As a real estate investor I hold title to each of my properties in individual LLCs. I like the peace of mind that my personal assets (and cash) are protected from a lawsuit in the event that something happens on one of my rental properties. Several years ago I was notified by one of my tenants that her family member had tripped on a rug in her hallway and broken both the tibia and fibia in her leg. She had to be taken by ambulance to the hospital and it required surgery. I was at no fault for the accident, but the tenant was looking to me for reimbursement of medical expenses.
Luckily I work with a team of highly skilled professionals. My attorney had set up this property in an LLC when I took ownership. I also had a really good insurance agent who dealt with the tenant questions and ultimately told her that I had no fault so there would be no payment. Had I owned this property in my individual name versus in an LLC, I think I would have panicked when I received that initial phone call wondering if I would be out any money.
By placing each of my properties in their own individual LLC, I’ve created a buffer between that individual piece of real estate and the other properties in my portfolio. Because of this, a potential lawsuit can only be filed on that specific property and cannot tie up my other properties. The following article looks at the cost of setting up an LLC and the value it delivers:
I’m going to be brutally honest here. The upfront cost of an LLC isn’t bargain-basement cheap. But it isn’t bank-breaking, either. Regardless, I can also promise you that not setting up an LLC is more expensive, especially if you think about your finances in the long run.
In the article Scott Smith looks at the cost of properly setting up an LLC and the reasons to do it anyway. According to Smith, the price to get it done right is in the range of $1000, and you should seek proper legal advice in the process. The benefit of setting up the LLC is the value it delivers in the long term and the protection it provides to you and your assets. Think of it in terms of the cost of the LLC versus the cost of a lawsuit.
Here is one of Smith’s critical points about protecting yourself:
…a lawsuit against you, even one without merit where the plaintiff can’t collect against your assets, goes against your credit score. The shell corporation’s protection preserves your good credit. Lawsuits will also kick in a lovely concept called lis pendens, which means you would be holding the asset in question until the suit is resolved… This point is critical: Once you have a low credit score, you won’t be able to obtain the financing necessary to operate your business and acquire property. This prevents you from being able to do deals the way that you want to.
Owning real estate is the best way to create passive income, but it is important to know how to own and deal with the asset so that you do not lose your income stream. Call me today to discuss this in greater detail. The professionals at Pacwest Commercial Real Estate are Eugene multi family experts. We can be reached at 541-912-6583.