Many people are aware that they can protect themselves and their assets by transferring their investment properties into an LLC. As a fellow real estate investor, the question I hear most frequently is, “should I transfer all my properties in the same LLC?”Imagine that those little green plastic houses from Monopoly represent your investment properties. Imagine also if you took one of those houses and put it into a box. That is similar to what happens when you transfer the deed to a property into an LLC. If someone tries to sue you, they are suing the LLC and not you. If they win, they can only get what is in the box.
Now, what would happen if you put two green houses in the same box? If you get sued, both houses are at risk because they’re both inside the same box.
If your investment properties aren't in a box at all and a judgment that exceeds your insurance limits is levied against you ALL of your assets are in jeopardy. You would remain personally liable for the balance of the judgment thereby risking any remaining equity, your current savings and potentially your future income.
For maximum asset protection, its best to put each house in its own box – or – in its own LLC. This very basic overview does not cover every possible scenario; just like the name says, there is a limit to the liability protection that this entity gives you. You could still be held liable if you, say, decide to change your own hot water heater and it explodes. Still, why risk the equity potential in your investment properties when they can be adequately protected for a mere $279 per property? That’s pretty cheap insurance!
P.S. The whole strategy fails to work unless you actually transfer the properties in the LLC and provided you add your LLC as an insured on your homeowner's policy. Any title company can help you with the transfer and your insurance agent can handle the rest.
Source: Opt2Invest, LLC - personal notes from Summer 2006 presentation
