BiggerPockets Podcast 109: You Will Get Sued. Here’s How To Survive with Attorney Scott Smith
No one wants to get sued, but if you plan to build a real estate empire, the question is not so much “if” but “when.” However, we here at BiggerPockets have your back, so today we are bringing on Scott Smith, an incredibly smart and funny asset protection attorney from the great state of Texas! Scott shares with us a variety of tools and tactics you can use in your real estate business to protect yourself from losing the wealth you are working so hard to create.
Be prepared to learn new tips you’ve probably never heard before regarding umbrella policies, building your real estate team, LLCs, trust funds and more. Don’t miss out on this information-packed episode!
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We just wanted to give a shout out to our podcast sponsor on today’s show: RealtyShares. RealtyShares is a crowdfunding platform that allows you to invest in professionally managed properties without leaving your living room!
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In This Episode We Cover:
- Forming an LLC right off the bat
- The ins and outs of Insurance vs. Assets
- Ten things you need to know to protect your assets
- What exactly an Umbrella Policy is and why it might not do what you think it will
- Why you shouldn’t put all your properties under one name
- What you should know about the Delaware Statutory Trust
- Scott’s advanced strategies for real estate investors
- Everything you need to know about LLCs vs. Trust Funds
- Who you need as part of your team when investing
- And SO much more.
Links from the Show:
- BiggerPockets Webinar
- BiggerPockets Wholesaling Calculator
- Trivia Email
- 10 Ways to Protect Your Assets — This document was prepared by Scott Smith to accompany this podcast presentation.
- BiggerPockets Podcast Show 105 with Neal Frankle
- BiggerPockets’ Investing in Real Estate with No Money Down
Books Mentioned in this Show
- “Rich people don’t own things, rich people control things.” Share on Twitter
- “You don’t really have any friends once you start getting sued.” Share on Twitter
Connect with Scott
This is the BiggerPockets Podcast Show 109.Scott: Personally, the strategies that I’m recommending you are usually only given to people that have five to ten million dollars in assets.
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Josh: What’s going on, everybody? This is Josh Dorkin, host of the BiggerPockets podcast, here with my co-host, Mr. Brandon Turner. What’s going on, Brandon?
Brandon: Do you have a Band-Aid?
Josh: I took some Advil, man. My head is pounding.
Brandon: Yeah, I got like this hole right there and it’s like bleeding from all this stuff I learned today on this podcast. Crazy amount of stuff people are going to learn – if you’ve got a Band-Aid ready, because it’s a great show. There’s so much. One thing I noticed, the more I get into real estate, the less real estate books I read, right? We’ve talked about this before because I’ve bought a lot of real estate books. I still like them but I don’t learn a whole lot from real estate books. Today, I learned more than I’ve learned in the past twenty years combined, I feel like.
Josh: His brain is bleeding.
Brandon: It’s bleeding. There is so much going on. Anyways, people are going to love this. It’s definitely, yeah, we’re talking about asset protection but it’s not boring. This is entertaining, funny, really, really, smart.
Josh: Well, they’re listening to us. I mean, you know.
Brandon: Yeah, we keep it real. But I mean, yeah, it’s great.
Josh: I’ll tell you what, this show is for everybody from somebody who is thinking about investing in real estate all the way to somebody who’s been doing it who’s got a hundred properties. There is something to be learned. There’s some tips in here that blow your mind. Blow your mind. Apparently, there are tips here that your lawyers don’t want you to know about. There’s some really good stuff, so definitely pay attention.
This is Show 109 of the BiggerPockets podcast and you check out the show notes at BiggerPockets.com/Show109 . Also, we want to make sure that you guys sign up for this week’s webinar at BiggerPockets.com/Webinar . We did one a few weeks ago on multi-family and it was huge. It was awesome. It was amazing. The feedback was phenomenal. If you have not yet checked out our webinars, we definitely recommend you do that. Again, BiggerPockets.com/Webinar .
Before we move on, hopefully you guys got a chance to check out the new wholesaling calculator that we launched last week.
Brandon: I think it was a couple of weeks ago
Josh: Oh yeah, two weeks ago. But if not, definitely check it out. http://BiggerPockets.com/calc . You can find it there. I think that’s all I’ve got on that. We’ve got trivia, don’t we?
Brandon: We do. So, last week we interviewed Grant Cardone and it was an incredible podcast. If you haven’t listened yet, go listen to that one right after you listen to this one.
Josh: It’s the one show of all the shows that you probably want to listen to.
Brandon: Yeah, it’s amazing. Anyways, in that interview, Grant mentioned that two years ago, he bought a huge apartment complex in Florida. I think it was like 1000-something units and he said he won the bid against 38 other investors even though he was the lowest bid because he did two incredible, unique things. So the question today is, what were those two unique things that he did to win that bid? So if you think you know the answer, send the e-mail answer to [email protected] for your chance to win the digital version of The Book on Investing in Real Estate with No (and Low) Money Down written by me and yeah, if you want to get a copy of that book right now without the trivia, it’s on sale actually over on Amazon so go over and pick it up or just go over to BiggerPockets.com/nomoney .
Josh: And we link to the Amazon sale from BiggerPockets.com/nomoney so you can find it there.
Brandon: Yep. Awesome. Well, I think that’s pretty me all the upfronts. Why don’t we get on with today’s show?
Brandon: We do, there we go. Let’s not forget our sponsors, guys.
Josh: They’re awesome so we can’t forget them. All right, here we go.
Brandon: Let’s bring it in. Let’s bring it in. Thank you, by the way, to our sponsors for their support and here we are.
Josh: All right, this episode is from to you by RealtyShares.com . Realty Shares is a real estate crowdfunding platform that allows accredited investors to invest in pre-vetted real estate deals online. So, investors can browse and invest in both residential and commercial properties that yield returns of 8 to 16% annually.
So as Realty Shares member, you can also possibly invest of professionally managed real estate investments in a variety of asset types and geographies for as little as $5,000, all from the convenience of your living room.
Brandon: All right, awesome. Good stuff, good stuff. Thanks again to everybody who comes and sponsors us here on the BiggerPockets podcast. We definitely appreciate it. Also, quick heads up, if you have not yet left us ratings or reviews on iTunes – you’re a listener and haven’t done that – please do that. It really does help us get more listeners to the show so we’d definitely appreciate it if you do that and you can find the link on the show notes.
With that, why don’t we get to this? Today’s guest is Scott Smith. Scott is a asset protection attorney located in the Austin, Texas area and Scott’s just got some amazing stuff. I just want to kind of get to it. He’s got so much to say, so much to share. He’s got amazing tips so bust out your pen, get a notebook. If you’re driving, pull over. Park your car. Get out a notebook and take notes because there’s a lot to learn today. So let’s get to it.
Josh: All right, Scott. Welcome to the show, man. It’s good to have you here.
Scott: Yeah, thanks, Josh. Great to be here.
Josh: Awesome. Well, today we’re going to talk about something that maybe some people find a little bit, what’s the word –
Josh: Daunting, scary, whatever. This is the #1 question I get from people all the time because it’s so overwhelming. I don’t know what to do about it. That is the concept of asset protection, LLCs, stuff like that. And I don’t know what to tell people. I mean, like –
Brandon: Well, they ask me all the time. Hey, should I do an LLC? What should I do? And I’m like, talk to your lawyer.
Josh: Yeah, talk to your lawyer.
Brandon: I’m not going to tackle that. Don’t go asking me because I’m not going to get in trouble for giving you the wrong advice.
Josh: Today, we’re going to make Scott here get in trouble because he is a lawyer.
Brandon: Pretty much, pretty much.
Scott: Yeah, well, I’m really excited to share with you guys today some of the cutting edge strategies for novices all the way to advanced strategies for the really high level players that are doing. First and foremost, what we always have to do as attorneys – we always have to hedge our liability –
Josh: Wah-wahh. Come on, man.
Scott: The yadda, yadda, yadda.
Josh: Let’s hear it. Let’s hear it.
Scott: Obviously, this is not legal advice. I am not your attorney and you should retain counsel before taking any action and I won’t become your attorney until we have a signed retainer agreement. But apart from that, I think I’m going to have some really great concrete strategies that everybody’s going to be able to implement in one way or the other to help make sure they’re protected and that every dollar that they make and work hard to make in this industry, that they’re going to be able to keep it from other people trying to come after it.
Josh: Hey, Scott. By the way, would that disclaimer pretty much stand across everything that we do? You know, I mean – you’re a lawyer so it’s probably perfect advice, like, hey folks listening. Don’t listen to us. You can listen to us, it’s great, but before you go and do stuff, talk to your lawyers, right?
I mean, you want to make sure – we’re an entertainment show. We give good practical advice but at the end of the day, before you actually make decisions that could have ramifications, talk to your lawyer. Not enough people, not enough real estate investors are willing to invest the money to talk to their lawyers and it’s so important because it could save you so many problems. I just want to kind of get your feedback on that.
Scott: Yeah, you’re absolutely right, Josh. Here’s my thoughts on that topic. First of all, if you think that you can give one blanket piece of advice that applies to everybody equally, you’re crazy because everybody’s business is different. Everybody’s situation is different. The law is very particular to the circumstances, right? That’s why we have facts and we have the law and that’s where legal precedent gets created from. I think you’re right that I find time and time again that the real estate investors that I talk to are trying to save money. Everybody wants to save money, right? But it’s kind of like trying to save money by not buying fire insurance on your house. Sure, you can save some money in that.
Josh: Or flood insurance.
Scott: Yeah, flood insurance is another great one, right? That you can wipe out – the cost to you up to 10, 20, up to $100,000 to repair a property if you don’t have properly insured and the same kind of thing ends up happening with what I focus on, which is asset protection and making sure that people have their businesses structured correctly. That way, when somebody comes with a lawsuit against them, I get to be as their attorney to go into the other attorney’s office and say, good luck trying to sue me because what you’re going to collect against is this piece of paper and this piece of paper has no assets in it.
Josh: You’re the man!
Scott: That’s the way to do it. It’s not as hard as you would think it would be. Just a couple of strategies can really get you into a much higher barrier for anybody to come after your assets. Just kind of taking that insurance asset protection kind of issue – they’re really two sides of the same coin. We really should start thinking about insurance as a way to protect the property like we have flood and fire insurance, and we should think about asset protection in the way that, how do we cover our ASS-ets? How do we cover ourselves from being able to, if somebody sues us, to keep their hands off our money? That’s the way that I kind of like to explain it to a lot of my clients.
The first question I ask whenever I go into any conference or I go in to speak to anybody is I ask, does anybody here own a piece of investment property in their name, personally? You’ll be surprised that even with the power of the internet, and even with your great podcast and forms that BiggerPockets offers, you still find people that are still owning property in their personal name. They have this idea that ownership of the property means that they want to be able to have it in their legal title. So, I tell them, what you don’t want – what rich people do is rich people don’t own things. What rich people do is they control things.
Josh: Can you explain that, by the way?
Scott: Yeah. The difference between ownership and control is more like a legal fiction. The legal fiction is in the sense of saying that, do you really care whether you own a yacht or do you care that I just get to go use my yacht whenever I want to? It’s not even my yacht. I just get to go use it. Well, no, you wouldn’t care whether you had ownership at that point or not, right?
Josh: I’d use your yacht.
Scott: You can come anytime, Josh. It’s a pretty small one right now. It’s more like a bass boat. But you can still have a good time on it, I think.
When we talk to them about that, we say, let’s take the properties and let’s put them into trusts, LLCs, and other types of business entities where you get all the benefit and all the money from your properties and the ability to control your properties but without all the liability that comes with actually owning something.
Josh: That makes sense. Now, I for the first six years of my investments, everything was in my own name. 100% of everything. Just two years ago, or three years ago now, when I started full-time here at BiggerPockets, that’s when I started putting everything into LLCs because I thought, well I have a lot more increased visibility now and I’m just a little bit worried. Now, I’ve shifted everything over.
Maybe I can kind of step back a minute before we get too deep into the LLC side of things. I know today, one thing you had sent me earlier in an e-mail you said you would talk about – you said there’s 10 different ways to protect your assets and that’s what we’re going to cover today, right? All those 10 things?
Scott: That’s correct, yeah.
Josh: So maybe we’ll just start right at the beginning and just hit each one, one at a time, if that’s what you want.
Brandon: I’m loving it.
Josh: Is that easy to do?
Scott: Yeah. So, I think we’ve kind of already started covering the two topics with that – how do we use our asset protection strategies and insurance. We covered what are the difference between those two things and how they’re the same side of the coin to protect you but just in different ways.
One of the key parts – #2 on that list – is how insurance really isn’t sufficient. A lot of people think that being able to get an umbrella policy – the dog is barking here.
Brandon: We’re having technical difficulties here.
Josh: Brandon and I will sing a song for you.
Brandon: That’s all right. My dog was barking in the background a minute ago. I had to mute him. Or mute my mic – not mute him. I really got to mute my dog.
Josh: Well, like Scott said, this is stuff that you and I talked a fair amount about and like we said, guys, there’s so many of you who have these questions. I really, really urge you to bust out a pen, start taking notes on this because there’s a lot of great stuff. As a quick heads up, if you’re listening and you have questions, you can ask questions on the show notes at BiggerPockets.com/Show109 . That’s BiggerPockets.com/Show109 and Scott will be happy to assist where he can. He’ll probably tell you to talk to your lawyer, but you know. I’m sure he’ll jump in.
Scott: I’ll always tell you to talk to your lawyer but I’ll also give you a little hint about the kinds of things that you should be thinking about to research for your state because every state’s different.
Josh: Yep. So now that he’s back from smacking his dog around, let’s get back to it.
Scott: He always picks the perfect time. So, getting back to where we were talking about insurance and how insurance really isn’t sufficient. A lot of people think if they have a couple of million dollars in an umbrella policy, that’s going to be able to cover me. The real fact of the matter is that you can have a lawsuit filed against you from the very first communication that you undertook with a buyer or seller and those lawsuits can be based on allegations of fraud. Any type of statements that you make gives a basis of a lawsuit and what happens is the court looks at a statement and says, oh that’s an intentional act.
And if it’s an intentional act, the insurance company says we’re not going to cover you in the case that you intentionally did some wrongdoing. So don’t think that insurance is actually going to get you there. What you really have to do is be able to set up a structure that allows anybody that would look to sue you to not be able to collect against your assets. But to really understand the real danger that we walk into as investors by owning various properties – too many properties grouped into an LLC as well as owning property in our own name is what the real power of a judgment is.
Brandon: Before you go there, I want to kind of circle back on the insurance thing. So, even prior to going into a contract with somebody, if I’m communicating with them via text or via the phone – not by the phone, by email – those communications are a part impartial to any evidence against me in some kind of intentional act to mislead somebody. Is that correct?
Scott: Sure. Take for example the instance that you wrote somebody an e-mail and you told them that you’ll replace all of the plumbing underneath the house. Even though it didn’t state it in the contract and even though it’s not in the deed, the mere fact that you told them that could be considered an element of fraud. That’s the way those kinds of things are attached and the worst thing you can do is put those kinds of things in writing.
Josh: So, I’m trying to understand this and I apologize – my thought on this – the insurance companies want nothing more than to have nothing to do with this case, right?
Scott: They won’t cover it. They’ll deny coverage.
Josh: So, it’s in their interest to deny coverage as much as possible because then otherwise they’ve got to pay out of their pocket.
Scott: That’s why they make money. They collect premiums and deny coverage.
Josh: Right. So that’s where this comes into play. Yes, you have insurance but don’t count on that. Realize that the second that you start communicating with people and the second they can find a way out, they are going to wiggle their way out of it and they don’t have your back anymore. Is that pretty much a fair assessment?
Scott: Yeah, you don’t really have any friends once you start getting sued. Everybody tries to run away from you as fast as possible, and especially in these types of situations because all of a sudden once you get sued, you say, well, it wasn’t really my fault, it was actually somebody else that told me to do this or instructed me to do this so every attorney will say, if you know anybody that’s going to get sued and you’re in any way involved in what they did, try to distance yourself as much as possible from that.
Josh: What I find that’s fascinating – I mean, the whole thing is fascinating – but what I find that’s fascinating is that there’s this advice that goes around all the time; I see it. People say, don’t worry about an LLC, just get an umbrella policy. I’ve never heard anybody say it the way you did that an umbrella policy alone isn’t going to cover you. So you flat out say that that’s bad advice to say don’t worry about any kind of asset protection, just get a good umbrella policy and you’ll be fine.
Scott: Yeah, I would say that unless your umbrella policy is going to cover for intentional acts of fraud and other intentional acts that are in violation of the law, that your umbrella policy is not going to be sufficient. I’ve never reviewed a policy where any insurance company was willing to take on that kind of liability because that means that you could do anything you wanted to and do it intentionally – you could go punch the mailman in the face because he keeps knocking on your door and say oh, my insurance policy’s going to cover me for that.
Josh: Are most of these frauds, the “intentional frauds”, presumably they’re unintentional, right? People just kind of doing their thing and trying to get by and it’s like –
Scott: Exactly, right? Being accused of fraud doesn’t actually mean you’re a bad person. In fact, most everybody – all of my clients are good people. They’re all honest businesspeople. It’s usually a miscommunication but when there’s money on the line and you’re talking about 30 or $40,000 in replacement costs and one person had one idea and another person had another idea, well then you have a lawsuit even though you have two great, honest people that were trying to do a business transaction together. Don’t think that just because you’re honest and just because you’re as up front as possible that you’re not subject to a lawsuit because that’s just not the case. Honestly, the one takeaway that I usually start all these presentations with is the real estate industry is the hottest litigated area of law. If you’re serious about this business, it is not a question of if you’re going to get sued. It’s a question of when and in what condition you’re going to be to defend yourself when that happens.
Josh: Oh, yeah. I’ve never heard anybody put it quite that bluntly, but it makes sense. I don’t know. It’s scary. Like I’m going to get sued someday and that’s why we have you on here. So, if insurance is not good enough – it helps but it’s not good enough – what else do we do?
Scott: So, what we want to do is be able to have a proper asset protection strategy. The reason that it’s worth investing in a proper asset protection strategy is because, take this hypothetical example where you have $100,000 house with an $80,000 mortgage on it. A plaintiff ends up suing you – maybe it’s one of your tenants, maybe it’s a contractor, maybe it’s anybody that’s suing you for any work they did on the property.
Well, you only have $20,000 in equity and they have a $50,000 judgment so they get to foreclose on your house and take that house. Well, they still have $30,000 left over from their judgment and they can go to your next house and foreclose on that house and keep doing that to all of your properties until all of the attorneys’ fees are satisfied and until they get all of the money back from their judgment and the attorneys get to keep charging for every foreclosure they do so what do you think ends up happening to the judgment? It goes down a little bit by a little bit by a little bit and they take more and more of your things. But you don’t have to be that exposed if you properly structure things inside of LLCs.
There’s a couple of different ways to be able to do that. The first, just to kind of give you a worst case scenario is to hold all of your property in a sole proprietorship. That’s the worst because everybody knows you own the property and everybody can get to it. It’s not protected.
Josh: That means you just own it with your name, right? Like, me and my wife bought a property, it’s in our name – that’s what the vast majority, I’d say, of new investors do it.
Scott: Exactly, because that’s the easiest. There’s no setup cost. There’s no extra tracks, treatments that you end up having to do. So, with the LLCs, what you end up having to do is you have to end up spending a little more time and money, right? You have to file the LLCs and you have to keep the corporate formalities meaning you have to keep the corporate minutes. You have to issue shareholder agreements. You have to have operating agreements. All of the paperwork in there has to be done and it actually has to be done perfectly because any defect inside of the paperwork – there is an allegation there that you weren’t really treating it as a corporation so then they’re going to treat it as if it was your personal asset, being the manager.
Scott: So that’s why it’s worth it to pay what we’ll call the attorney insurance to be able to pay your attorney insurance to have somebody else that’s a professional look at it and make sure that you’re prepared in the event that you’re getting sued.
Scott: There’s a quick tangent I want to take with the LLCs. For Texas and a lot of other states, it’s what’s called a series LLC and you’ll see this a lot on BiggerPockets, people talking about how cool series LLCs are and they’re really cool because you get one tax filing which makes it really easy to manage but you get the asset protection because you can separate all your properties out into what would look like different LLCs. So each house then would be owned by a separate LLC underneath the series. So even though you only have one legal entity, the court and the legislature kind of made almost like a fiction to say okay, we’re really going to let people treat it as if they are separate entities.
Brandon: So if one of the LLCs in the series LLC gets sued, it doesn’t spread to the other LLCs?
Scott: Correct. You’re going to be able to isolate your assets that way.
Josh: So it’s like having an entity that owns another entity within it, like an escort that owns an LLC. They’re independent LLCs. Of course, as long as you’re not comingling, right? You want to make sure that you’re personally not making deposits of the company’s cash into your own name and playing around. You really have to make sure that you’re keeping these entities separate, which I know in your notes is something we’re going to get to.
Scott: Yeah, you have to make sure that everything is separate when you’re moving money around into accounts. You really have to kind of step back and say, as if these were separate companies that were owned by different people, how would things need to be treated here? So, that should be your assumption when you’re starting to work in that type of structure.
Josh: Okay, I’m new to the series thing. I don’t know really anything about it other than I’ve seen it mentioned. So, in my business I have I think five or six, seven LLCs that are all just separate because I have one for each of my partnership – ownership structures, essentially. The ones that I have with this partner will have an LLC, this partner has an LLC, this partner has an LLC. Is that something you’re talking about, I should have those in a series LLC so the taxes are easier to do?
Scott: Yeah, there would be a way for you to do the taxes easier inside of a series LLC, but depending upon the complexity that you’re doing, there’s also the option of creating what’s known as the Delaware Statutory Trust that operates very similar to a series LLC that you can create different series inside of a trust agreement. So, trust is just like a filing that ends up happening in Delaware with an attorney and an agent in Delaware but it’s another way that you can separate it out and those are arguably more protective than even an LLC because Delaware actually created it to be in response to people moving their money offshore. They wanted to create an entity that was arguably as strong as having an offshore bank account.
Scott: That way, all the money wouldn’t flow out.
Josh: Delaware’s always at the forefront of entities and structures, aren’t they?
Scott: Absolutely, yeah. Delaware likes to keep the money positioned in their banks and inside of their control so they can charge through taxes on it, which is admirable.
Josh: Yeah, that’s great.
Scott: That’s good political business to see if you can make money off of taxes for other people’s money then you get to give it to your constituents so it’s a beautiful thing. So they like to protect themselves with that.
Josh: So this is called a Delaware Statutory Trust.
Scott: Correct, yeah. DST for short.
Josh: Do you want to cover that now or do you have that later on planned to talk about?
Scott: I have that for a little later on. A couple of things – we can jump to that and kind of backtrack a little bit.
Josh: Sure, if you want to. Whatever’s best.
Scott: So, the thing you want to know about DST is, apart from what I’ve already told you, is that it’s really easy to create new business entities in a DST and they don’t actually have to be recorded with the state of Delaware. It’s almost like as if you were to create an LLC for an investment package for recruiting potential investors but the only piece is a piece of paper that’s inside of your desk.
Josh: So, I’m going to ask you to repeat yourself because I’m sure that I’m not the only one who’s like, what –
Brandon: Yeah, I get like 50% of that.
Josh: Yeah, okay. So tell me really quickly – I think that this is the question that people are really going to want to ask. Why would I choose a DST over an LLC or a series LLC? I think that’s the fundamental question.
Scott: Yeah, so granted this type of strategy is usually for bigger players that end of happening, right?
Brandon: Don’t insult me, man. I’m a player.
Scott: What ends up happening with that is, one is, the upfront costs to create it are expensive because it’s got to be done right. But after that, you can create what would almost be like any of these investment structures underneath it really quickly and easily. Within a matter of hours, you’d be able to create a whole new legal investment package to be able to shoot to investors. And it’s really tough to get at the money once it’s inside a DST for any type of court actions.
So, if you’re looking at EB5 money or foreign investment money and you’re worried about what could happen in another country or what could happen with somebody else that looks like they’re a little shaky in their legal position and what’s happening in other places, a DST is a great way to kind of shelter what the money is because it’s really typical for people to find out that the money is there and even more difficult for them to be able to get a judgment inside of Delaware to enforce to be able to get out that money. So, did that answer your question, Josh?
Josh: Yeah, I think it did. It’s still – I will tell you –
Brandon: We’ll listen to this episode like three times.
Josh: I mean, this all makes sense but at the same time I know I’m not alone in wow, I’ve still going to have to sit down with an attorney. This is a broad overview, right? That’s what this is. You’re not here to tell us what to do and I know that listening to some, I’m like, oh man. I know I’m going to have to take notes on all the different structures and I’m going to bring it in and say hey, which one of these are the ones for my situation are going to be best? When I say me, I mean me being our listeners. I’m assuming that’s probably going to be what they are going to need to do.
Brandon: I have actually a suggestion. Here’s my thought. Scott, would you mind – I mean, I know we’re still going to talk about all the rest of this, but would you mind maybe you and I sit down and I’ll outline a PDF. We’ll go through the stuff and I’ll outline the notes of what we just talked about today and we’ll put it in the show notes so people can download it. Is that cool?
Scott: Yeah, that’s absolutely cool and I have plans to be able to do – I’ve done some posting on the BiggerPockets blog on some issues that ended up coming up along these things. My plan is to keep creating those types of reference docket for people. So it’s really easy for me when I’m in the forums, I can be like, hey I just wrote a post about how you can use trusts and LLC structures and all that.
Josh: I love that. Fabulous.
Brandon: So people listening and want to go to BiggerPockets.com/Show109 , we will have a PDF that you can download with a lot more detail on what we’re talking about today. Just throwing that out there. Me and Scott will put that together.
Anyway, okay. We’re going back. We were just talking about the DSTs and that was based, because we’re talking on the series LLC thing – maybe I can just ask you because I’ve got you on here and I like taking advantage of my position.
If I’ve got like 6 or 7 LLCs, should I do a DST based on what you know of me – I know this is quick – should I do a DST or an LLC?
Scott: Are you having lots of other – are they all different types of asset classes or are they all real estate?
Brandon: They’re all real estate.
Scott: So you’re probably okay. And they’re all the same types of real estate? Like, you don’t have really huge commercial transactions combined with single-family homes and what not.
Brandon: Some are singles and some are like small multis and there’s a 24 unit.
Scott: All right, so I’d say what you would probably be okay with is a series LLC in that case and just go ahead and take the same types of assets and group them together. So, don’t keep your fix and flips with your buying holds. There’s a really good reason we do that.
Josh: Why is that? There’s got to be a reason.
Scott: Yeah. So the reason that you separate those out is because it’s tax treatment that the IRS will do. Those types of investments are taxed at different rates. If the IRS were to audit you, they actually get to choose – when they see that type of income, which rate they’re going to tax you at and I’ve never known the IRS to tax people at the lower rate if they had the option. Don’t give them the option. Separate things out. If you have different kinds of companies that you’re running or really big projects where you’re having big fundraising that has to go with it, then it makes sense to go ahead and spend the money for the legal work to be able to establish your DST.
But for whatever you’re doing with that, it’s so cheap in reality to hire an attorney who would be able to give you that initial advice of what you need to do as compared to what it’s going to cost you in taxes if you ever get audited or if you ever end up having a lawsuit filed against you. A lawsuit alone is really expensive and that’s just for attorneys’ fees much less having a judgment.
Josh: Well, you and I are talking after the show more.
Brandon: Here you go, Scott. I think it is. Just say it man.
Josh: All right, we’re moving. Not to sabotage Brandon or anything but dude, really?
Brandon: All right, I do have one more question. I do have one more question then. This is important, right? So people who already have LLCs set up. Can they still jump into a series LLC or do you have to start all over?
Scott: It’s a new filing so you can file a new and just move your assets over. It’s not a problem.
Brandon: Okay, so it’s not like I have to go and open up seven new LLCs within that series.
Scott: No, in fact you would just do maybe one or two series and then move the assets over into that.
Josh: Okay, so all of these things are remedied. You’re never stuck in any of these things that you do as long as you’re proactive about it.
Brandon: I’m going to take over because I see my co-host can’t offer advice here, huh? My goodness.
Scott: I want to introduce an advanced strategy if I could. Here’s another point that you won’t ever hear from any other attorneys because they kind of keep it inside of their secret desk drawer of things to do. So, you think it’s really cool that I’d be able to have an LLC that says, okay, this separates my business from me and so that way if I’m ever sued, it’s only going to go – they can’t ever get to my business. My business is sued, they can’t really get into that either. But there’s another level of that that says, okay, what if they can’t even find out what I own? How cool is that? If they can’t even find out if I own an LLC or they can’t even find out that I even own a property.
There’s two ways that you can end up doing that commonly. The first way that a lot of people don’t know about is what actually happens in the formation of the LLC. I don’t know if you guys knew this but did you know that a trust instrument can actually be the registered manager? You don’t actually have to have your name attached to an LLC filing personally.
Brandon: No, the trust is the name that’s on the LLC filing.
Josh: But you can find out who owns a trust though, can’t you?
Scott: No, because a trust doesn’t have to be registered with the state so there’s no research that somebody can do to be able to discover it because that trust document literally is a document that I drafted that’s on my computer. So unless somebody can break into my house and get into my computer somehow, they’re never going to be able to find out that you actually own that property or own that company.
Scott: And the second way that this ends up being another advanced strategy for anonymity comes into say when you want to be able to hold the actual property itself on the deed in the name of a trust instrument because again, the trusts don’t have to be filed so if I have an address that’s called 62-10 Winewood, for example, and I have the trust instrument on the deed instrument that says who is the owner of this property – well, it’s just the 62-10 Winewood Trust. Now, when it comes time to sell that property, you’ll actually have to go to that title company, produce the trust document, verify that you’re the trustee of that to be able to execute the sale but anybody looking through the county clerk records or anybody that’s looking through the Secretary of State to be able to find what you own won’t be able to find your name.
Josh: Fascinating. That seems brilliant. Absolutely brilliant, and my question is, why did lawyers keep that in their back pocket? I mean, it seems kind of an obvious thing or is it the more people that do it, suddenly they’re going to clamp down and not allow that to happen? Now that everybody in BiggerPockets knows – hold on, it’s out there. You’re going to get hate mail from lots of lawyers.
Scott: I know, that’s what I tell everybody. I’m just going to open up the kimono and show off all our secrets here about what we end up doing in the industry. It’s a really good question. Personally, the strategies that I’m recommending you are usually only given to people that are 5 to 10 million dollars in assets and I think they’re paying really big bucks to have people really invested inside of asset protection and because it’s a limited industry. And asset protection is what I do – it’s the only thing that I really focus on to be able to know everything there is to know about that and that’s why I wanted to come on. I think it’s great that these type of strategies, everybody should be using and they’re not too expensive.
Josh: Fascinating. Okay, I want to go back to and I want to dive into the trust thing a little bit. First of all, that’s a word you hear a lot in the real estate space but I know very little about – what exactly is a trust and what are you talking about when you do that?
Brandon: And really quickly, I believe it was Show 6 with Neal Franklin –
Brandon: Frankle – oh gosh, he’s going to kill me. Neal Frankle. We did a show on preparing for death and it was all about hey, how do you prep yourself for when you’re going to die and you want to pass everything along and we do cover this stuff a little bit so if you’re interested, it’s definitely a complementary show to probably check out a little bit but I’ll let you get to it.
Josh: Yeah so, trusts. What is that?
Scott: I think what you’re referring to there is estate planning and that’s when you’re talking about having a living trust but probably in combination with a pour-over will to manage your asset? That’s exactly what I recommend to anybody that comes to me that has a lot of real estate property because what you don’t want to happen is things get caught in probate so it’s a lot to have things in trust but here are the types of trusts that I’m talking about that we’re using. There’s two different types – there’s either revocable or irrevocable trusts. It gets somewhat complex regarding what way you want to hold the property.
If you’re just using your trust for anonymity alone, you’re fine using just a revocable trust. And I say that you’re fine using it because a revocable trust actually provides no asset protection at all. So, it’s only being used to be able to obscure the names from people being able to search for them.
Irrevocable trusts on the other hand actually takes the property out of your ownership and places it inside of this fictitious instrument called a trust and a trust again, it’s just a piece of paper – there’s no filing that goes with it but a trust can have bank accounts, it can have tax numbers, it can basically – you can operate a business outside of a trust and if it’s an irrevocable trust, that means that if anybody sues you personally, they’re not able to get at the trust assets.
Josh: Nor are you, though, correct? I mean, aren’t you typically using an outside trustee, somebody that you trust to kind of manage said trust? It’s hard to answer that question with that word six times but isn’t that what we need to do?
Scott: Yeah, it gets to be complicated about exactly the way to do it but a trust will only fail if the trustee is the same as the beneficiary. So, there’s a couple of ways that you can get around that and it depends upon your state’s laws regarding the issue but if you have a beneficiary that is an LLC, for example, you can own the property inside of a trust and since the beneficiary is an LLC, then you could actually be the trustee.
Or, in the example, as I can appoint Brandon Turner to be the trustee, Brandon Turner can go ahead and refer control of the trust’s corpus – whatever is inside a trust – to my operating company. Scott Smith’s operating company is actually going to do it. So, there’s ways around the legal technicalities of how it gets established and that’s why it’s a good idea to have an attorney look over that to make sure that you’re going to have that structured correctly.
Josh: Got it, or not really, but –
Brandon: I’m getting a good foundation, at least. I have a couple of questions that are related to that. First of all, LLC – I’m going to throw out both questions now even though they’re completely different – LLC versus trusts. That’s the question – what should a person do and why? And then the second question is how much does this cost? I know it’s a very weird question but like if I need a lawyer to help me set this up, am I looking at $1000 or $10,000 or $50,000?
Scott: All right. So, I’ll take them in reverse order. In reverse order, you’re thinking in terms of like thousands but not tens of thousands, unless you have a really big organization, like a really, really big organization that you’re doing. By really big, I mean like 50+ properties and upwards in that range. But to answer the first question, is that I’m going to have to give you almost like a non-answer in the sense that it really depends on what state you’re living in but I’ll tell you that just to be able to say here’s a blanket thing that if you want to say here’s a jumping off point for most people, is you can start off with looking at a series LLC if you have the ability to be able to do a series LLC, go ahead and do it. If you don’t then start looking at multiple LLCs with holding properties and trusts underneath the LLCs. If you’re acquiring property, another way to be able to do it is to have the trust instrument itself actually acquire the property because remember the trust is just a piece of paper, right? We can create that in 15 minutes on your computer to be able to print out and the trust can be the one negotiating all the contracts and holds, all the liability for what can result from that. Go ahead, Josh.
Josh: All right, so as I raise my hand – me, me, me. Okay, so I think that one of the questions that I recall hearing a fair amount on the site has to do with being able to purchase a property with a company or a trust, LLC that has no credit, no business. Let’s take an example. I want to go and buy rental property at 123 Main Street, right? I have Josh’s credit and I have established my credit and I want to purchase this property, so I go – do I need to write the offer in the name of my trust or can I write the offer in my name? That’s the first question. The second is, if I write it in my name, can I close in the name of the trust or LLC or whatever it is? And third, if I close in my name and I move it over to a trust, is it now protected or was it not protected because the public exposure of me having previously purchased it in my name makes me open to the world? I guess there’s my questions.
Scott: Starting from the beginning of that, the trust can purchase the property but taking a step back even from that point is that Josh, you shouldn’t be doing anything in your name. Like, that’s how you get exposure. Everything you should be doing should be in the name of another entity. As is, Josh is the trustee of this trust. And yes –
Josh: Even the offer.
Scott: Even the offer. Anything you do can be in the name or in the name of an LLC even, as in you’re a representative of the LLC. There’s an LLC manager that has probably more protection than a trustee because a trustee can still be sued by mismanagement for the trust. But let’s just go ahead and take it so far as the assets if you were the manager of an LLC conducting the business or in the instance of a trust, the trust can enter into the contract and can negotiate the contract then when you actually have the contracts at the final stages of what you want to do, you just make it where the contract is assignable. So when it’s assignable at the time that you end up signing for it, it’s immediately assigned over into your holding company of whatever holding asset that you have for it.
Josh: Gotcha. And how does a loan work for that? Are you signing a loan docks through the trust or will the lenders even lend money to a trust or do I have to do that in my personal name?
Scott: If lenders would be willing to lend me money based upon a document that I drafted up on my computer, it would be the most amazing thing that I could ever imagine and I would probably get in a lot of trouble for that.
Josh: Yeah, I’d say you’d be in jail, wouldn’t you?
Scott: Probably in jail pretty quick. Remember that we have to separate out what is – a loan really has nothing to do with the property. The only thing that a loan has to do with the property is that the property is security for the loan. So the loan is actually going and it being established by Josh’s credit, okay? But the bank is going to say, okay, regardless of if there’s ever a default on this note, we’re going to make sure that we can foreclose on that piece of property.
Josh: But in my experience, I’ve always seen like if I went to a bank and said, hey, I’m buying this property, it’s in an LLC. They would say, well, you need to talk to our commercial department and put down 30% and blah blah blah. They don’t like lending on properties in LLCs from what I’ve seen. Have you seen that in your experience as well? What are your thoughts on that? I think it’s really particular to what banks you’re working with and what not and how well you can educate the people that are the underwriters for the bank about what type of legal structure you’re doing. The reality of the situation is that it can take some hand-holding with them and your attorney to be able to negotiate with them about what you’re doing is really about asset protection purposes, that you’re not really trying to hold onto property that’s really in your name.
The flipside to what I see is that people will have property in their own name and they don’t want to transfer into an LLC because they’re really afraid of what’s really called a “due on sale”. That’s right. Me and my network of attorneys that I collaborate with on asset protection work, we’ve never seen a “due on sale” clause get enforced inside of recent history unless the note wasn’t performing.
So as long as they’re performing, the bank’s just going to say, hey listen, it’s still a good investment. The asset class is still strong. The whole secondary market for them is still looking good and they’re not losing money, so why would they rock the boat? So, as far as practical terms go –
Josh: By the way, there’s a monster – your topic, what you’re talking about, “due on sale” clause has led to some epic, epic debates on this site and it’s interesting to hear an attorney say what you just said. And you’re not saying, go ahead and violate some agreement. You’re just saying you’ve never seen it happen.
Scott: I’ve never seen it happen and I’m not advising anybody to break their contracts or do anything like that but when you sit down with your attorney, think about the practicalities of the situation as much as you’re thinking about what is the actual black letter law?
Josh: Gotcha. Go ahead.
Brandon: That brings up a good point, too. Even if you are violating a “due on sale” clause, and we can do a whole show on just that, but in all my research and what I’ve done, it’s not breaking the law anyway. It’s not necessarily a legal thing. It’s a contractual thing, which I guess then you could say down the line that there’s legal implications, but there’s no law that says you can’t break a “due on sale” clause. It’s a clause. It’s just an agreement.
Again, I’m not giving advice as to what people should do, but I had them in my personal name and then I transferred my property into an LLC. That probably technically violated a “due on sale” clause, yet I did it anyway with the assumption that I’ve never heard of somebody getting called their note due, and that’s a risk that I’m okay taking. If one of the banks decided to be a jerk and pull it on me, that’s why I only buy incredible deals. So worst case scenario, I buy incredible real estate deals to give me exit strategies in case the one in a million shot happen where they’re going to get mad at me for transferring into an LLC.
Scott: Brandon, I think your approach actually is the proper approach that an investor should be taking. The investor should be thinking about, how can I make the most amount of money possible and then hiring out other people that are experts to handle their insurance and to handle the way that they’re doing to hold and manage the technical legal aspects of what they’re doing. Because if you’re good at making money, why in the world are you racking your brain trying to figure out all the other minutia details that go on in these kinds of things?
Brandon: That brings up something I hear all the time – I want to know your thoughts on this. People use the LLC question as a – I don’t know what you would call it – the psychological blockage from them actually getting into an investment –
Josh: Oh, they won’t even start, yeah.
Brandon: So people are like, yeah I’ve been wanting to invest in real estate for years but I don’t know what to do about an LLC. Like, that’s always where they stop.
Scott: But remember, those are the people, Brandon, who weren’t going to start in the first place.
Brandon: I agree.
Scott: A lot of them don’t have the money to put down. A lot of them are trying to start on the cheap and –
Josh: You need money to invest in real estate?
Josh: You need money?
Josh: My name is Josh Durkin and I got a course for you for $997. You can buy that course but you need no money to get – what? You can do it but it’s not easy. Low money is more reliable, but you know, whatever. Okay, moving on.
Brandon: All right, good. Did I cut you off?
Josh: He was going to answer.
Scott: One last piece here, before we get going. A lot of times, you won’t end up wrapping up what’s going on with the “due on sale” clause. It’s very important but there’s also an issue that happens with insurance – whether it’s personal insurance or commercial insurance, and there’s different pricing that can happen with that. However, if what you do is, you establish a trust that’s called a Joshua Dorkin Trust and you move your property into that trust, now all of a sudden, the insurance company as well as the title company and the bank all think you’ve only done something for asset protection, that you actually haven’t made a sale.
So, it’s a way that you can have some, and you can have some of the asset protection elements without actually triggering some of those contractual issues as well as the insurance issues depending upon how they get structured. It gets very technical. Exactly.
Josh: We’re not going to ask.
Brandon: No, but I’ve heard that – again, it’s more technical than I’m sure we can get into, but that trusts – somebody mentioned in something I read one time in a book that trusts do not violate the “due on sale” clause typically because they’re protected by U.S. law that says that a bank can’t foreclose on somebody who transfers into a trust.
Scott: Right. And I believe just shooting from the hip over here, I think that applies to one to four unit properties.
Brandon: Gotcha. By the way, if you’re trying to establish an entity for the purpose of hiding from potential folks who might want to sue you, I’m assuming naming it the Josh Dorkin Trust is a bad idea.
Scott: Well, you wouldn’t get the anonymity with that, right?
Brandon: I’m just checking because you know – I don’t want these people who want to litigate against me to find it so I’m going to name mine the Brandon Turner Trust, the Heather Turner – you know, you probably want to be a little more anonymous.
Scott: You want to be a little more anonymous but the great thing is once you have the property in say a land trust, what ends up happening is that if you own like an apartment building and you wanted to sell out particular shares of that apartment building, that will end up happening because you want to diversify your portfolio a little bit more – those are other ways that really make sense to be able to hold the property inside of a trust and still be able to have some of the management that would go on with that.
Josh: Boy, that’s like a whole topic, man. That’s a show in itself right there.
Scott: Yeah, it’s definitely a whole other hour on what you can do with some type of creative trust instrument for investors.
Josh: Yeah, nice. All right, talk about family office, I think that was the last thing on your list of things. What is a family office? I’ve got an office in my basement.
Scott: Actually, yeah. I don’t know if your family office is doing the same thing that my family office does, but my family office is a service that you can use for attorneys to be able to review all your paperwork for you. So even if you have all your LLCs and Brandon has his six LLCs that he has, I would bet dollars to donuts that unless he has an attorney reviewing all that paperwork that I could find a defect in there somewhere.
Scott: It’s something that he hasn’t – some ‘i’ that he hasn’t dotted or a ‘t’ that has hasn’t crossed and what he’s doing. One of the things I always tell people is it’s part of your attorney insurance. It’s part of your asset protection plan that you should be looking at saying, what does it cost for me to make sure that I’m solid whenever a lawsuit arises because once you even get threatened to get sued, it’s already too late because you can get frozen inside being able to transfer assets around by what’s known as a Fraudulent Transfers Act that can look back up to two years from the time that the lawsuit gets filed or even threatened to get filed to be able to claw back where the court will actually annul the sale and pull the property back from whoever you sold it to.
So, the family office ends up coming to say listen, set up all your LLCs, get all your structures right but don’t just stop there because if you spend all your money to be able to supe up your car, it doesn’t really make sense unless you have enough money to be able to keep putting gas in it to be able to keep using it. All your structured business entities can almost become worthless unless you’re paying the money to have somebody that knows what they’re doing to be able to review it properly.
Josh: Okay, so family office literally just means a law firm to review stuff at some periodic basis? Is that what it is?
Scott: Right, exactly. It’s called a family office because it’s the type of law firm that usually only the really wealthy people can afford, the people that have 5, 10 million plus in assets would be able to spend the money to protect their assets with the law firm. But I don’t think that that’s necessary. My research and my work, I think, shows that there’s a way that the average investor who only maybe has a few properties can be able to afford these same types of protections that usually used to be only exclusive to the really wealthy.
Josh: Who are now really pissed off at BiggerPockets because we just cut the rug out from under all that money that they’ve been spending to get all that information, so, awesome.
Scott: Absolutely, yeah.
Josh: Nice, nice. Okay, cool. So I think there’s one more thing Brandon shot me a note here that we forgot to cover which was two-member LLCs.
Scott: Yeah. So, the two-member LLCs – what can happen is that, particularly in the state of Texas, if you have an LLC that you established and that you’re actually the sole member of, that can look like you actually tried to create a business entity but it’s really just you. There’s nobody else there. So, the way that we get around that issue from the court looking at that and saying, ah, it’s really just Brandon. It’s not really Brandon Turner, LLC that’s really conducting this thing, is to go ahead and fill in another member. You can throw in a member and say, you know, Josh has been really great to me this year – I’m going to give him 1% of my company but I’m not going to allow him access to any distributions. He can’t vote. He can’t sell his interest. So, it’s a really crappy gift.
Josh: Cheap bastard.
Scott: It works out well for him for being able to make sure that the court is going to look at that LLC appropriately.
Josh: Now one thing it does do, though, and correct me if I’m wrong – if you have a single-member LLC, it’s just you, taxes are passed through, which means you don’t have to file business tax returns. You add a second member, now you’ve got to file business tax return, so taxes become more expensive. Do you know if that sounds right?
Scott: Yeah, that does sound right and that can be the case but the question really becomes, it’s one of those things you have to balance between – what are your awesome taxes and what can you lose if you get a lawsuit against you? Remember, these lawsuits come up not because you really did anything wrong. I mean, I’ve seen really great people that didn’t do anything that I thought was wrong get huge judgments against them and we’re talking about an average house here in Austin can cost $400,000-$500,000. As an investor, you’re talking about $100,000 in equity right off the bat. That’s enough for me or any other litigator that works on the field to have a good enough reason to file a lawsuit because there’s enough money there to be able to get at and depending on how many other properties are there.
Josh: You’re a shark, man. Look at you trying to pick people apart.
Scott: I’m the opposite of that. I’m trying to make sure that these guys don’t have any leg to stand on when they come looking at the BiggerPockets investors.
Josh: Okay, so just to add onto that. The reason that I brought that up and the reason that I know about the single-member versus multi-member tax issue is because an issue I had two years ago, and I probably mentioned this on an earlier show but back five years ago or something like that I formed an LLC with some partners of mine. We were going to buy a property together. So we formed it, we get all excited because that’s what you do when you went on LegalZoom or whatever and formed it. And then we just didn’t do anything with it. We just ignored it basically, and I never transferred a property into it. I just kind of forgot about it. I didn’t even touch it.
Anyway, a few years later we get a bill from the IRS for $10,000 for back payments on that because even if you don’t have any business income or if you don’t even touch your LLC, you still have to file a business tax return if there’s two members in it that’s not your spouse. So, we had a $10,000 bill from the IRS for back penalties. Anyways, I got a waive. I used Amanda Hahn and she worked me through the process of getting me fixed up but that was a stressful time.
Anyways, I guess my point is, if you’re going to do the LLC thing and the asset protection thing which you definitely should, don’t forget about the tax side of it either. Consult with a CPA on what it means about all this stuff. So, that’s my quick tip.
Scott: So I was going to say, that kind of leads into like a point that I wasn’t planning on discussing but you get a lot in BiggerPockets when people are starting off to say, who do I need as part of my team? There’s three people that you need – you need somebody that does your insurance, you need a CPA that’s going to be able to tell you what tax implications are going to look like and you need an attorney to be able to make sure your documents are going to be the way that they need to go because the average investor will go onto LegalZoom and do exactly what you did and I think it sounds like you were fortunate enough to know somebody that could help you get out of that situation. But in the reality for most people, if they don’t have that kind of network of people that owe them favors, they’re talking about paying thousands of dollars to attorneys at least $3000-$5000 to attorneys to be able to get out of something like that with the IRS. And the IRS is not forgiving on a lot of these issues.
I had a quick five takeaway items that I want to be able to tell everybody.
Josh: Awesome. Love it.
Scott: So, takeaway item #1 is that if you’re not insured, get insured. Protect your property if there’s going to be a flood or fire, whatever’s going on. There’s too much money that you have invested to try to skimp on having insurance.
Action #2 is to say for most investors, go ahead and set up at least three LLCs or start using a series LLC structure. You should be having one company that’s going to hold your flips, one company that’s going to be holding your buying holds, and one operating company that you’re going to be used to enter into contracts, to purchase property, collect rent, etc. Your operating company is the one that’s actually performing all the business. The holding companies don’t do anything besides just holding the assets and we separate those out for IRS tax reasons.
Josh: That’s interesting.
Brandon: Real quick while you’re on there. Again, I’m picking your brain because you’re here. So, we did that. We have an operating LLC. One of ours is just for operating. I assume now – I mean my plan was to separate everything in separate bank accounts for every LLC separate – you know, like when the rent comes in I have to go to that bank to drop off the rent there. Is that not the case? Can I actually still use that one LLC for everything and just distribute?
Scott: If you have any contracts that are coming into the operating company, the way you can also end up doing is setting up different DBAs or assumed names for that one operating company that’s not an LLC. So you’re going to have checks coming in all underneath different names but for who’s actually holding revenue from a property, you don’t want any type of privity established between an asset holding company and somebody that is paying money to you. So you want one face to your company and you don’t actually want anybody to know who your other asset holding LLCs are at all. That should not be having anything inside the public sphere because that’s the last thing that you want somebody to be able to find out that they could try to collect against.
Josh: Okay. Anyway, that was good.
Brandon: That was two, right?
Scott: Yeah, that was #2. So #3 is that you should never have any assets in your name unless they’re statutorily protected like Texas has homestead protections which makes Texas one of the best states to be able to do asset protection in and in fact you can have a company in Texas, an LLC in Texas that can own property anywhere in the United States and Texas actually has a multiple hundred year tradition of this. In fact, it’s an old saying that so-and-so went off to Texas because our debtor laws and our consumer protection laws are some of the strongest in the United States.
Josh: Do you have to have physical residence in Texas in order to open a Texas company?
Scott: To open up a Texas LLC, you don’t have to be resident of Texas. You’ll have to have a Texas address and stuff like that but us attorneys have already figured out all the ways and all the checklists of things that you need to be able to have there to be in compliance. But remember that we don’t have any assets in our name because when we have assets in our name, it increases our exposure and wealthy people don’t have assets. They only control properties so they can get the benefit of the properties.
Scott: So we get to #4 is the family office. If anything is not being properly maintained inside of your corporate paperwork, it makes your asset protection plan vulnerable to having an aggressive litigator come at it and be able to dissolve your corporate structure. So, we should be thinking about the money that we’re paying out to be able to maintain our structure. It’s kind of like maintenance on a house. You never think that you could build a house once and that it’d be good for forever. There’s always additional updates that we need to do and we all know every year Congress tries to act even though they’ve had a hard time recently with that, but they want to pass laws that are always changing and that you would need to be able to keep up with.
Brandon: What, we have to work together to pass laws, what?
Josh: Right? Like why can’t we all just be friends?
Scott: So, on #5 is a takeaway when we talk about looking at costs. The cost of a good asset protection plan is approximately, in my experience, it’s about half the cost of the attorney fees alone in a single lawsuit. So, apart from saying that you had a judgment against you or anything like that, we’re talking about even if you were to go get sued and win, the cost of that is half the amount to be able to have an asset protection plan as it would be the cost of having a lawsuit. So, you can look at it as having a 50% savings right off the bat if I go ahead and be proactive about this. And remember that real estate is the hottest litigated industry. It really shouldn’t be an issue of when you’re going to get sued. It shouldn’t be an issue of if you’re going to get sued, it’s just a matter of when. And being a nice and honest person doesn’t protect you from lawsuits. It’s not a legal defense.
Josh: Hey, Scott. How do I go about finding a guy like you? I mean, obviously, we know you’re open and available, yadda yadda. You guys hit up Scott, he’s the man, yeah yeah yeah. But hey, I’m in Maine and I want a guy who’s in my area – how do I find a good attorney who knows his stuff like you cold in this stuff, the asset protection.
Scott: That’s kind of the same question of asking, do you have a good doctor, right? Have you ever asked somebody if they know a good doctor? They always say, oh no, my doctor is the best. Because nobody wants to believe they have a crappy doctor. It’s the same thing that happens with attorneys, right? If you ask your buddy, do you have a good attorney? Well, hell yeah, I have the best attorney, is what would end up happening here.
It’s also the same type of thing as saying like how do you know a certain doctor is good? Well, we don’t really, as I’m not a doctor, I don’t know the criteria of what makes a good doctor and really know how to judge the quality of work they do. So, I would say that if you’re looking for somebody that’s in your area, which isn’t necessary – you don’t have to have somebody in your area. If you can find somebody that you like that’s not in your area, you can still use them potentially. They can’t practice law in your state but there’s other ways around that. But I would go take out your smartest attorney friends for a really nice dinner and have them do some work for you to vet some people on your behalf. And perhaps you can skate out of there for the price of a nice steak and a great bottle of wine.
Josh: There you go.
Brandon: All good advice. I have one more question before we head out.
Josh: Of course you do. Me, me, me, me.
Brandon: No, this is not me. So, I’m a brand new investor. I’ve never started investing in real estate yet. Does any of this matter to me? Why should I care? I don’t even have a single property yet other than my own house. Why should I care?
Scott: So, if you own nothing, then you own nothing and you have no money and you’re trying to get started then you don’t really have any assets to protect. But say, if you’re really anybody else that owns any property at all, whether it’s a car, a home, or anything. That means you have exposure whenever you’re entering into any type of business arrangement. And that’s really just what real estate boils down to. Now, you’re operating your own company and you have exposures that anybody that starts a company would have. No good company starts without having some type of structure in place.
Brandon: Makes sense.
Josh: I love it. Fantastic. Well, I don’t know about the rest of you guys but I’m probably going to have to rewind this and listen a couple of times myself and so hopefully you guys enjoyed this. We haven’t done a ton of shows like this and I do think they’re extremely valuable and before we head out of here, I think we need to hitch around.
First of all, you’re doing real estate yourself, right? You’re focusing on commercial. Is that right?
Scott: Yeah, I do some work with commercial real estate, residential real estate, and doing some nodes. My focus really has been on developing these type of cutting edge strategies that end up happening with asset protection unless on the investment side, apart from structuring a lot of the bigger development deals that comes around across my plate.
Josh: Gotcha. All right. Why don’t we get to this Famous Four?
Brandon: All right, these are the questions that we ask everyone and we’re skipping the fire around today because I don’t want to drill you with a whole bunch more questions because I already asked you like a bunch of specific legal questions, so we’re just going to go right to the Famous Four.
Josh: So you get to ask your questions but people here don’t get to ask theirs.
Josh: Wow, look at you. All greedy and stuff, man.
Brandon: Well, my thinking was, one – every question is going to be like, it depends. A lot of that because we don’t know anything about these people and what they’re talking about, they’re all short questions. So anyway, that’s why.
All right, moving on. Famous Four. Giving me a hard time, thanks.
What is your favorite real estate book?
Scott: My favorite real estate book – it’d probably have to be the one I started with, was Rich Dad, Poor Dad and I know that’s really cliché but it was actually in part and parcel that he actually made this game called the ‘Rat Race’ that ended up coming about where it was actually a board game that would teach you about the way –
Brandon: That was an expensive board game, too, wasn’t it?
Scott: He’s very proud of that board game [from Isaki][1:07:15] for a piece of cardboard cutouts because in that sense that board game shows a lot about saying that when you’re younger and you can start taking a lot more risks with capital gain issues to build up that stack of money so you might be able to retire early and live the dream life, and kind of coaching about saying does it really make sense that you would only look at minimal cash flow properties if it takes you eight years to develop the capital to buy one property? Kind of just retouring the way that you approach what your strategy is depending on where you are in life.
Josh: Right on.
Brandon: What about business books? What’s your favorite business book?
Scott: One of my favorite business books of all time that I always go back to reading is The Four Hour Work Week by Tim Ferris, which I’m sure is also a book that a lot of people reference in here. The reason I like it is because I think it distills down a lot of principles that I’ve read in other books so recently I’ve been applying the principle of the one thing. In my personal life, in my health and in my business, I’ve noticed that it’s really made so much of an impact where I’ve just been able to have that single focus, that Steve Jobs-esque kind of obsession of making sure that your one thing that day is prepared for, done correctly, and by doing that one thing everything else in your life either becomes easier or unnecessary.
Brandon: Love it.
Josh: Brandon doesn’t shut up about that one either.
Brandon: It’s like sitting within arm’s reach of me. That’s how much I like this book.
Josh: There you go. There you go. All right, hobbies. What do you do for fun, man?
Scott: Yeah, so I live here in Austin. So, I rock climb, I run around the lake, I do some boating that’s around here, I actually have been doing a lot of boxing recently which has been a lot of fun.
Josh: No kidding.
Scott: Yeah, we suit up with the head gear and stuff so my brain still stays intact.
Josh: I didn’t take you’re a boxer, okay. You know, Brandon, whenever somebody –
Scott: I’m too pretty, is that what you’re saying, Josh?
Josh: You would never hit a guy with glasses, so –
Brandon: Yeah, me and Scott are going to fight at the next BiggerPockets conference.
Josh: Yeah, we’re going to meet up. Brandon’s going to punch you.
Brandon: We’re going to fight. It’s going to be good.
Josh: All right, my last question for you – what do you believe sets apart successful real estate investors from those who give up, fail, or never get started?
Scott: I think what really happens here and what this question really delves down to is much more of a personal question. I think what actually separates out the successful people from the unsuccessful people is the ones that really know how to develop systems with themselves so they can be successful with. So, for me, for example – I try to work a traditional eight, nine hour block out of the day and segment all of that at one time and I realize that I was just wasting a lot of my time during the day on Facebook or whatever, just something to distract myself. So, I said okay, well, that doesn’t work for me. What works for me is to say, do I know myself well enough to say every three hours, I need to go do some form of exercise? I think when you’re talking about what makes a successful person and what makes a successful real estate investor is to know yourself well enough to know what type of business you can run and be successful at. And don’t try to be Brandon Turner, don’t try to be Joshua Dorkin, try to be you and running your type of business.
Brandon: That’s great advice.
Josh: You know, it’s funny. I know me, I’m an addictive personality and pretty much everything that I do, I go balls to the wall, so to speak, and I like playing video games and I used to have all these video games on my cell phone. What I discovered was, and it took a long time to figure this out – I discovered, I’m in the bathroom on this game, I’m in bed on this game, I’m at work in between working on this game, I’m constantly doing it. I’m like, what am I doing? If I take this game off my phone, I’m going to save hours and hours and hours a week. I’m going to be more productive. I’m going to be more successful. You know what, I love the game but at the end of the day, oh my God, this is such a distraction. And I think that’s kind of what you’re talking about. Find what in you helps you get to where you need to be. Get rid of the things that distract you and kind of cause issue and just go forward.
Scott: Yeah, absolutely. I don’t think anybody can be a machine, right? If I offered you $20 million to work 24 hours a day for the next six months, it doesn’t matter. You couldn’t do that. No matter what I was offering you as a cur ad to be able to change your behavior, you really have to dial it back to say – all right, so my video game is a waste of time, it’s distracting me. What is it that I can replace that edge? What’s really going on with me that I’m using this video game to kind of use as a crutch? The same way some people use smoking or eating snacks or chewing gum or something like that.
Josh: I don’t have a problem, man.
Brandon: The first step in the process, Josh.
Josh: All right, man. Scott, it’s been a pleasure, man. Really, you’re fascinating. I thought most lawyers were jerks. You’re not that jerky but you know. I’m just kidding. Absolute pleasure. Where can people find out about you? I know you’ve got a website. How do we get in touch?
Scott: I offer myself up to anybody here personally. Just go ahead and give me a call. My number is 512-757-3994.
Josh: Ring. The phone just started blowing up, by the way.
Scott: Way to blow up here. I have all kinds – you’ll likely get my voicemail but I always return calls the same day or if not the latest, it’s going to be the next day and we can set up a time to talk and we can be able to look at exactly what kind of things , if anything, you’re going to need. Or you can always shoot me an e-mail at [email protected] . And you can find me on BiggerPockets. I usually try to post a lot into the forums and what not and it always has my contact information underneath every that I post as a pro member, so everybody should sign up for a pro account to have access to that.
Josh: Nice, well done.
Scott: A promo works both ways, doesn’t it?
Josh: You do realize your 24-hour response rate is going to change after today. It may take him two or three, guys. It may take him two or three. There’s going to be lots of calls.
Well, Scott, thank you so so much, man. Again, we really appreciate it and it’s been a pleasure.
Scott: Well, I look forward to it, guys, if there’s anything I can help out with in the future with anybody out here or to come back and talk more about these topics, I’m always available and happy to do the research on the back end to be able to help out, whatever we can do for the BP members.
Brandon: Love it. Good stuff. Thanks, Scott.
Josh: Thanks, Scott.
All right, that was Scott Smith. The man, the myth. The guy who’s going to save your “ass”-ets. Scott Smith. Thanks again, we really do appreciate it. Otherwise, guys, thanks for listening. Hopefully you guys are loving the content that we’re bringing you. Hopefully, you’re getting a lot of value out of it and if, you know – is your brain still hurting?
Brandon: Yeah, a little bit.
Josh: Yeah? Nice, nice. But thanks guys, for being our listeners. If you’re not a part of our world, our community, jump in – join BiggerPockets.com today. It’s the greatest thing since sliced bread. Actually, the greatest thing since a slice of pizza. It is good. It is yummy. It is delicious – I don’t know.
Brandon: It is good.
Josh: Join up. Join up.
Brandon: I’m getting some pizza right now. See ya.
Josh: Do it. All right, guys. It’s been a pleasure. Check us out on BiggerPockets.com . Check us out on Facebook. Jump in, get involved, and make moves and we want to thank you and wish you a good week until the next show. We’ll see you at 110. I’m Josh Dorkin, signing off.
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