Idaho Business Law Real Estate Investing and LLCs

By Lane V. Erickson, Idaho Business Attorney

After many years of representing landlords in various types of litigations and problems, I made the decision to become a landlord myself. Over the last 15 years, I have invested in numerous real estate transactions, including purchasing investment properties. I have personal experience in dealing with tenants, and in operating as a landlord. Also, as an attorney, I have in the past and currently represent many landlords, investors, property management companies, homeowners’ associations, and so forth.

Many of the clients I meet with who are investing in real estate as landlords, ask me one simple question. The question is should I own my investment property(ies) in an LLC? If my client doesn’t ask this question, I often ask it for them so we can have a discussion about risk. My goal in asking this question is simply to help my client understand all the options that exist for them so they can make the business decisions they feel will be best for them and their circumstances.

At the Racine law office, we’ve represented business owners for more than 70 years. During this time, we’ve helped each of our business clients create business entities, create business plans to use in the operation of their business, add business owners, bought out business owners, dissolved businesses, so forth. Our experience and expertise have helped our clients avoid serious problems and resolve problems once they arise.

The purpose of this article is to focus on real estate investing and LLCs. To put it in the form of a question, if you are a real estate investor, should you use LLCs as part of your business operation? This article will discuss whether you need an LLC if you invest in real estate, and will also talk about how an LLC could help your real estate investing. Finally, it will discuss whether you need more than one LLC as part of your business operation.

So, first things first, if you are a real estate investor, do you need an LLC as part of your business operation? Let’s define what it means to be a real estate investor. Are you simply lending money to someone else who is purchasing real estate and then using that real estate to secure your investment? Or, on the other hand, are you actually purchasing real estate yourself, that you will then rent out to others? Also, is the real estate you are investing in residential real estate or commercial real estate? Each of these questions could have an impact on whether you feel you need LLC as part of your business operation.

The most common scenario I find is that an individual wants to purchase residential real estate which they will then rent out to tenants. The goal is to use the rent money to pay the mortgage and, in a few years, own the property free and clear. After that, the landlord (owner of the property) will have a nice stream of income flowing from the property.

The question at the beginning of the investment is should the owner own the property individually, in their own name, or should the property be purchased through an LLC. In most instances, I encourage my clients to think about the benefits that an LLC can offer.

An LLC is considered to be a separate entity or if you rather a separate person. Because of this, an LLC offers protection to a person who owns real estate investment property. Here’s what I mean. Let’s suppose that you purchase a duplex as a real estate investor. As a landlord you rent out the duplex units to tenants. You have liability insurance on your duplex up to $500,000. Now suppose that there is some tragic accident that occurs on the property. A person is either injured or killed and a lawsuit is filed against the landlord. Let’s suppose that the lawsuit result in a judgment against the landlord for $1,000,000.

Under these circumstances, the insurance will pay out its total limits. However because of the size of the judgment, there is still $500,000 that is owed. If you own the property individually, the person who holds the judgment has the ability to come after you individually and the property you own individually. In other words, they can virtually wipe you out to satisfy the judgment. They can also garnish your ongoing wages or bank accounts until the rest of the judgment is paid in full.

However, let’s change the facts a little bit. Rather than owning the property individually, let’s assume that you purchased the property through an LLC. The LLC is the actual owner of the property. Additionally, the LLC is the landlord of the property. In this circumstance, assuming all the other facts above to be the same, the only assets the judgment holder can take from you are those that are owned in the LLC. In other words, the judgment holder would not have the ability to come after you individually to take away your own property, or to garnish your wages or bank accounts. All they can do is take the assets located within the LLC itself.

Lawyers like to call this protection that’s offered by an LLC the “corporate shield”. The idea is that by having an LLC, you have a shield that protects you individually from any liabilities that arise through the real estate that is owned. This protection is evident given the actual name of the LLC which is “limited liability company”. This essentially means that it’s limiting the liability of those who are the owners of the company from the liabilities that arise within the company itself.

The next question I’m often asked by my clients, especially those who own multiple real estate investments, is how many LLCs should they have in order to provide protection to themselves and to protect their assets? This is a highly personal question. In other words, there’s no formula. The key is risk. A person has to decide how much risk they are willing to take. It’s possible that risk could be lessened, by increasing the liability insurance. It’s also possible that risk could be lessened by owning multiple LLCs with different investment properties in each LLC. By doing this, a real estate investor is protecting some of those real estate investments if liability arises on a different property.

Investing in real estate, and how to protect that real estate investment, is a highly personal matter. For this reason, we suggest that our clients meet with us, so we can discuss how an LLC or multiple LLCs could protect their investments. We have helped numerous real estate investors accomplish this. We are confident that we can help you too.

Our team of Idaho business lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial free 30-minute consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a free consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.