LLC for Rental Properties
Pros and Cons of Placing Your Rental Properties in an LLC
Do you need an LLC for your rental properties?
Well the answer to that question is "it depends." There are three (3) ways of thinking about an answer to this question. (1) Have one LLC for multiple rental properties. This could work in the sense that, yes, you do now have an LLC holding your properties. The benefits of this is that it is cheap. You only have to create one California LLC. The downsides of having all our rental properties in one LLC is that it is simply too risky. As the saying goes, you don't want to keep all your eggs in one basket. Having all your properties in one LLC does just that, puts all your eggs in one basket and exposes you and all your other rental properties to potential liability to unnecessary lawsuits.
The other way is to have one LLC to house each rental property you own. This would be wise and preferred. This method addresses many of the issues above. By not placing all your rental properties in one LLC, you are in a sense, disbursing your exposure to liability. If one property is subject to a lawsuit, the remainder of your properties are safe and unexposed. The downside of this method is that it is clearly expensive. It costs money to form a California LLC and there are other expenses associated with it as well. For example, you need to pay the filing fees for each LLC, you will need to pay taxes for each LLC, you will need to open and manage separate bank accounts for each LLC, etc.
Finally, the last thing to consider and possibly the final option discussed in this article is that you can bundle your properties in multiple California LLCs. For example, lets say you have eight (8) rental properties. You can have four LLCs to house all eight rental properties, two in each LLC. That way you are not putting all your eggs in one basket, and have the benefit of saving on LLC associated costs. Or you can do two LLCs with four rental properties in each LLC. The choice is up to you and how well you can tolerate risk.
As you can see, there is no one correct answer for everyone. Each situation is unique to each person's risk tolerance, and financial situation. If your rental properties provide you with significant income and are significant equity for you, you should definitely consider putting those properties in an LLC.