How To Set Up LLCs For Real Estate Investing

A few blog posts ago, I explained, in shorthand, a formula I use for setting up LLCs in real estate investing. It’s not a universal formula, but it’s a very robust structure that can help most real estate investors create anonymity for their holdings. I promised I would provide more detail in a future article. So here goes. I’m going to show you exactly how to set up LLCs for real estate investing. By knowing this one formula, you will be miles ahead of other investors.

The idea, as I said before, is to create a “smokescreen” that prevents your ownership of properties from being discovered in a search. To do this, you will put your properties into limited liability companies. You will also shield the fact that you are the owner of these LLCs.

The first step is to set up a “holding” LLC. If you know how to set up any LLC (it’s pretty simple), then you know how to set up LLCs for real estate. They’re no different from other LLCs, but you need to take a few precautions.

1. You want to keep your name off the holding LLC.

So, if your name is Fergus Ferguson, then obviously you don’t call your company Fergus Ferguson, LLC. Kind of defeats the purpose, right? But it goes deeper than this. When an LLC is formed, many states collect information on who the manager(s) or member(s) of the LLC are. Your information then becomes searchable by anyone with a smartphone. To avoid this, I recommend establishing an LLC in Wyoming (or Delaware for commercial real estate). Not only does Wyoming keep the manager/members’ names anonymous, but it also offers asset protection and charging order protection—meaning if you are sued personally, they can’t come after the holdings in your LLC.

2. Next, you’ll register a second LLC in the state where the real estate property is located.

The property itself will be deeded directly into this state-based LLC. A lot of people think they can skip this step and just deed all their holdings directly into a Wyoming LLC, but you lose a lot of protections this way. You’ll have no legal status in the state where the property is, so if you ever need to evict a tenant or sue a contractor, you’ll be out of luck.

Set up a separate, state-based LLC for each and every property you own. That way, if you’re ever sued for damages that occur in one property, your liability doesn’t “spread” to your other properties—each is owned by a different company.

Now, here’s an important point. There are two ways an LLC can be set up to be managed—either by manager or by members. In a manager-managed LLC, the manager makes all the decisions, and the manager’s identity must be disclosed. So…

3. Set up the state-based LLC as member-managed.

Now here’s the brilliant part:

4. List only one member for your second LLC, and make that member your holding company in Wyoming.

So now your state-specific LLC points back to the Wyoming LLC as its sole member. And the Wyoming LLC does not disclose your identity.

You’ve just created a structure that makes it extremely difficult for anyone to trace your property back to you. And that’s how to set up LLCs for real estate investing.

If you think there’s something underhanded about this, go back and read my blog post about privacy protection and why it’s important. When you allow your property ownership to become public information, you become the “low hanging fruit” that green-eyed attorneys go after anytime you become involved in any kind of litigation. You want to protect yourself better than that.

There’s one caveat to the above strategy. It works best when you’re starting from scratch. If you already have some LLCs set up, you can run into some problems by switching over to this structure. Maybe we’ll talk about that situation—and ways you can protect yourself—in a future blog post.

Until then, happy investing.