Protect Real Estate: LLC vs Personal Ownership

The Mistake That Costs Investors Their Portfolios

One tenant lawsuit should NOT follow you across your entire portfolio. But when you own properties in your personal name, it does.

A Real Client's Story

I'm working with a client who learned this the hard way. Years ago, she had a tenant lawsuit at one of her properties. She thought it was behind her—the case settled, and she moved on. But there was a problem: she'd bought all her properties in her personal name.

Years later, the case came back. Not on the original property, but on a completely different property she was trying to sell. A judgment from years past was still hanging over her personal record. Now, when she tries to close a deal on her newer property, that old lawsuit appears in the title search. Buyers get nervous. Lenders ask questions. What should be a clean sale becomes complicated. Her deal timeline stretches. Her sale price drops.

One lawsuit. Multiple properties. One person's name connecting them all.

The lesson: That old lawsuit at Property A followed her to Property B, even though they're completely separate investments in different neighborhoods. If she'd structured them properly in separate LLCs from day one, that lawsuit would have been contained.

The fix: Separate LLC per property isolates liability. One property lawsuit stays contained. Period.

Compare Ownership Structures:

Why Buying in Your Personal Name Is Dangerous

When you own a rental property in your personal name:

• Personal liability: A lawsuit doesn't just target the property—it targets YOU
• Cross-contamination: One property lawsuit can follow you to other properties
• Asset exposure: Your home, savings, car, retirement accounts could all be at risk
• Legal complexity: Judgments follow you for years, potentially decades
• Future deals complicated: Sellers and lenders see the history

The scenario: • Tenant at Property A sues • Even though you win or settle, the judgment/case stays in records • Years later, you're selling Property B • That old lawsuit appears in due diligence • Buyer gets nervous (title issues, legal clouds) • Deal falls through or price drops

One property lawsuit shouldn't affect another property. But with personal ownership, everything is interconnected.

The Solution: Separate Your Assets

LLCs, Trusts, and Proper Structuring

The fix is structure. Professional investors use one of three approaches:

1. Separate LLC Per Property (Learn more: IRS LLC Classification)

Best practice for serious investors.

How it works: • Property 1 → LLC 1 • Property 2 → LLC 2 • Property 3 → LLC 3

Advantage: • One property lawsuit stays isolated • Lawsuit at Property 1 doesn't touch Properties 2 or 3 • Cleaner title when selling individual properties • Complete liability separation

Disadvantage: • More expensive to set up (filing fees, legal fees multiply) • More paperwork (separate tax IDs, filings per LLC) • Best for 4+ properties

2. LLC Per Property Type or Market

Balanced approach.

How it works: • All Troy properties → Troy LLC • All Schenectady properties → Schenectady LLC • All Saratoga properties → Saratoga LLC

Advantage: • Better protection than personal ownership • Less overhead than per-property LLCs • Geographically organized

Disadvantage: • Still some cross-contamination risk within market • More setup than single LLC

3. Revocable Living Trust

Works but less protection.

How it works: • Properties held in trust name • You manage as trustee • Estate planning benefits

Advantage: • Avoids probate • Privacy (trust ownership not public) • Simpler than multiple LLCs

Disadvantage: • Less liability protection than LLC • Trust liability still reaches all trust assets • Best for estate planning, not liability protection

How LLC Protection Works

The "Veil" Between You and Liability

When you own a property through an LLC:

The lawsuit: Tenant sues the LLC, not you personally

The judgment: Limited to LLC assets (the property itself) not your personal assets

Example: • Property value: $300,000 • Lawsuit judgment: $100,000 • Your personal exposure: $0 (lawsuit limited to LLC's assets)

Without LLC: • Property value: $300,000 • Lawsuit judgment: $100,000+ • Your personal exposure: Everything you own (home, savings, future income)

The protection works ONLY if you: • Keep the LLC separate from personal finances • Don't commingle business and personal money • Maintain proper records • Don't engage in fraud or gross negligence

Technically, courts can "pierce the corporate veil," but this requires intentional misconduct. Normal business operation stays protected.

The Critical Mistake: One LLC, Multiple Properties

Here's where many investors get it wrong:

They put all their properties in ONE LLC to "save money" on setup costs.

The problem: • Property 1 gets sued • Judgment applies to ALL properties in the LLC • Plaintiff can go after all properties to collect • You've accidentally cross-contaminated

Example: • LLC contains 5 properties valued at $1.5 million total • Lawsuit judgment at one property: $150,000 • Plaintiff can potentially attach ALL 5 properties to satisfy judgment • Instead of protecting 4 properties, you've exposed them

The fix: If you're holding multiple properties, separate LLCs for each (or at minimum, geographic grouping).

Yes, it costs more upfront. But it prevents one lawsuit from destroying your entire portfolio.

Insurance: Not a Substitute for Structure

Many investors think insurance solves the problem.

It doesn't.

Good liability insurance is essential, but: • Insurance has limits (policy caps) • Insurance doesn't prevent liens or judgments • Insurance companies can deny claims • Insurance is reactive (covers damage, not prevention)

Proper LLC structure is PREVENTIVE. It stops liability from reaching your personal assets in the first place.

Best practice: LLC structure + strong liability insurance.

Structure first. Insurance as backup.

How to Properly Structure Your Real Estate

Do This Before You Buy Another Property

1. Talk to your attorney

   • Discuss your specific situation
   • Decide on LLC, trust, or hybrid structure
   • State-specific laws matter

2. Talk to your CPA

   • Tax implications of structure choice
   • Depreciation benefits
   • Self-employment tax considerations

3. Set up properly

   • File articles of organization (LLC)
   • Get EIN (Employer Identification Number)
   • Open separate bank account
   • Keep meticulous records

4. Take title correctly

   • New properties: Buy directly in LLC name
   • Existing properties: Consider transfer/restructuring (consult attorney on tax implications)

5. Maintain the separation

   • Don't commingle personal and business funds
   • Keep LLC books separate
   • Document business decisions

Cost: $500-$2,000 per structure depending on your state and complexity. Worth every penny.

The Real Cost of Not Doing This

My client's situation: • Had old lawsuit hanging over her • Couldn't sell cleanly • Buyers demanded discounts • Complicated title insurance • Years of legal tracking

All because she bought her first property in her personal name.

If she'd set up an LLC from day one? That lawsuit stays isolated. Doesn't affect other properties. Doesn't haunt future sales.

Fix: $1,000 today Cost of not fixing: Potentially $100,000+ in lost deals, discounts, and legal fees

The choice is obvious.

Before You Buy Another Property

If you're thinking about buying real estate or already own properties in your personal name:

1. Talk to your attorney about proper structuring
2. Talk to your CPA about tax implications
3. Don't delay (liability exists even if you don't think about it)
4. Get it right the first time

I help investors buy and sell every day. Part of my job is making sure you avoid traps like this. [Learn more about my approach].

If you're buying, selling, or investing in real estate and want to make sure you're protected, let's talk.

Phone: 518-348-9535

One conversation could save you tens of thousands of dollars.