How many properties in one LLC?
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Real Estate Investor · CA · Member since 2008 · 61 posts · 19 votes
17yLLC for each property is just too much trouble to manage. Try 'equity split' to protect your assets. This is a method to group all or number of properties in #1 LLC, then create #2 LLC that holds the note for all the equity in #1 LLC.
So, if anything goes wrong with #1 LLC (manages all RE activities,) then it'll show no equity/asset in it. Because #2 LLC holds a note against it.
For detail, do some search on line.
Good luck,
Denise
43 Replies
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes16y
Originally posted by Jimmy Hamilton:
Or could I start an LLC now if i am planning on getting into REI in the next few years even if the LLC would be essentially a vacant shell? Is aging effective in this manner?
It really depends on what your goal is. Back when it was much easier to get unsecured lines of credit for your business (before this whole market crash a couple years ago), it was common for people to buy shell corporations that had been around for many years and had built up some credit.Basically, the owners/sellers of the shell corporations would create them, take out lines of credit and use them every once in a while to build the credit of the company. Then, they'd sell the company a couple years later with a good credit history to people who wanted to use the company get unsecured credit lines based on the company credit (as opposed to their own).
I don't know too many places where you can get unsecured lines of credit these days, so I'm not sure there is any value in an aged corporation anymore...
That said, perhaps there are other uses that I'm unaware of...
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes16y
Just along the lines of these "aged LLCs". Since any loan application will include the Articles of Organization, might include the Operating Agreement and the names of the Members (Principals) and since you're going to offer a personal gurantee for any small LLC anyway, the new memebrs will have a credit analysis, if the LLC had a good credit standing and they see you just bought it and see that youjr credit score is a whopping 520, what do you think your line of credit will then be?
Buying an existing LLC or any business entity without extreme due diligence is nuts! You have no idea what the previous owner(s) did or did not do that can become a liability of the company.
Even if you have a hold harmless agreement, and you got sued, you'll have to chase down the previous owner and sue and then collect. You could well be buying nothing but trouble.....and anyone pulling such deals IMO, trying to sell a short cut to a credit line, is a little on the shaddy side to begin with!
- Real Estate Investor · Northeast TN, TN · Member since 2008 · 516 posts · 361 votes16y
Originally posted by Jimmy Hamilton:
This sounds great in theory, but would likely be considered a sham transaction.
What makes you say this Jimmy? Has this been your experience? I have to go with Denise on this one. This technique (also called "equity stripping") has been around for years and is recommended by quite a few prominent asset protection attorneys. It does have to be carefully structured but can work like a charm when done properly. - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes16y
Hi, filing a mortgage or any lien against a property owned by or where an insterest is held by the party filing such lien or encumbrance for any other purpose than to show the true intent of the lien is illegal. All states have penalties for filing false liens and a mortage is lien.
Filing a mortage or deed of trust as a security instrument for a debt that was never consumated or truly perfected is a form of real estate fraud.
A sham transaction, is a transaction that is accomplished where the usual intent and purpose of such transaction is not intended to be accomplished and the the intent is to achieve some other purpose or provide a benefit to the parties, usually accomplished between related parties.
The IRS may deem a a transaction as a sham transaction under certain circumstances where a tax benefit is accomplished between related parties that would not have existed unless the transaction had taken place.
Now, if you have an LLC and there is a good business reason to convey title or equity from a property held in another entity, with related parties, and the purpose for such transfer is convencing, then that transfer may be allowed even if there are collateral benefits. If you transfer equity to an LLC say to fund a collateral requirement for another member (not a party to the equity transfer) that may be viewed as a ligitimate transaction. The benefit of having less equity in the property may later be accepted even though the equity in the property has been reduced and no longer available to other creditors.
Equity stripping or skimming is a whole different animal and occurs when excessive fees are charged in a preditory lending scam, or where equity is transferred to someone who is to acomplish a service in connection with a foreclosure or bankruptcy, such as a promise to save the equity for a homeowner who is about to go into foreclosure.
If you use a note and deed of trust to transfer equity as a method to reduce equity between related parties, you really need to see an attorney, do not take any such scheme off the internet or from a book. Circumstances may be similar but not the same and it may work for one and not another, especially in different states or areas. IMO!
- Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes16y
Originally posted by J Scott:
I don't know too many places where you can get unsecured lines of credit these days, so I'm not sure there is any value in an aged corporation anymore...
That said, perhaps there are other uses that I'm unaware of...
J Scott, a friend of mine bought a company with accumulated losses of around $5 million in order to save on taxes. People don't realize how valuable a loss can be! (I believe these transactions have to be done carefully in order to be able to offset the accumulated losses against the profits of the acquiring company.)There are probably a lot of aged LLCs out there today with accumulated losses that investors can use to reduce their taxes.
- SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes16y
Originally posted by J Scott:
I don't know too many places where you can get unsecured lines of credit these days, so I'm not sure there is any value in an aged corporation anymore...
That said, perhaps there are other uses that I'm unaware of...When I first heard of "shelved" or "aged" corporations, one selling feature was that you'd look like you've been in business longer than actual.
These days it may not help with credit, but it may help with credibility.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes16y
Originally posted by Vikram C.:
J Scott, a friend of mine bought a company with accumulated losses of around $5 million in order to save on taxes.
There are probably a lot of aged LLCs out there today with accumulated losses that investors can use to reduce their taxes.
Vikram,I completely forgot about carry forward losses in this scenario...fantastic point!
Thanks for the correction...
- 16yClint CoonsBusiness MemberReal Estate Attorney · Tacoma, WA · Member since 2009 · 38 posts · 55 votes
J Scott,
Couple items in this thread that I will hit upon. 1st, aged entities is a red flag for an audit and trouble down the road. I have been consulted by the IRS on various asset / tax protection strategies/scams and one area in particular that we have discussed is the use of aged entities for tax deductions. The Service takes a hostile view of persons using entities in this manner. Be cautious. 2nd, the number of properties per LLC should be based on a number of different factors â€" equity, number of units, cash flow, location of real estate, and tenants. For example, you might own 4 properties with a sum total of 50k in equity but one of the properties generates $900 per month positive cash flow. In this situation I would structure my client so the cash cow property is held separate from the other 3 rentals despite the low overall equity. In other words each person/situation is a case by case scenario.
3rd, regarding insurance, it is difficult to find a provider that is willing to offer blanket coverage for all of the properties within one LLC. I have yet to find a carrier that is willing to insure my LLCs in such a manner. I typically insure each property and name the owner of the LLC as an additional insured (I do this to protect the LLC owner/member if the LLC shield does not hold or he is named in the suit.) 4th, single member LLCs are preferred because it avoids the filing of a federal tax return. 5th, in California the franchise tax is a problem so everything must be tempered by cost.
Hope this helps but in the end every situation is unique and must be evaluated against several factors.
Anderson Advisors4.7619 Reviews - Real Estate Investor · Northeast TN, TN · Member since 2008 · 516 posts · 361 votes16y
Originally posted by Financexaminer:
Equity stripping or skimming is a whole different animal and occurs when excessive fees are charged in a preditory lending scam, or where equity is transferred to someone who is to acomplish a service in connection with a foreclosure or bankruptcy, such as a promise to save the equity for a homeowner who is about to go into foreclosure.
Equity stripping is also, as defined at Ivestopedia, "the process of reducing the overall equity in a property in order to avoid creditors." As this thread was discussing LLCs and asset protection this, of course, is how I was using the term. But then I think you probably know that. No one has advocated "filing a mortage [sic] or deed of trust as a security instrument for a debt that was never consumated [sic] or truly perfected." Equity stripping is just one of many asset protection strategies. It is not (and no one has claimed it to be) a "one size fits all." Like it or not, as I said before, the technique has been around for years, is recommended by several asset protection attorneys, and works like a charm when done properly. A good real estate attorney, of course, should be consulted. But then that's just my opinion! - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes16y
The next time I get pulled over speeding, I might try that, I'll ask the cop how "investopedia" defines sppeding and see if his basis for the determination comes from statutses of intenert sites.
I thinki I said..see an attorney. I have used this method myself and without incident. But I never needed to "use the method". But then I don't know if a determination of asssets was ever made in connection with any suit, where someone might have though about it, but didn't carry through. But then, I have not ever given anyone a reson to go there!
- Lexington, KY · Member since 2010 · 315 posts · 133 votes16y
Originally posted by Bill Walston:
Originally posted by Jimmy Hamilton:
This sounds great in theory, but would likely be considered a sham transaction.
What makes you say this Jimmy? Has this been your experience? I have to go with Denise on this one. This technique (also called "equity stripping") has been around for years and is recommended by quite a few prominent asset protection attorneys. It does have to be carefully structured but can work like a charm when done properly.
Bill I have come to this conclusion not from experience (fortunately). I was researching the best asset protection strategies and was led to believe that splitting whatever equity you had leftover in any LLc's properties by holding a note for all equity in another LLC was a good idea. I posed the question to BP members who told me it would be a sham transaction and told me to reasearch more to that end. I can see how it could possibly be considered a sham because the transaction has no legitimate business purpose. If you have a different experience I would love to hear about it, as I was a bit disheartened when BP members shot the idea down. Please enlighten me as to how to properly execute such a strategy. - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes16y
Jimmy, as Clint pointed out, these transtions need to be evaluated on a case by case basis. You need to find, IMO, a reasonable and litgitimate reason to provide a note. There should be some financial need to transfer that equity. I have done this by pledging or assigning notes for other loans, I have done this to collateralize the accrual of retirement benefits-obligations by the company to fund future payments. It would be rather hard to call a note a sham transaction if there is a third party involved unrealted to the property encumbered.
A single memeber LLC has the advantages of maintenance, but carries other circumstances that can be problematic. I also worked with other investors who had LLCs. We actually worked together as seperate entities.
You can make loans from one entity to another and collateralize them. You can create assignments of notes and swaps.
You can also have options to purchase notes and agreements to repurchase at a later date.I know a CPA that used this basic method and actually it was not really intended to be a sham, but it was involving another partnership which he had an interest in. Since the debt perfected was particially to himself, it was found to be a sham transaction and was invalidated. He even told me he knew better, but it was not that big of a deal either, but it coiuld have been and he just wasted his time and his partner probably lost faith in him (which is what his resal problem was with the whole thing). This was in the mid-90s and I doubt the opinions have changed.
When accomplished properly such notes can be a good vehicle in this strategy. I doubt there is any guru out there that can describe a "how to" that fits every situation, (or even most)except the situation of selling thier system. My "system" was somewhat "tested" in the closing of a non-profit and an LLC and it was accepted without much question.
My advice to all investors is to find a good real estate attoney and go over these issues when you set up your business entities.
- 16yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 690 votes
Originally posted by Rich Weese:
If you have enuff assets, please consult a real estate/estate planning acct and attorney. It doesn't matter how many LLCs you have, if you are the beneficiary and get sued on a separate matter. It MAY help, if someone falls and breaks her neck on your property.
An irrevocable trust, as I mentioned above, with you as the manager(and others/entities as the beneficiaries) is the best method, according to Bernie the Attorney. $1000 per hour and well worth it. Good luck with your system. Rich
Rich, can you share Bernie's contact info?Thanks!
Mark
Updegraff Group Realty4.746 Reviews - Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes6y
@Bill H
Will they be leveraged? If so, there's probably not much anyone can come after you for, so the number of units is less important.
- Attorney · New York, NY · Member since 2019 · 72 posts · 27 votes6y
It depends on where you're from. There have been new laws in NYC that have prevented LLC owners to differentiate themselves from the LLC in buying or investing in real estate.
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