QUESTION FROM ONE OF MATT’S READERS-

What is the best way to structure our real estate business in which we own multiple properties to maximize our protection but minimize the operational headache?

I know I have asked you this before, but this subject has become more pertinent. One of my partners thinks the best way is to do it like this: say we have $500K worth of properties. You should have 5 “children” LLC’s that each own the actual properties ($100K in each). Then you have a “mother” LLC that owns the 5 children LLC’s. The mother LLC is the only one directly owned by my partners and me.

I’ve heard of a “series” LLC option which accomplishes the same level of security with layers as with the “mother and children” approach but is much easier from an operational/accounting point of view because you don’t have to operate 6 different LLC’s-just one.

MATT’S ANSWER-

Generally, I recommend that you hold investment real estate in an LLC- a limited liability company. That is unless you buy and sell properties frequently and might be classified as a “dealer” of real estate, in which case I would analyze whether you should operate as an S-corporation. So, let me assume that you are buying and holding these properties as long-term investments.

A series-LLC is not neccesary and may do some damage. A series LLC connects multiple LLC’s and subjects the business to “Affiliate Liability” risks. Affiliate Liability is liability that crosses over from one entity to another, because the two entities are so closely affiliated that the courts view them as one, inseperable entity. You want to avoid affiliate liability. So, there is no good reason to form a series-LLC for rael estate investing, generally, but there are many reasons NOT to form one.

You probably want to consider multiple LLC’s onwing “bundles” of properties with a centralized management structure. I often form a seperate property management company in a structure that looks like this: