By Phil Rarick, Weston Business Attorney
Here is a Big Red Flag: bundling multiple investment properties in the same LLC. This is a mistake we are seeing more and more often: a real estate investor has six condo rental homes; all rental homes are owned by the same LLC. This investor has essentially defeated the purpose of the LLC. A slip and fall claim on one of the properties would expose all six to the claim.
Does this mean every property should have a separate LLC? In most cases, for maximum protection, the answer is yes, especially if each property has equity. But you may say that this will increase my accounting and paperwork – and heaven knows I already have too much paperwork.
The answer to this quandary is to have a holding company that will centralize and simplify management. Each property will be owned by a separate LLC and each LLC will be owned by the holding company. Bookkeeping can be centralized in the holding company. With a good accounting program like QuickBooks, accounting can be efficiently managed.
The investor may reply, “No problem. I have an umbrella insurance policy.” Frankly, there is no such thing as an “Umbrella” insurance policy: every insurance policy has gaps and exceptions. “Umbrella” is a great name the insurance companies have come up with to market and sell an insurance product. I recently reviewed an umbrella policy – by an established and reputable insurance company – and this policy had six pages of exceptions. Umbrella policies do have their place as a supplement to a comprehensive asset protection plan, but to make the policy the centerpiece of the asset protection structure is a big mistake. It provides a false sense of security and makes the properties much more attractive to attack.
- Avoid bundling multiple investment properties in the same LLC.
- Consider a holding company to centralize and simplify management of investment properties.
- Do no rely upon umbrella insurance as a substitute for protection by an LLC.
- A properly structured LLC that takes advantage of the protections provided by Florida law is the entity of choice for most investors and usually the most cost effective way to protect investment properties.
For further information contact Rarick & Beskin at (305) 556-5209 or email@example.com.
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