top of page
milwaukee-art-museum-2018554_edited.jpg

BUSINESS ENTITIES

Business Entities

I own multiple rental properties. Should I own each property in a separate LLC?

It depends. There are several factors that investors might consider when
deciding how to structure the ownership of multiple rental properties. These factors
include: risk tolerance, the amount of equity in the properties, organizational skills and
willingness to perform administrative tasks, and how the properties are financed.

 

To illustrate, consider a landlord who owns rental properties free and clear
and has other rental properties with short-term commercial mortgages against them.
The landlord has a full-time day job and manages his properties himself. With the
properties that are owned free and clear, there is no risk that the landlord will become
unable to make mortgage payments and face foreclosure. Thus, the landlords primary
risk exposure with respect to these properties is property damage or personal injury.
The landlord can greatly mitigate these risks by purchasing insurance.

 

In contrast, the properties that are encumbered by mortgages present the risk of
foreclosure in addition to the risks of property damage and personal injury. The
characteristics of a commercial loan's risk heighten the risk of foreclosure relative to the
risk posed by traditional 30-year fixed-rate loans. First, the life of most commercial loans
are short, typically five to seven years. This means that staying current on mortgage
payments requires the borrower to refinance the loans every few years. Thus, even if
the properties are fully rented and have good cash flow, outside forces such as global
economic conditions can limit or eliminate refinancing options. Second, most
commercial loans have variable interest rates. A sharp, sudden increase of interest
rates combined with unexpected vacancies and/or repairs may cause the landlord’s
cash flow from one or more properties to fall into the red.

 

To avoid the possibility of the landlord’s lenders attacking the properties that he
owns free and clear to collect on the mortgages taken out against his other properties,
the landlord may want to separate the ownership of the free and clear properties from the
mortgaged properties. All the free and clear properties can be owned by a single LLC
without sacrificing much liability protection because the landlord can simply purchase
insurance to practically eliminate the risk of liability for personal injury or property
damage. That said, while insurance greatly reduces the risk of liability, certain types of
harms, such as health problems caused by mold, are commonly not covered and could
result in substantial personal injury to tenants.

 

A landlord who has a low risk tolerance or is unable to personally monitor the
physical condition of the properties on a regular basis may wish to separate ownership
of the properties to achieve the greatest possible amount of liability protection. This
strategy increases the administrative burden because it is essential to keep the
operations of each LLC separate and distinct from the others. For example, the landlord

would need to maintain separate bank accounts and accounting ledgers for each
company.

bottom of page