” The state has its maintenance requirements, but there are also “legal” maintenance requirements.
The fact is, most people cannot withstand the monetary costs and/or the time costs to having a large number of LLCs. If the LLCs are not maintained properly, they become worthless as asset protection tools. Each LLC has to have a tax ID number and file Federal and State income tax paperwork each year or possibly each quarter. Thus, it becomes impractical or impossible to have a large number of LLCs.
If you have a larger number of properties, you will need to have multiple properties in a single LLC. Group the properties in LLCs in a logical way. One LLC could hold your commercial office building. One could hold your high-end residential properties. One could hold your Section 8 properties, and one could hold your properties in a specific state.
You can also group properties in LLCs by value. The concept is you don’t want to have all your eggs in one basket. But you can’t have a different basket for each egg. You also could group properties by their risk. If a property has a specific high liability risk with it, hold it in a separate LLC and don’t group it with other properties.
Figure out what your tolerance point for paperwork is, and don’t go past that point when you are creating LLCs. Group properties in LLCs logically. Don’t ask your lawyer how many, because the lawyer doesn’t get paid until they form an LLC, so they will give you as many as you can pay for. As Dirty Harry says, “ A man’s got to know his limitations.” What are your limits?