Many people have heard that they need to hold their rental property in an LLC. Unfortunately, they often also use that same LLC to manage the rental property.  A better solution is to have two different LLCs, one that owns the property and another that manages the property.

The management LLC contracts with the property-holding LLC  to manage the property. The management LLC signs the contracts with the renters and deals with the maintenance issues. In the contract between the LLCs, the management LLC collects a normal management fee. This structure provides an extra level of asset protection. Disgruntled renters will first go after the LLC that manages the properties in a lawsuit. Because that LLC does not hold ownership, the properties themselves will be protected from the lawsuit.

Another level of protection for your property that is often looked over is a revocable trust. A revocable trust does not provide asset protection, but it does help protect your property from lawyers after you die. You use the trust by not putting your rental properties themselves into the trust, but by putting your membership interest in your LLCs into the trust. In other words, the trust will be the owner of the LLC. After you die, your successor trustee will be able to pick up where you left off and run the LLCs.

If you are willing to put in a little effort now, you can save yourself and your children a lot of work and frustration by structuring your investment properties properly. Make sure that there is a LLC that owns the property and a separate LLC that manages the property. These LLCs will contract with each other to make sure they are working together at arms-length. Then put the ownership of both of those LLCs in the name of the trust to make sure that there will not be any problems with passing the investment property on to your heirs/beneficiaries.