{"id":88906,"date":"2017-05-19T14:30:50","date_gmt":"2017-05-19T20:30:50","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=88906"},"modified":"2021-03-16T12:26:10","modified_gmt":"2021-03-16T18:26:10","slug":"dont-start-an-entity","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/dont-start-an-entity","title":{"rendered":"Maybe You Shouldn’t Start an Entity. Consider 4 Alternative Asset Protection Strategies Instead."},"content":{"rendered":"

I often hear newer real estate investors being told that they shouldn\u2019t hold properties in their own name or even that every single property they own should be held in its own entity\u2014and this advice isn\u2019t without merit.<\/p>\n

The two primary reasons for owning properties inside an entity are\u00a01) for asset protection in the case of entities like LLCs and 2)\u00a0for anonymity for entities like trusts. Despite what you may have heard, trusts by themselves don\u2019t provide much asset protection, other than making the pursuit of one\u2019s assets a little more difficult.<\/p>\n

That said, other considerations could make you lean the other way (towards postponing entity setup). For example, it may be more difficult to obtain financing inside some of these structures. There can also be tax implications, such as transfer tax. In fact, Pennsylvania charges a transfer tax any time you change the titling of the asset. Transferring assets to an entity can also trigger the due on sale clause of the mortgage.<\/p>\n

When it comes to when and how to hold property, the arguments can be endless, but the real question for me in the beginning was which master am I trying to serve? <\/em>In other words, what\u2019s most important to me? Is it tax and estate planning, financing, asset protection, or something else?<\/p>\n

Maybe You Shouldn\u2019t Start an Entity<\/h2>\n

Of course, I\u2019m not giving accounting or legal advice, as I am neither a CPA nor an attorney. What I\u2019m alluding to is that maybe, just maybe, there are some strategic reasons not to start an entity just yet.<\/p>\n

This may sound strange coming from someone who has 20+ entities at any given time. And trust me, I have the tax returns and legal and accounting bills to prove it. So, my question is not whether you should set up an entity but rather when <\/em>you\u00a0should. This decision is a very personal one.<\/p>\n

Related:<\/strong> The Pros & Cons of Using a New LLC for Every Property Purchase<\/a><\/em><\/p>\n

In a perfect world, we would all have an entity for almost anything we did, so long as things like tax and estate planning (even legacy) strategies didn\u2019t get in the way. That said, it can be difficult to look that far ahead and think of all the potential issues, especially when you\u2019re just starting out.<\/p>\n

So, I\u2019ll reference my approach, which I\u2019ll say isn\u2019t for everyone, and you can decide if it makes sense for you. I was a blue-collar guy trying to build wealth, so some of my ideas may not be as relevant to a high-income earner or someone who already has some significant assets or businesses to protect.<\/p>\n

\"landlord-lessons\"<\/p>\n

Real Estate is a Finance-Driven Business<\/h2>\n

As a real estate agent<\/a>, I knew a little bit about financing in regard to residential and commercial real estate investing, and to be quite honest, their differences dictated a lot of why I did what I did. At first, many of us are just venturing into real state, so we\u2019re not even sure this is something we really want to do. Let\u2019s face it, investing in hard real estate and dealing with tenants or property issues is not for everyone.<\/p>\n

When I was just starting out, though, investing in hard real estate made perfect sense since I had worked in construction while going through college, owned my own painting company, and later even became a property manager. Real estate was absolutely my thing.<\/p>\n

Plus, since self-employed contractors and real estate agents usually don\u2019t have any real retirement, I was hoping my retirement was going to be my paid-off rentals.<\/p>\n

Once I decided I wanted to build a real estate portfolio, the strategy and plans followed. Personally, my goal was to get as many properties in mine and my wife\u2019s name as quickly as possible, with the best rates and terms, before going to commercial financing, so our tenants\u2019 payments and real estate tax write-offs<\/a> could help us build significant wealth that much faster.<\/p>\n

Related:<\/strong> Accounting Practices for LLCs: What Every Real Estate Investor Should Know<\/a><\/em><\/p>\n

With that goal in mind, I decided to postpone setting up an entity, and looking back, I believe that my portfolio would\u2019ve grown much slower if I had gone down the LLC\/trust path right away. After all, commercial financing typically requires a higher down payment and more insurance, and it usually has higher interest rates over a shorter term (i.e. 5-20 years, although it may be amortized over a longer period of time, as opposed to 15-40 years with residential).<\/p>\n

Since growth was my main goal, I knew I had to find other ways to protect my assets. For me, these four strategies went a long way towards limiting my risks before starting my first LLC to hold real estate.<\/p>\n

4\u00a0Alternative Asset Protection Strategies<\/h2>\n
    \n
  1. Use debt as asset protection.<\/strong><\/em> This strategy involves keeping properties in my own name but making sure they\u2019re fully encumbered by mortgages (including HELOCs). That way, there\u2019s little to no equity to go after.<\/li>\n
  2. Increase the liability coverage on your landlord policies.<\/strong><\/em> It\u2019s much easier for collection attorneys to go after policies than actual assets.<\/li>\n
  3. Take out additional insurance coverage with an umbrella policy.<\/strong><\/em> This additional liability coverage can be beneficial in a lawsuit that exceeds your current liability coverage.<\/li>\n
  4. Know the titling advantages and\/or disadvantages in your state. <\/strong><\/em>For example, I\u2019m from the state of Pennsylvania, where if you take title to a residential property through \u201cTenants by the Entirety,\u201d jointly with a spouse, creditors pursuing one spouse cannot force the sale of the property.<\/li>\n<\/ol>\n

    \"sheriff-sale\"<\/p>\n

    Which Master Are Your Serving Right Now?<\/h2>\n

    There are many situations that could dictate changes in your strategies in the future. Some advisors will tell you to have some of your personal property in your name and some in your spouse\u2019s name for estate tax purposes, but this can vary as well, depending on the size of your state. Again, it\u2019s back to which master are you trying to serve<\/em>?<\/p>\n

    My strategies may have been a little unorthodox, but I believe I was able to build a stronger portfolio\u00a0more quickly by treating properties in our personal names as just a separate bucket of assets, while still building several other buckets, all with varying degrees of exposure to risk. Even today, I still employ this strategy and still own a few properties in my own name, although as I pay some off, I move them to a trust and LLC structure since they\u2019re now owned free and clear.<\/p>\n

    So, I\u2019m interested to hear from the BP audience: How do you feel about owning some real estate in your own name? Have you ever used one of the strategies listed above in lieu of setting up an entity right away?<\/em><\/p>\n

    Please share your thoughts or strategies below.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

    Starting out, I knew I had to find ways to protect my assets. For me, these strategies went a long way towards limiting risk before starting my first LLC.<\/p>\n","protected":false},"author":807,"featured_media":88914,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241],"tags":[],"class_list":["post-88906","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/88906","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/807"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=88906"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/88906\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/88914"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=88906"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=88906"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=88906"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}