So you’re thinking about investing in another piece of real estate?  You have an existing Limited Liability Company that holds a property you previously acquired so just go ahead and title the new property in the same LIMITED LIABILITY COMPANY right?  WRONG

The beauty of holding a property in a LIMITED LIABILITY COMPANY is that if someone slips and falls on the property or has some other mishap and the injured party sues the property owner, the injured party is limited to getting a judgment only against the assets of the LIMITED LIABILITY COMPANY (the vast majority of the time). In other words, your potential liability is limited to the equity in the property.  

However, if you have multiple properties titled in the name of the same LIMITED LIABILITY COMPANY and someone is injured on one property, the equity of all properties owned by that LIMITED LIABILITY COMPANY is at risk.

Example: Joe and Jenni own three rental houses.  House A has $140,000 in equity. House B has $60,000 in equity and House C $100,000.  Tenant in House A falls off the deck because of faulty/poorly maintained railing and suffers serious injuries.  Tenant sues for $500,000.  

If each house is owned by a separate LIMITED LIABILITY COMPANY, the most (under most circumstances) that Tenant will be able to collect after winning a lawsuit would be $140,000.  If all houses are owned in the same LIMITED LIABILITY COMPANY, Tenant stands to collect $300,000.

Worse yet, if Joe and Jenni have House A titled in their individual names, then all of their personal assets are at risk including any interests in limited liability entities.  This leads to RULE #1 in real estate investing: NEVER HOLD TITLE IN YOUR NAME!! Even if you only own one rental house (or other investment property), it should be titled in a Limited Liability Company.

But what about the cost and hassle of setting up a LIMITED LIABILITY COMPANY for every property??  So what!! It pales in comparison to litigation risk.  Assume it costs $600-1000 to create each LIMITED LIABILITY COMPANY with the help of an attorney and yes, you would need separate bank accounts for each LIMITED LIABILITY COMPANY and the like.  So, yes, there will be increased costs and minor administrative headaches but the cost-benefit analysis is a no brainer.

For each property you might have up front, one-time, LIMITED LIABILITY COMPANY creation costs and some minor ongoing administrative fees but in the example above your minor headaches and $1000 set-costs are worth every penny if that’s all it takes to limit your liability to $140,000 instead of $300,000.  This is a perfect example of that old saying: “Don’t be penny wise and pound foolish.” You are working hard to make money so don’t risk your investments unnecessarily. 

*The entity format you use does not have to be a Limited Liability Company. It could be an S-corporation or other limited liability format.  Just make sure you have a correctly created limited liability entity holding title to any investment property. You should consult a CPA to make the determination of the best entity format for your specific circumstances.

DISCLAIMER: The above is, of course, a very general assessment of basic actions to limit liability exposure in real estate investing.  Your specific circumstances must be taken into consideration to formulate a proper plan for you.  To fully understand your circumstances and options, you should speak to at least one attorney.  I have been practicing law in Colorado for well over 20 years and I am happy to consult with you via phone, Zoom or in person.

ABOUT THE AUTHOR:  John Cyboron has been practicing law since 1996 and has lived in Colorado Springs since 1997. He has been married for 20 years and has three children. When he is not working tirelessly for his clients, he enjoys, cycling, playing hockey, golf and tennis.