If you own real estate as an investment, whether rental properties, house flips, VRBOs, etc.*, it is critical that you own these properties in a way that protects your personal assets (home, car, retirement, and so on) from liability arising out of these rentals. Imagine the horror scenario where someone is injured on one of your rental properties, leaving them disabled and unable to work for the rest of their life. Owning rentals in your personal name puts all of your personal assets at risk to pay that injured Plaintiff’s medical bills, court judgments or settlements. Yes, there is insurance for this, but imagine the worst-case scenario: The Plaintiff is an injured child. Who knows how much personal money could be at stake for lifetime medical expenses, lost wages, and other damages multiplied times the child’s life expectancy? Your personal liability could very well outpace your insurance coverage.
Put differently, you could lose everything.
Traditionally, Texas real estate investors have protected against this type of catastrophic loss by owning rentals in a separate company outside their personal name. Corporations, partnerships, and certain types of trusts are all options, but the company type most favored by real estate investors is the limited liability company or “LLC”. The LLC is a flexible and easy to manage company structure that places a fictitious barrier between your personal assets and those of the LLC. With this wall in place, if someone is injured in a rental owned by the LLC, only those assets the LLC owns would be available to cover a Plaintiff’s expenses, judgments, etc. Your personal assets would be protected.
Now, what if you own LOTS of properties? Here is where things used to get messy. One the one hand, you could hold all your rentals in one traditional LLC. Your personal assets would be protected, but all the rentals would be lumped together. In the event of a lawsuit, a Plaintiff injured in one rental could go after ALL the other rentals to satisfy a judgment. That would be a nightmare. On the other hand, you could set up one LLC for each rental. From an asset protection standpoint this is certainly a step up, but managing multiple LLCs can get time consuming, cumbersome, and very expensive. Not ideal.
Herein lies the beauty of the “Series” LLC. The Series LLC is a twist on the traditional LLC model where you can put all of your rentals into one LLC, but segregate them from one another. The Series LLC is like all of your rentals living under one roof, but everybody has their own room (and a door that locks). Each rental would be owned by its individual series. If one series gets sued, the assets in other series aren’t at risk.
Personally, I LOVE this model for Texas real estate investors. With the Series LLC, not only can the Texas real estate investor own multiple properties within one Series LLC, but he or she can own them with different people within each series. Want to own a rental house with your wife? Put it in one series! Want to own a multi-family with your cousin? Put it in another series! Want to go halvsies on a storage business with a business partner? Put it in yet another series! Truly, the flexibility of this company structure is incredible.
A couple of caveats: First, this type of company structure is still very young; only 15 states recognize it and Texas just adopted it in 2009. States are slowly starting to catch on to the upside of using the Series structure, much like they did with traditional LLCs in the early 1990s. Second, because of its relative youth, there are also some unanswered questions that will be resolved over time (i.e. Can one series file bankruptcy without affecting the others?). Third, the formation and record keeping requirements on the Series structure are strict, so don’t go it alone. Work with your professionals for continuing advice on best practices and how to set this structure up properly. Doing it right isn’t super expensive and doing it wrong could cost you dearly.
Overall though, the future is bright for the Series LLC and it makes a great setup for the Texas real estate investor.
*We’ll use the term “rental” throughout this article for the sake of uniformity, but the same arrangement applies to different types of real estate investments.
The information contained in this article is provided by BOOK LAW FIRM and is provided for educational and informational purposes only and should not be construed as legal advice or as an offer to perform legal services on any subject matter.