Q: I have tried unsuccessfully to find an article you wrote several months ago regarding the preferred organizational structure for an individual (and possibly his spouse- no other partners) to own rental real estate.
We’re trying to decide whether to hold the property as individuals, in a limited liability corporation (LLC) or in an S Corporation. Holding the property in an LLC or an S Corporation involve substantial accounting and tax filing fees each year.
Instead of going that route, couldn’t we just buy an insurance policy of sufficient size to give us the same liability protection? I’m just a small time investor seeking to start investing in rental real estate and am planning to own as many as 10 single family residences.
A: The answer to your question will depend on many factors including your willingness to put up with the paperwork required to keep and maintain an LLC. There are reasons why people choose to put property into an LLC vs an S Corporation. Some of this has to do with liability protection, but there are estate reasons and tax reasons to choose these forms of ownership as well.
You can hold property as an individual. And you can buy a lot of liability insurance – maybe more than you need. To fully protect yourself you might need a $5 or $10 million policy, or more.
People are a little crazy and litigious today. If you own each property in a separate LLC, the litigation that affects one property shouldn’t affect the other properties. If you and a tenant get into a dispute and the issue isn’t covered by any of the insurance policies you buy, that tenant could sue you and that suit could affect your ownership in all of the properties.
Many real estate investors buy individual liability insurance and forgo the expenses of corporations – and for many of them that route is just fine.
But many other investors want to make sure that each property stands on its own and any issues that affect one property don’t spill over onto another property. So, they choose to open up an LLC for each individual property. But you’re right: There are significant filing, accounting and other costs involved in having multiple LLCs.
/You’ll have to decide how to handle this issue. If you have enough insurance to cover yourself for most issues, you might be willing to take the risk on some other issues that aren’t covered by insurance. You will save quite a bit of money on filing fees, accountant fees and on other issues when you have ten or more LLC’s to deal with.
Talk to an insurance agent and a real estate attorney to figure out what is going to be your best course of action going forward. Start at my website (ThinkGlink.com/llc) to read about the choices other real estate investors have made.
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