LLCs and Real Estate Investments
Okay, so you want to start investing in real estate. One of the most common questions real estate investors ask me is should I hold the property in my own name, in a revocable trust, or an LLC? Generally, I recommend that every investment property should be owned by a separate LLC that owns only one property and that is not engaged in any other business activity. The reason to hold each property in a separate LLC is to maximize asset protection. Here are four quick and easy asset protection rules to protect your investment property:
1. Buy Property and or Business Insurance. Purchase as much insurance as you can afford to insure all of your LLC’s real estate and business activity. Make sure you have written proof of insurance showing that the LLC is a named insured. If you transfer real property to your LLC, but do not obtain insurance naming the LLC as an insured, the insurance company will probably deny coverage.
2. Form an LLC to Hold Title to Property. Organize an LLC to hold title to investment property. LLCs provide asset protection for real estate investors, holding property in an LLC reduces or eliminates the risk that the investor may lose his or her life savings because of a disaster with the property. If the gas stove blows up at the rental property and you hold title in your name, you may be sued and a judgment that exceeds your insurance coverage could take your life savings. If your LLC owns the property, it will be the defendant in the lawsuit, and you should not be held personally liable, unless you were the reason the gas stove blew up.
3. Diversify Your Investment Portfolio. Diversify your assets. The old adage “do not put all of your eggs in one basket” applies to real estate investment just like it does to any type of investment. If you create a single LLC to hold title to let’s say three of your investment properties and a disaster occurs on one of the properties, the creditor could reach all of the equity in all the assets owned by that limited liability company, i.e., all three properties to satisfy a judgment. However, holding title to each property separately helps to isolate the risk to one property. Therefore, diversifying through separates LLC’s for each property is usually recommended.
4. Importance of an LLC Operating Agreement. It’s very important for all LLC owners to draft and implement an operating agreement. The operating agreement covers how the business will be run on a day-to-day basis including: (1) management structure, (2) allocation of distributions, (3) LLC accounting, (4) disassociation or dissolution of the business, and much more. If your LLC were ever to get into legal and financial trouble, an operating agreement reinforces the limitation of member liability. For this reason, every single-member LLC and multi-member LLC should have an operating agreement and some banks require it. Also, an operating agreement would be the first document to review in order to try and resolve any member disputes. An operating agreement is essential for real estate investing when using an LLC. Subhan Law Office, LLC, offers a comprehensive, customized operating agreement with all of our Wisconsin LLC formation packages.
Contact Subhan Law Office, LLC, today to discuss forming an LLC to protect your real estate investment. Call us now at 414-223-5718.
Author: Attorney Ili J. Subhan
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