Rookie Podcast 105: Don’t Lose Your Portfolio to Lawsuits! Here’s How to Protect Yourself

Rookie Podcast 105: Don’t Lose Your Portfolio to Lawsuits! Here’s How to Protect Yourself

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As a rookie, you’re in the best position possible to start protecting your growing empire of rental properties, but what’s the best way to legally shield yourself from liability and litigation?

We talk to awarded asset protection attorney, Brian T Bradley, Esq, who answers questions ranging from when to buy umbrella insurance, how to set up LLCs, and whether or not S-Corps are worth forming. If you’ve ever worried about protecting your personal assets from business-related liability, this is THE episode to watch!

The most important point discussed throughout this episode is how you need to start planning for protection early. All too often, investors start building their rental property portfolios without the correct legal setup behind them, only to have one bad lawsuit wipe out decades worth of work. Even Ashley and Tony had some questions on whether or not they needed to shift their portfolio structures!

We’ll also have Brian back this Saturday to answer Q&As from listeners, so stick around for that show to minimize your risk when getting into this profitable industry of real estate investing!

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Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate Rookie, episode 105.

Brian:
For you rookies, if you’re buying one property or two, bare minimum, start with an LLC and insurance, create one layer of separation between you and the other personal assets for when something does happen, because owning real estate is the most heavily litigated area.

Ashley:
My name is Ashley Kehr, and I am here coming live from Virginia Beach, and I’m here with Tony Robinson and it looks like Tony is just at home. Okay.

Tony:
I’m just, I’m nowhere excited. But I think we got a call out for everyone that’s watching this on YouTube that Ashley’s got probably the best t-shirt on that I’ve ever seen her wear in my life. It’s a Boyz N The Hood t-shirt with a young… Yeah, I love that shirt. Ashley’s got, I swear you were like a hip hop, I don’t know, like kind of sewer back in the day or something. Ashley, like you got all the good songs, you got the good t-shirts, you got some Jordans on maybe right now that I can’t see.

Ashley:
Come on Tony, back in the day, you mean currently. Wait until you see my… So we’re recording this, it’s almost July, but you’re going to love my 4th of July t-shirt that I have too. So keep an eye on my Instagram because you’ll love it even more. But today was super awesome episode, we brought on a professional for you guys to break it down for a rookie investor what you need to do now and what you need to plan for in the future to be protected. So we brought on an attorney who specializes in asset protection. This was awesome, awesome episode, Tony.

Tony:
Yeah. I mean, I learned so much. As we were going through the episode, I’m like feverishly scribbling notes on how not to get sued, on how not to lose my portfolio. So I think what he really breaks down in a clear and concise way that a lot of the rookies can follow is kind of the three layers of protection that he talks about that you need as your wealth and as your portfolio continues to grow. So make sure you’ve listened for that. But I think the important thing is that he also breaks down really clearly what you should do as a rookie investor, right? We talked about a lot of advanced concepts, but not all of that is stuff you need to do on day one. And he gives some really clear advice on what you should be doing as you’re starting out.

Ashley:
So what we did was we did a full interview with Brian and then we actually are going to bring him back on next Saturday’s episode or this coming Saturday. And we did a Q&A where we had a bunch of rookie investors submit questions, and we read them to him, a great episode. So makes you guys listen to both parts of the series here. But before we get into the episode, I want to make sure you guys know that we are doing the BiggerPockets Conference this year. If you guys haven’t already bought your ticket, they went on sale and you can purchase them on biggerpockets.com and makes you join Tony and I there. Tony, will people be able to see us there? Do you want to tell everybody?

Tony:
They will. So some very special news, Ashley and I will be emceeing this entire conference. You’ll get a lot of face time with Ashley and I. We will have choreographed dance and matching fashion outfits the entire weekend. So yeah, it’s super excited to share that weekend with you guys. So the show is couple of days with you guys.

Ashley:
Yeah, we really need to coordinate with BiggerPockets, but our budget is on hiring a choreographer and for our outfit changes. So if you guys want to see mine and Tony’s special performances throughout the whole BiggerPockets Conference, I mean, you should guys buy your ticket. And we’ll see you guys there. Okay. Let’s get into the show. Brian, welcome to the show. Thank you so much for joining us today. Can you give us a little background about yourself and why you are here today?

Brian:
Yeah, absolutely. And thanks Tony and Ashley for having me on. And this is going to be an important topic. I mean like I’m not anyone’s legal guru, we’re going to be talking about generalities. And we’re really are living in a fascinating time right now. We’re seeing laws and policies drastically change every day. And you’re like, I’m going to try to make a talk about protecting your assets and law and the legality of it, pretty fun. And we’re seeing people getting sued and being sued that normally wouldn’t be getting sued. So protecting your assets and your wealth, especially if you’re investing in real estate and getting into landlording is more important now than ever. And so I hope that the concepts that we talk about help you and your listeners understand this area better. And I’m definitely going to question and blow up the status quo a lot and clean up a lot of the misconceptions that we’ve been hearing.

Brian:
And a little bit about me, I am an asset protection attorney. That’s all that I do is asset protection, and I’ll define that later on. But I was selected to America’s best attorney 2020 Super Lawyers’ Rising Stars list, 2021 and 2015 Lawyers of Distinction three years in a row. I was nominated to the Top 100 High Stakes Litigators list and top 100 in real estate list. I just really love what I do, I’m passionate about what I do. I’m a big legal geek, investor geek, and I like helping and sharing knowledge with people. So that’s why I’m here.

Ashley:
Oh, Brian, we are so happy to have you. Thank you for joining us and congratulations on your achievements. That is really great. Could you, before we actually get into the asset management, could you tell us a little bit about your own investing and into real estate and what that looks like?

Brian:
Yeah. I like investing. Right now, I’m actually investing a lot in crypto right now. And I’m also like real estate, but I don’t like investing personally as being a landlord. I like more notes because it’s the most passive way of investing for someone who’s really busy. I don’t really have the time or interest to be landlording or doing that. So I like investing in underperforming notes more in like a JV position, which is even more passive, as well as syndications. And then I really like investing in the stock market.

Ashley:
Brian, can you just explain real quickly what note investing is for some of our rookies that probably don’t know what that is?

Brian:
Yeah, absolutely. So a note is essentially just think of it like a mortgage. It’s a piece of paper. So you’re investing in paper, you’re going to own, you’re going to go and buy a house, you’re going to have a mortgage. Banks have to have velocity of money. So money has to be moving. And so they are going to give you your mortgage and then generally it’s going to be sold. And so where it’s going to be sold as to other institutions are going to buy those notes, I can go up to my bank and buy what’s called like a tape or a strip. And they’ll generally be like a 100 of them or a note investor or someone who invests in like the portfolio would purchase them. And I can go to that holder and say, “Hey, are you looking for a JV position? How much are you looking for?” Give them 50 grand into a lower position in a junior position. And then we own your mortgage.

Brian:
And then we have a lot more freedom if it’s underperforming, meaning you’re not making your mortgage payments, then a bank would be able to do. And so what we’d be able to do is come over and knock on the door and be like, “Hey Tony, hey Ashley, what’s going on? Why aren’t you making your payments?” And then we can adjust what you can pay, which a bank can’t really do. Over the next six months, we’ll turn that note performing and then you can sell it. So if I bought an underperforming note at 60%, when I make a performing in six months, it’s now increased in value. Now I can sell it at 80, 85%.

Tony:
That’s a really interesting way of investing in real estate. I’ve heard of note investing, but I’ve never really had a conversation with anyone that’s done it. So I’m adding that to my list of things to look into.

Brian:
Yeah. And a great thing is also, the idea is not to foreclose on the property at the end of the day, but that is one of the exit strategies is that’s why you see you’re selective on where you buy to where if you do have to exit the position and foreclose on the property, then it’s, what am I going to do with the property? Sell it to a wholesaler, am I going to fix it up and rent it out? Am I going to flip it? Then you have different exit strategies for there. So you got to know what the market is on where you’re buying the notes at.

Tony:
Yeah. So we’ll have to have you back on, Brian, to give us a whole rundown on how to become professional note investors, because I’m sure a lot of people in the audience are intrigued, but I want to shift towards what we brought you on here today to talk about, which is asset protection. So I guess just give us a general definition of what it means when someone says asset protection.

Brian:
Yeah. That’s a great question. And I think the general definition is they’re just calling and saying, I own some stuff, I know I have some risks, I need some peace of mind is really what asset protection is. And asset protection is not traditional estate planning. It’s modern estate planning, and we’re really combating out of control medical costs in a very litigious society. And we’re creating legal barriers between your assets and your potential creditors before it’s needed. All this has to be done before you’re being sued. That’s it.

Brian:
It’s just like a barrier, like a safe for your gold or your guns or other valuables. Anything of value, you want to put behind a legal barrier and out of your personal name so that it’s not easily attached with a lien or reach during lawsuits, just like the rich. Like I love Tony Robbins. And Tony Robbins has the saying, success leaves clues, the rich don’t own things. They don’t own them in the personal name, their businesses on them, their estate plans do, they just get the beneficial use and enjoyment out of them while separating out liability. And so now our firm are collectively protecting over 5 billion worth of assets now.

Ashley:
Oh, that’s impressive. So what is the difference? Everyone, the biggest questions rookie ask is an LLC, like, if I get an LLC, I’m protected or if I get umbrella policy under, and I have the property in my name, I’m protected. What is your thought on an LLC? And is that enough protection for someone?

Brian:
That’s a great question. And I’m going to go to the second part of that first, where you’re like, an umbrella policy, because, and I’ll tie it in with an LLC to where, when you’re just starting out in your rookie, your very base level foundation is insurance plus an LLC. If you can afford those two things, I would say, tap the brakes on waiting to invest. Just like when I advise people starting businesses, if you don’t have enough money to not be a solo practitioner and you can’t afford an LLC or an S corp or something like that, you need to tap the brakes until you can afford that as a minimal cost and that needs to be put into your budget and your planning.

Brian:
Insurance is great, you need to just understand the limitations of insurance. They’re good for the little matters, but when you’re getting into larger lawsuits, like million dollar lawsuits, and I’ve had some of these like $40 million lawsuits where an apartment complex had a $40 million mold issue. The insurance companies don’t make money by paying those claims, or there’s an issue like we’re tracking right now with a client who is a California resident, he bought a New Jersey property, ended up renting it out to a gang member. Didn’t know was a gang member, there was a fight inside the house, guns were pulled, somebody shot, killed. Who’s being sued for wrongful death? The owner of the property, the doctor in California. So these are the things that you can’t plan for, but your insurance won’t cover you for, even if it’s an umbrella policy. And insurance just provides capital to fight legal claims. Eventually all that capital gets even up in court. That’s why it’s in everybody’s advantage to settle.

Brian:
And then the way insurance as a business works is their job is to create, it’s good for slip and falls. That’s why I’m like, you have to have insurance. As you grow, level up your insurance, people forget to level up their insurance. But they create legal room for through fraud and intentional acts, intentional wrongdoings. And for large lawsuits, that’s as simple as sending an email because a judge will look at a case and say, “Well, they wrote an email saying the plumbing was done. That’s an intent, you picked up your finger, you picked up your hand to type a message and click send. That’s an intent.” The insurance defense team, this all goes to legal department now will say, well, this was an intentional act, this case now has intentional potential wrongdoing. We don’t cover you for intentional wrongdoing. So we’re not going to cover you. And if you think we’re wrong, sue us while you’re being sued. We don’t care. Good luck. And so just understand the limitations of insurance. That’s where as the foundational level, you come into LLCs, that’s the base level, entry-level 101.

Brian:
And so when you think of asset protection, I want you to think about winter. And when it comes to asset protection, we have different layers. The first entry layer is your base layer, and it’s going to sit on your skin and that’s an LLC. And then as you grow and you get more assets, you’re going to want a mid-layer, which is usually a little thicker. And this is called a management company or limited partnership. Then when you hit around 1 million net worth, you want an outer shell waterproof layer. This keeps you nice and dry and warm when the weather gets really bad, this is an asset protection trust. By layering, what you’re now doing is making yourself more flexible and you can adjust and make yourself more comfortable.

Brian:
Now to break each of these layers down, I want to start with what you asked, the LLC. And there’s a lot of problems with LLC. As we all heard about, LLC is limited liability companies to hold your real estate in and your risky assets in. So anything that has a key or needs insurance on it or can go boom, you want to take out of your personal name and they go into an LLC. But I want to spend and talk dime on and talk about the unspoken problems. And this is going to be through like disregarded entities, charging orders and amenity.

Ashley:
Yeah. Can you break those down for us? Because when I set up my LLCs, I do it as a disregarded entity, so that it’s on my taxes like a sole proprietorship for tax purposes. So let’s go into that one first.

Brian:
Yeah. And that’s the first problem generally is that most clients have single-member LLCs. And like you, they’re all in your personal name. The problem here is that courts now are having a tendency to disregard single-member LLCs for liability issues, so like lawsuits and CPAs tend to set up LLCs as disregarded entities, like you said, for tax purposes is great for taxes, but really bad for lawsuits. What being disregarded means is that the IRS is not taxing your business separately from you, it passes through you personally. And because of this, they’re basically worthless for asset protection and liability issues because that liability just like your taxes pass through directly to you, so does a liability. But don’t get me wrong, I use LLCs, they’re the foundation level, I use them in every setup that I have with clients is just the base layer entry protection 101. What you actually want is for that single-member LLC that’s holding your real estate to then be owned, not by you, like the individual, the person, but by a second layer of protection, which is going to be called a multi-member limited partnership, not an LLC.

Brian:
And I can break down the limited partnership later, but by doing this, what you’re doing is properly layering your protection, your mid-layer, the limited partnership will be owning all those LLCs that you’re holding your real estate in. So as you grow and you’re getting more assets, you have like 15 properties, maybe eight to 15 LLCs, all those LLC tax filings and K-1s will simply passively flow directly through to the management company. So you just have one tax filing now instead of 15. What you’re doing is maintaining that legal protection, but we’re disregarding them for the tax purposes. And this then creates a really smooth and easy transition for fewer tax returns by adding that second layer, the limited partnership. And then the next thing is charging orders, like, where do we even set these things up in?

Tony:
Before we get to the charging orders, quick question, because this is a lot of information that’s good stuff. I want to make sure that our rookies are digesting all of this. So what you’re recommending is that at a very base level for someone that’s just getting started, having an LLC with some additional insurance coverage is like the bare minimum someone should have before they started investing. And as you start to scale up, then you add some complexities with this kind of middle management company in the end all be all is asset protection trust. But I guess I want to get some clarification. So you’re saying that if I’m a rookie investor, I should not purchase a property and have it in my own name, I should always put it in the name of an LLC.

Brian:
You should. Anytime you own something personally, you now have the personal liability all on you, which means, and also your personal residence can be taken from you to satisfy a claim, your car, any asset that you have. So you want to at least create, if you think about it, like you’re creating a castle, your own legacy. And when you build a castle, you want to start building moats around your castle and different areas and lines of defense. Your first line of defense, your first moat is going to be insurance and LLC.

Brian:
So when you buy that first property, and then also really depends on what your day job is like if you’re a doctor who has a high malpractice liability as well. So you’ve got to look at holistically your whole situation, not just the asset itself, but where’s the rest of your liability of your life come from. But for you rookies, if you’re buying one property or two, bare minimum, start with an LLC and insurance, create one layer of separation between you and your other personal assets for when something does happen, because owning real estate is the most heavily litigated area of law.

Tony:
So just to follow up on that. So is there a specific way that we should be setting up these LLCs as rookie investors to make sure that we do get that asset protection? Because you mentioned that sometimes the CPA might set it up to where you get the tax benefit, but not the legal protection. So what are the kind of red flags or things we should be paying attention to when setting up this LLC for asset protection purposes?

Brian:
Yeah, that’s a great question. That’s going to come down to the net worth of the client and how many assets they have. It’s not an issue down the line to have, this is where most of my clients come in, 15 LLCs, all single-member LLCs, all in their personal name. We can fix that. What we would do is remove you as the managing member and owner of the LLC and create the limited partnership to own those LLCs. And so when you’re just starting out, you might not have the risk and liability and the net worth to warrant a second layer protection of management company yet. But when you get to property four or five, you will, there’s just too much risk.

Brian:
So starting out, I would be comfortable saying, create the LLC, you will most likely have to name it in your own personal name as a disregarded entity. It’s something is better than nothing. Then just realize where you started is not where you’re going to end. Your next stop on that journey of investing would be around 250 to 500,000 net, which would be around four or five units. That’s where the asset management limited partnership comes into play.

Tony:
So can we talk about like our own personal experiences, like Ashley, I know you’ve got a few LLCs, I’ve got one LLC. So I’m just curious what your recommendations would be to Ashley and I. So if I can give you like a brief breakdown of where I stand today. So I’ve got, sorry, we’re closing on a property here on Friday.

Ashley:
I know, Tony, you’re putting us on this spot. Okay, the [inaudible 00:19:11] LLC is the same properties.

Tony:
Yeah. But I’ve got, I think we’ll be at 11 short-term rentals come this Friday. We’re closing another property on Friday. And right now, our personal names are on four of those properties. And then we have, I’m sorry, our personal names are on four of those properties and four of those mortgages, properties five through 11. It’s just our names on the title, but not on the mortgage. We have an LLC, but because these are short-term rentals and the way that we got the financing, it has to be through personal names. So technically our LLC isn’t even tied to any of these properties. So what would your recommendation be to, I guess, get that set up in the right way?

Brian:
Yeah. So when you say short-term, are you flipping these or?

Tony:
So they’re rented out on Airbnb, like so if you go book a property on Airbnb.

Brian:
Okay. Gotcha. I was thinking short-term as you’re just like 90 days, hold them and get them out, flip them. But no, for that, you definitely want to put those into which would go into like charging order selections and where to even set these LLCs up in which I’ll tie that into that. But you want to put those properties into an LLC because they’re not, they’re long-term holds, you’re renting them out, there’s going to be a constant influx of renters. So it increases your liability even more. So get the title out of your name, put them into LLCs. The number of LLCs would come down to the equity that you have in each property.

Brian:
Rule of thumb, I would generally say, don’t have more than four properties in one LLC, or more than 500,000 equity into an LLC. And the reason is you can’t stop an asset from blowing up. You just don’t want it to blow up and affect other assets. And so it becomes cost, not efficient, but it really eats into your return on investment if you put each property into its own individualized LLC, especially if it’s not worth a million dollars or more, like you can’t do that in California or the East Coast and West Coast, because the properties are so expensive. But if you’re investing in the Midwest, you can generally put four properties in one LLC from the same state. Don’t go more than four properties and don’t go more than like 500,000 in equity. And then you start separating out risk from there. So for you, I would say, step one, get the assets out of your personal name. The mortgage is always going to be in your name. You’re not going to change that. Get it out of your personal name, put it into an LLC.

Ashley:
Brian, I want to jump in real quick there. With the mortgage still being in a personal name, does that affect any of the liability? Will that tie you into it somehow because even though it’s in an LLC, the mortgage is in your personal name?

Brian:
No, because the property and the title is going to be held through your LLC. And then the LLC theoretically should be giving each member its separation and personal liability so it doesn’t bleed into your personal assets called charging orders protection. Each state has different charging order strength. That’s why you hear about shopping for a jurisdiction to go into different states, whether it works or not, we’ll talk about that. But ideally, whatever state the asset is in, that’s where the LLC is going to be in, put that in there. If the mortgage is in your personal name, you’re not going to transfer it out of your personal name.

Brian:
We generally tell clients, go get it in your personal name, that’s fine, you’ll get a better deal on it anyways, especially until for you rookies, you’re going to have like a three or five-year window of your trading an LLC or a management company to season it to even be able to get mortgage like loans from a bank because you’re too young. So you haven’t been seasoned and vetted. So in that period of time, you’re going to be getting mortgages in your personal name, which is fine, put the assets into the LLC, minimally protect yourself from there. Then as you grow, maybe down the line the banks will start lending to that LLC. If you personally guarantee alone, that’s where asset protection really can’t come into play because we’d have to exempt the lawsuit. If you personally guarantee a mortgage or a loan, we can’t protect you from a personal guarantee.

Ashley:
That is really interesting because every commercial loan that I’ve seen is they ask for a personal guarantee to get that lower interest rate.

Brian:
Yeah. And so if you can shop around to different lenders and see what you can get from there, I’m trying to get out of it. But that’s one thing that if you are in the commercial real estate area and you have to personally guarantee that loan, that means that if you get sued through them because of a default and they got a foreclose and you can’t pay for it, you just personally guaranteed it, which means your house could potentially be taken away if you’re not at that net worth asset level to where you need to have like a strong bridge trust, because then there’s things we can do offshore where we can protect your equity from there.

Ashley:
Well, that is so interesting because I always thought that that was just if you couldn’t make the payments, they could come after you personally to cover the foreclosure of the property. I did not even realize that that was a whole viability for if you were sued that somebody could come after you through that.

Brian:
Yeah, someone’s suing you and there’s whatever the damn, like we’re just doing the gunshot case I explained earlier, wrongful death lawsuit right there, that’s going to be a multi-million dollar lawsuit. You don’t have that in the property value itself most likely. So then where’s the rest of that’s going to come from? It’s going to bleed through into the rest of your assets. And so that’s why setting up very strong asset protection at different layers and jurisdiction spots come into play is you need to be able to protect yourself from an ultimate loss and doomsday scenario. And that can just be from something as simple as driving your car and t-boning somebody. There’s loss and liability around your whole life. So that’s where you need to protect yourself from the unknown.

Ashley:
Brian, let’s go over my portfolio, I guess, real quick. So I have separate LLCs for each business partner I have. So there’s five altogether. One is my single-member LLC. And then the rest are with separate partners. How do you do that limited liability holding company then if I have all different partnerships? Does that matter at all that I’m not the same percentage for each?

Brian:
It doesn’t matter. What we would do is protect your ownership interest. And so as you create different business structures and entities LLCs you have a percentage ownership share, we would take your percentage ownership share, whether it’s 25, 50, seven, whatever, and move that into the management company and protect that. And then your business partner would do whatever they need to do with their own assets. And right, I would recommend they need to set up an asset protection plan for themselves and take their ownership interest out of their own personal name and put it into that level, into their own planning.

Tony:
Yeah. Great advice. And I love that we’re getting into the weeds here. I’m sure the rookies are getting some good content and everybody’s heads are spinning a little bit right now. So we talked about what the foundation looks like and how to get started as a rookie. But one thing you mentioned, Brian, that I want to circle back to is that different states offer different types of protection. So as a rookie investor, how do I determine which state I should be setting up this LLC or this asset protection entity in?

Brian:
Yeah. This is the second big problem I see with LLCs. And there’s a lot of confusion on where to even set these LLCs up in. Probably daily, I get this kind of question, do you go to Delaware, Wyoming, Texas, Nevada, Florida? And it really just comes down to an issue of what are you holding? Meaning like, where do you own and where do you own it? And so let’s, and I’m going to pick on California a lot during this talk. And that’s just because California’s a big state, is very expensive. And so people from California are generally buying real estate somewhere else, and it’s a very asset protection unfriendly state.

Brian:
So let’s say for example, it’s California real estate that you own and that you’re a California resident. And then you go and set up a Wyoming LLC, because you heard about it on the internet or your CPA. And then you go and hold a key piece of California real estate in it and you’re paying California franchise tax on this out-of-state Wyoming LLC, because you legally have to report it as a out-of-state business entity and pay the franchise tax. What you’ve done is just convert your Wyoming LLC to a California LLC, because again, you’re doing business in the State of California, you’re paying the franchise tax in California.

Brian:
But if you ever have a liability issue in California, meaning a lawsuit, the judge in California or any other state that you own that asset in is going to apply California law or wherever that law the lawsuit is coming from. They’re not going to apply Wyoming law. And this is because a judge in California or any other state doesn’t care that your LLC is a Wyoming registered LLC. What they care is that it’s doing business in California, it’s done this big legal word called availed itself of the protection of laws of that state. That’s the state the asset is in, that’s the state the injury or damage occurred in is going to be that state’s laws and damage laws and tort laws that are going to apply.

Brian:
It’s not going to be business and contract laws that come through on this lawsuit. That’s what’s called outside liability from the asset, not internal businesses fuse. So like you and me owning a business together and dissolving and suing each other, that’s an internal business dispute. We could get some protection through Wyoming, but when you’re holding real estate, that’s not what real estate and LLCs are. They’re just holding companies. And so you’re not taking Wyoming or Delaware tort and damage laws with you to other states.

Brian:
So just simply by owning an out-of-state LLC, and you have to legally register that LLC as doing business in another state that you live in. Again, you’re registering it in California, if you’re a California resident and it’s just basic law, once you do that, you did that fancy word called availed yourself of the privileges and laws of that state and given that state jurisdiction. And we have this great case called, it’s Indian Palms Country Club Association versus Anchor Bank 2015. This case lays out all, and 2015 just means the date that the case came out, this case lays out all the multiple legal standards you’d have to meet to successfully beat a piercing the corporate veil argument and jurisdictional elements. You wouldn’t meet any of these legal standards as a real estate investor. Then it’s just a matter of applying corporate bail piercing strategies and all your assets are now on the hook.

Brian:
So for assets that are real estate, I recommend using the state that the real estate is located in because you’re not gaining anything by using other states, you’re just doubling your maintenance costs. And so just keep it simple in properly layer. And don’t think that you can just ghost the lawsuit by thinking you’ve created up an anonymous LLC.

Ashley:
And for the rookies listening, I know that some people go out of state to set up their LLCs because it may be cheaper, but if you are sued, it is not going to actually be cheaper. And when you run your numbers, put in the cost of having that LLC in that state into your numbers to make sure that it’s a good deal. And that just becomes part of it when you are analyzing a deal. I think that that’s awesome you brought that up, Brian, because I can think back to a couple months ago, I heard somebody talking. It was their first property and they set up an LLC in Wyoming and they don’t even live in Wyoming and the property wasn’t even located in Wyoming, but they just wanted to, they had read something online where they wanted to detach themselves and be anonymous. And so that’s what they did was set that up. So could you maybe go more in depth about how to be anonymous and is that actually a thing?

Brian:
There is, and it’s a great question. And that case that I’ve mentioned actually is specifically an in-state California resident using an out-of-state Wyoming LLC. And that’s why I picked that case specifically because it addresses specifically all the multiple standards that have to be met. And as a real estate investor, you’re just placing real estate in an LLC, it’s not doing business, automatically, you lose all the elements right there for that case. And that’s a big question, it’s like, why can’t I just go and use the Wyoming LLC and I want an amenity? Like, I want to just disappear. And this is a big misconception of LLCs and the thought that you can just create an anonymous LLC and that just disappear and completely ghost a lawsuit. And this is just completely false, but I get this question two or three times a day. When your LLC is sued, you’re going to be legally required to appear and defend it.

Brian:
You have to have, especially like Wyoming and Delaware LLCs if it has out-of-state owners of it, I mean, like you’re a California resident creating a Wyoming LLC, you have to have a personal agent of service. Their sole job is to simply say, hey, guess what, Ashley? Guess what, Tony? Congratulations, you just got sued, you’re served. Now you got to show up in court, go get a lawyer up and go defend yourself. Once that lawsuit and you go into court, this is a process called discovery, which is sharing of information, a judge is going to say, “Okay, hey, you’re being sued for X amount of money, you have to, here’s a document of disclosure asset list, list everything that you have, disclose all the assets that you have because we have to make sure you can cover a potential full amount claim for this.”

Brian:
At that point, you have two options. You either lie under oath and commit perjury and go to jail and say, I own nothing, which I don’t recommend. And you might hear some people say like, “Oh, well, you don’t own it, your LLC does. You’re the managing member of it. You’re connected to it.” A judge is not going to buy that. Like, sorry, you’re going to disclose those assets or go to jail by committing perjury. Once you disclose those assets, there’s no anonymity to it.

Brian:
And amenity exists, I’m going to use another kind of an outlandish example, to prevent harassment from people before you’re being sued to saying like, oh, I hate Ashley, she’s a horrible landowner, I’m going to go egg her house and find your personal address. That’s what it does is protect the personal little bubble of people not identifying where you live personally, it doesn’t mean you’re not going to have to show up in court for a legal lawsuit. That’s not how the legal system works. What you can do to get stronger anonymity is then as you grow again, third layer protection comes to an asset protection trust because all trusts have a layer of anonymity just because of their trust. And so you don’t have to disclose assets owned in a trust 123 Main Street will own that trust. The assets in it don’t have to be disclosed unless you’re a purely foreign trust.

Tony:
All right. So there are some ways to build some of that anonymousness anonymity into your business. Now, you talked a little bit about this, but I want to circle back to this as well, Brian. How do taxes and kind of asset protection go hand in hand? Is there a way to set up your asset protection so that you can reduce your tax liability as a real estate investor? Or those two not connected in any way?

Brian:
Those two should not be connected in any way. And the IRS has a very big guidelines on what to avoid. And if you’re setting up asset protection to not pay taxes, that’s called tax avoidance. It’s against the law, people go to jail for that. Asset protection works by being tax neutral. And so that’s what you want. And then you use your CPAs and your wealth managers to throttle the tax code and use that as a guiding mechanism. And then this is a matter of how conservative or aggressive do you want to be? I would say, I’ll ask your tax attorney, where’s the line? Tell me where the line is. Then it’s your choice to decide how close to the line you want to go or not. And then that’s their job to execute it.

Brian:
But for asset protection to work, if you were to come to me and like Tony, you’re coming to me and saying, “Hey, I don’t want to pay taxes and I need to create this asset protection trust, what can you do for me?” That’s fraudulent transfers and tax avoidance. I would go to jail doing that as well, and I’m not going to jail for anybody. And so that’s where it’s working to protect you from creditors and lawsuits and liabilities, so that if you have an excess lawsuit against you, you don’t lose your whole legacy and life work. That’s acceptable, judges and courts agree with that. That’s the same principle of having insurance. Insurance is just a low-level form of asset protection, but you’re not going to be getting away from paying taxes. That’s through tax strategies, tax mitigation strategies, deferred depreciation and all of those things. That’s where let them work their magic. We have to protect it. And most good CPAs will say, protect the assets first, because if you get sued and lose it, we have nothing to do tax filings on it.

Tony:
To the point. Now, I guess I want to get a little bit of clarity grabbed because we’re talking about a lot of different advanced strategies, but I guess when you meet with the client, Brian, or someone that’s an asset protection when they meet with the client for the first time, what does the process look like for setting up the roadmap for that individual person? Is it just like, you guys meet, I don’t know, every quarter for the first several years? I guess just what does that look like actually getting your own unique asset protection roadmap created?

Brian:
Yeah. So generally, the client would call in. And whether you would talk to me or any decent asset protection attorney, they’re going to do an entire risk profile. And so I get some clients that call in and say, “Well, I just bought this one piece of property, I only want to protect that one property.” But really we need to look at a holistic level of what’s your day job? Where’s your liability come from your employment? Are you a 100% investor? Are you a doctor investing? Are you a CPA? Where’s all your risk and liability come from? Do you have kids at home driving your cars? There’s another level of risk.

Brian:
So we do this whole risk profile and then look through and say, okay, what’s then the net? What equity do you have in each asset? Because we’re not protecting the land because land can’t be moved. What we’re protecting is equity. And so what we’re protecting is unprotected equity, which means if you buy a property all in cash. So we’ll just use like a $100,000 property and I pay a $100,000 for it, I have a $100,000 worth of equity. What we’re protecting is that. If you come in and say, I got a mortgage and I put 20% down, you only have $20,000. The rest of it is not collectible on because there’s no equity there to get. So we’re protecting $20,000.

Brian:
So what we look at then is through all your holdings and your non-exempt retirement accounts. So like personal brokerage and stock accounts, what’s your total unprotected net worth? And then from there, where do you own the assets at? What state are they in? Are they in where the state you live in? Because then that’s going to tell us what base layers of LLCs we need to set up. Then the net worth will tell us in the risk what additional layers that we need to go to from there. So it’s generally would be a 45 minutes to one hour long consultation of everything that you own, how you own it, what your finances are, what’s your risk, what’s your life like, what’s your short-term investment strategy, what’s your long-term investment strategy. Then we would create the full plan.

Brian:
And then if you’re at that 1 million net or more, we would add the asset protection trust. And then from there, it would be, just let us know what’s going on, keep us informed with your CPA whenever you before you make a move and after you make a move, because we need to be able to create the right bucket to protect it. And then your CPAs need to know how to file the right papers and documents with the IRS. And then your wealth managers need to know how to follow the needle and make you more money. And so the three of us all talk while you make moves to make sure you’re protected and maximizing the tax code.

Ashley:
Brian, I want to take all of that and put it specifically to a rookie investor buying their first property. What would be the dream route that you would recommend for them to start out? They’re going to buy one property and they slowly want to scale, how exactly should they start? What would that blueprint look like?

Brian:
Yeah. Like a lot of it, you can read, this is why I like the BiggerPockets program too is like they really dial down education on this and know your metrics and know your numbers and don’t go over it. You make money when you buy. And you make money when you buy through taxes. So people don’t like taxes, but if you start becoming an investor, taxes, you’re going to love taxes. You’ll read a bunch of tax books because that’s where you make your money. Cashflow is like the sugar on top of the cake, the crumbles. That’s even better. But you make your money through taxes, depreciation, forcing cashflow later on, but you make your money when you buy.

Brian:
And so realize you need to set up your team and have a team in place beforehand, which means if you’re investing in real estate, have a real estate investment agent to go find a deal, a good deal for you, then go have a CPA who knows real estate, not all CPAs, just like not all doctors do the same thing. Some are focused on business, some on real estate, some on different areas have, you may have, depending on the state that you’re in, have a real estate attorney, because not all states have the agents do the closings and stuff like that. So you need to realize what state you’re in, do I need a real estate attorney or not?

Brian:
Real estate attorneys and business attorneys are not asset protection attorneys because most of their practice, probably 90% of it is on the transactional side. So they wouldn’t know the deep details of taxes plus protecting the assets and liability. And an example of this is I have a lot of clients who get told to put real estate into an S corp. And that’s one of the worst things that you can do as a real estate investor is put real estate into an S corp for liability issues. They will be good for tax purposes, but the issue is when I have a client coming to me with a $100 million real estate portfolio all in an S corp, they can’t exit that position, that S corp, because they’re going to have to pay up big check to the IRS when they start selling all that assets. And so when they want me to put them into a bridge trust and an offshore trust for them, I can’t have them exit the property because most clients don’t have multimillion dollars sitting around in their bank account because it’s all tied up in the real estate.

Brian:
So the problem with S corps for real estate is S corps have shares. Shares can be frozen and seized by court orders and judgments, which means then you tied up all your real estate. So you should not be using S corps for real estate. You should be using LLCs for real estate. Then scale up into a limited partnership and into a trust. And that’s just, I see this a lot and it’s not a CPAs fault because their job is simply to maximize taxes. So I don’t fault them for it. But you need to realize that’s where an asset protection attorney specifically comes into play. And you want that asset protection attorney to do, that’s his only job, because then they understand all these details about investing. And most of the time we invest ourselves. So we understand the nuances of it.

Ashley:
Brian, before we move into our Rookie Request Line, can you tell us what is the best way for someone to find an asset protection attorney?

Brian:
Yeah. So we have, I would go and just type in asset protection. And what you want to do is make sure and see like, are they just an estate plan attorney? Because an estate plan is completely different. That’s the living will, like a revocable living trust, that’s not asset protection. They don’t work for asset protection. If you put all of your assets into an estate plan, family living will type of deal, family trust, that’s not going to protect you. They only work when you’re dead. And so asset protection focuses on and works while you’re living against predators suing you right now today. And so you need to find out, are you just an estate plan attorney who just took a course on LLCs for a continuing legal education, which most of the people you’re going to run into, that’s what they do?

Brian:
So you need to look at what’s their firms say that they do, do they do just asset protection or are they doing estate plans? Are they really real estate attorneys? Are they really business transactional attorneys who just took a continuing legal educational course on an LLC and now they think that the LLC is a one-stop silver bullet to everything? That’s not how it works, but that’s how most people you’re going to run into will be operating.

Brian:
So when you research what attorneys to look for, find out and talk to them on what percentage of your practice is purely focused on asset protection? What type of clientele do you have? Like if you’re a doctor, make sure that they have a lot of doctors who are investing in real estate as well, because then they understand the liability of a medical professional. So you want to make sure they have clients that match your profile also. Again, what percentage is purely asset protection versus another area of law? What kind of affiliations do they have? Do they affiliate with other asset protection firms and wealth managers and CPAs? Because then they are going to be able to quickly get you on contact with people to maximize your money as fast as possible and come up with a good solution to a question you might have. And so those are great questions to ask and vet them as you’re going through so you don’t get sold a bag of goods.

Ashley:
That’s awesome. Thank you so much for supplying those questions. It’s just like building your team, we always talk about finding your realtor, finding your CPA, finding boots on the ground, finding your contractor. This is just a whole nother side of it is to finding another person to add onto your team, a perfect attorney, and but also you want to have attorneys that cover different things. So your asset protection, you want someone, in New York State, you have to have a real estate attorney that does closings for you. So are you saying that it’s probably best to find different attorneys to cover those different areas instead of one general attorney that thinks they can do all of those things?

Brian:
Yeah, because if you think that you’re a general attorney and that you can be professionally an expert in everything, I’m sorry, you’re wrong. That works out when you’re starting out, but then eventually you have to specialize. It’s just like a medical doctor, eventually, you specialize, otherwise, you’re a general practitioner and you just outsource to different specialists when they come in. Yeah, that’s looks like in all sorts of OCD to GI specialist, that looks like a heart attack, you need to go to a cardiologist.

Brian:
So same thing with anything else in your life and law-related, find the right person who’s the right specialist in what you’re doing. The real estate transactional guy will close your deal, your tax attorney or your CPA will do your taxes and handle your tax issues, your asset protection attorney is going to protect you when your doomsday scenario comes around and you better hope that they have different solutions than just say, yeah, there’s an LLC, they’ll use that. Hopefully, they use asset protection trust and understand the difference of onshore, offshore hybrids and how those all work, because that’s a game changer later on.

Ashley:
Yeah. Thank you so much for breaking that down for us. Let’s go done now to the Rookie Reply. So this is where we have a rookie investor call in and leave us a voicemail. Anybody that’s listening, you can call in at 1-888-5-ROOKIE, and leave us a message. And we played on the show to answer.

Carson:
Hey guys, Carson from Jersey City, love the show. I’m calling because I am hopefully purchasing my first property next month. And my question has to do with LLCs and insurance. I don’t believe our lender will allow an LLC because of the due-on-sale clause. So I’m wondering if getting a really, really good homeowners insurance policy is a good way to prevent my parents from losing their retirement, just trying to protect us legally. And I hope you can help. Thanks.

Brian:
Yeah. So, I mean, it would be what saw the retirement in? Is it just that one property or is there a retirement also in like 401(k)s and IRAs personal brokerage accounts because 401(k)s and IRAs have exemptions through the federal government, they’re ERISA exempted? So those are really hard to get into. So they might get access into that from a lawsuit when they’re withdrawing the money from it. But while it’s in ERISA-protected account, those are exempted and really strong.

Brian:
On the real estate, we already talked about the insurance, you should at least put it into an LLC and get insurance onto it so that there’s a stop gap and a moat. Just realize the limitations of insurance. It just provides capital. It’s not going to cover everything under the sun. Know your limits. As you scale, you might need more umbrellas, policies are the same exact thing. All they do is provide more capital to fight a lawsuit, but they’re not going to cover intentional wrongdoings. And so it’s the same exact limitations. So I would say, have insurance, have as much insurance as you think you’re comfortable with affording, put the property into an LLC, you would get the mortgage in your personal name.

Brian:
We don’t use just like land trust. If you’re basically starting out, you hear people say, “Well, have an LLC in a land trust.” We don’t even go with a land trust because over the last, like 30, 40 years, you cannot find one case where just because you transferred a real estate asset out of your name into an LLC that the bank called the mortgage due because you’re paying it, they’re not going to rock the boat. They may ask what you’re doing, which is, fine, yeah, I’m transferring it into my LLC, I still have the mortgage under my name, it just for asset protection purposes. Okay, great. If you’re not paying your mortgage, that’s a different story, then they’re going to foreclose on you and call your note due.

Brian:
If you’re concerned about it, and we have over 3000 clients, like 5 billion that we’re protecting, and we’d never use a land trust for any one of our clients, but if you’re concerned about it, that’s where you would put it into the land trust and use a land trust because it’s into a trust and I’m not going to be able to call the mortgage due. Just realize generally, I find that to be just an upsell of someone trying to charge you an extra $1,000 for something. I haven’t had one attorney in other firm, and we affiliate with 100 of other firms through our asset protection council, no one’s seen a case over the last 30 years of a mortgage being called due just because you transferred out of your personal name into an LLC, but I would say, check with your local attorney on that and get insurance, but understand the limitations.

Ashley:
That’s really interesting to hear because that is a huge debate, especially in the forums on biggerpockets.com is, should I get it an LLC? Should I transfer it after I get the mortgage? Because the benefit of putting it into your personal name is that 30 year fixed rate mortgage with the low interest rate that is so enticing and can make a deal and even better deal by going that route, instead of having to go to the commercial side and putting in an LLC. And I have found a couple of banks where they will lend to you in an LLC and still give you that residential 30 year fixed, but the interest rate on both of those banks was super high, I think at 7.35% when you could go and get the 30 year fixed in your personal name for three and a half, 4%. But I think that’s really interesting to hear from an actual attorney what their experience has been with their clients about transferring it to an LLC after you’ve closed on the mortgage.

Brian:
Yeah. And that’s how we do it, we just transfer it straight out of your personal name directly into an LLC, even if they’re not using an asset protection trust, because if you’re using an asset protection trust, it doesn’t matter because it’s a trust. But not all of our clients are at that million dollar net worth mark where they need the trust yet. So we’d be using an LLC with a limited partnership and we still would just take the property, put it directly into the LLC without a land trust. But to clear up, a land trust is like any other trust, it just feels land, they’re essentially a privacy device and that’s the big distinction. It’s just a privacy device and not a protection device. And that’s because under the land trust agreement, your identity as the legal owner can’t be disclosed to the public unless it’s ordered by the court. And they’ll just see the name of the trust, like 123 Main Street Land Trust, not your personal name.

Brian:
But the issue is that land trust don’t have built-in asset protection or limited liability. They’re just a trust to hold land. They just separate ownership from use of the land and help transfer assets without potentially invoking the due-on-sale clause of a bank, which we haven’t seen happen in like 30 years. But if somebody let’s say slips and fell and they got hurt, the beneficiary, meaning you, of that land trust still is going to be liable when you’re sued and collected on if you’re just using the land trust by itself. So clients and people just starting out, if you are concerned about this, preferably use a business entity like an LLC that’s going to be named as the beneficiary of the trust and that’s going to be your privacy and then your protection element through the LLC. And then you can get a little bit of more comfort of saying, okay, I have a land trust and it’s connected to an LLC. As you grow, we would just get rid of the land trust, add the second layer limited partnership, and then come in with a strong asset protection Bridge Trust later on.

Tony:
Brian. So much great information. I feel like I got a lot of homework to do now after having this conversation, got me a little scared about how I’m protecting everything right now. But before we wrap up for today, at least the first part of our conversation with you, I want to give a quick shout out to today’s Rookie Rockstar. And today’s Rookie Rockstar comes from the Facebook group, the Real Estate Rookie Facebook group. So again, if you guys aren’t in there, make sure you join 30,000 plus members and they’re going really strong.

Tony:
But today’s Rookie Rockstar is Kyo Jones. And Kyo has a really, really a phenomenal story. But Kyo completed a flip in North Phoenix. I can’t really tell if it was live in flip or maybe it just took a while to get it done, but it was a two and a half year job. They bought the property and remodeled it for an all-in cost of $500,000. And they have it under contract to sell at $1 million. So I think out of all of our Rookie Rockstars that might be the highest purchase price or sales price that we’ve seen. So Kyo, congratulations to you for an amazing job.

Brian:
That’s awesome. Congratulations on that.

Ashley:
Yeah, that is so cool. Well, Brian, can you tell everyone a little bit where they can reach out to you or find some more information about you?

Brian:
Yeah, absolutely. My website, www.btblegal.com. I have my website set up as an educational resource with a lot of videos, a huge frequently asked questions section and just a lot of case law. So I’d rather have people just being able to go through and research before they start talking to people to understand what they’re getting into and what they need to and why. And I think there’s the more information you have, the better questions you have and the less likely you’re going to be taken advantage of. You can email me Brian, B-R-I-A-N, @btblegal.com. I’m pretty responsive. And again, I would just rather have people have access to information to make a better educated decision.

Ashley:
Well, Brian, thank you so much. We really appreciate having you on today. And everybody listening, Brian is going to be back on our Saturday episode this week for Rookie Reply, where we are bringing people on to ask Brian questions. So make sure you guys join us on Saturday to listen to that. I’m Ashley @wealthfromrentals, and I’m here with Tony @tonyjrobinson on Instagram. And we’ll see you guys on Saturday.

 

Watch the Podcast Here

In This Episode We Cover

  • Why everyone needs a “base layer” of protection when owning real estate
  • What asset protection is and how it benefits investors
  • When and how to set up your LLCs for different properties
  • How many properties should be housed under one LLC
  • Disregarded entities, charging orders, and anonymity
  • Designing a blueprint for your real estate portfolio 
  • How to find the best CPAs, attorneys, and legal professionals for your real estate business
  • And So Much More!

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