LLC when starting out

4 Replies

Hi All,

I'm starting off in the real estate investment realm and wanted to solicit some insights to LLC: best strategies, good tips, if there special considerations (i.e. currently overseas for work), and reliable online resources to get the process started so I can apply for an EIN, etc.

If a post with such information already exists, I would ask that you point me in the right direction.

Thank you.

I would most likely focus on the deal first.  You can deduct up to 5K in expenses prior to actually forming the company.  The formation of your company will all depend on the type of investing you are doing and you should consult with a Real Estate CPA for the best tax solutions and an attorney for risk.  

I have a really great real estate CPA that I'm happy to connect you with, shoot me a message and I'll link you up if you're interested.

This is often how I approach explaining asset protection to people who are just getting into real estate investing. Beyond this there are still MANY more steps you can take, but I've found that this explanation helps people approach the different strategies and entities involved in asset protection in the correct way. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

For someone just starting I find that it is tremendously beneficial for them to have an attorney write up their first LLC because they are trained how to use the LLC - if you don't operate it correctly you might as well not even use an LLC. Once you understand how it works and have seen an example of a good LLC you can move forward with confidence that you are doing things right. An experienced attorney can be invaluable through your investing career, so it's not a bad thing to start building out those strategic connections now.

This is not legal advice, just my opinion as a real estate investor.

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