Asset Protection Advice
Member since 2022 · 12 posts · 6 votes
Asset Protection Advice
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesBest asset protection? Leverage.
36 Replies
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
It is very easy as a new investor to get caught up in the topic of asset protection - it just sounds like the professional thing to do. Most of what you read here is complete overkill for starting out. Asset protection comes in when your asset worth is in the 7 or 8 digits - at that point you are becoming a target for frivolous lawsuits.
If you buy a duplex and you have 50k in equity and the rest is financed (what @Joe Villeneuvesays!) you are not an interesting target for an attorney to take on a commission only case. For that reason I question weather it is worth to hold your first few residential rentals in an LLC. A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!
Going commercial (LLC) also means that you can't use conventional 30y financing. I know some people are comfortable to deed after financing into an LLC, which is technically mortgage fraud, because you remove the collateral from the bank... Both options not worth it IMO.
If you want to flip houses an LLC will work, so you are not buying and selling in your name. S-corp selection to save on self employment tax only makes sense if you are exceeding a certain income level, talk to your CPA!
If you have an expensive personal residence with a lot of equity you can hold that in a trust, but for most people its better to focus on getting a few deals done to first create some net worth before asset protection becomes a thing.
You see that all of these tools have a down side (time, cost, energy) and you have to decide if the juice is worth the squeeze.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes"If you buy a duplex and you have 50k in equity and the rest is financed... you are not an interesting target for an attorney to take on a commission only case. ...A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!"
Quote from @Marcus Auerbach:
It is very easy as a new investor to get caught up in the topic of asset protection - it just sounds like the professional thing to do. Most of what you read here is complete overkill for starting out. Asset protection comes in when your asset worth is in the 7 or 8 digits - at that point you are becoming a target for frivolous lawsuits.
If you buy a duplex and you have 50k in equity and the rest is financed (what @Joe Villeneuvesays!) you are not an interesting target for an attorney to take on a commission only case. For that reason I question weather it is worth to hold your first few residential rentals in an LLC. A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!
Going commercial (LLC) also means that you can't use conventional 30y financing. I know some people are comfortable to deed after financing into an LLC, which is technically mortgage fraud, because you remove the collateral from the bank... Both options not worth it IMO.
If you want to flip houses an LLC will work, so you are not buying and selling in your name. S-corp selection to save on self employment tax only makes sense if you are exceeding a certain income level, talk to your CPA!
If you have an expensive personal residence with a lot of equity you can hold that in a trust, but for most people its better to focus on getting a few deals done to first create some net worth before asset protection becomes a thing.
You see that all of these tools have a down side (time, cost, energy) and you have to decide if the juice is worth the squeeze.
Not sure how a "good lease" or a "building in good repair" gets you good asset protection.
Also, you can have the greatest insurance in the world, and that doesn't keep you out of court.
However, if there is nothing to gain from winning in court, that is the greatest asset protection since that will keep you from having to go to court. You can't lose your asset if a court case never happens. The greatest asset protection is to keep out of court...not to win if you go to court. - 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
Understood on the private money - if you move forward with something, just be sure to run all the numbers conservatively. I just did a BRRRR in Pittsburgh, and transacting in real estate is expensive. It's just not possible to take your out of pocket costs to $0 - there are lots of things to pay for - closing costs, holding costs, insurance, financing costs, etc.
Whenever someone says "I'll start with a flip to make some money to invest!" I get nervous... although your personal background is certainly a huge risk mitigator here.
Good luck.
- Member since 2022 · 12 posts · 6 votes4y
Quote from @David Dachtera:
Have to admit that I'm not familiar with "Core 4". Care to share on what that is?
The way that I understand it is your team (Deal Finder, Financer, Contractor, Property Manager)
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
I am neither a real estate professional nor a CPA, but my understanding is that you are allowed to take the passive loss without being a real estate professional - but again, there is a cap, and it phases out as your income increases
The answers for anyone's specific situation lie in IRS Pub 925 or with a CPA
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
Okay. Sorry, it was late and my mind jumped to Federal...
Also, if you elect your LLC to tbe taxed as a S Corp, you will have "Corp-like" tax aspects that will make your tax treatment even worse.
Honestly, lawyers and accountants tend to push for the legal entities and complex structures somewheres between they were trained to use them and because they get paid if you use them (so the negative viewpoint is that they are selling you something...). Yes, I found the "comfortable" professionals who aren't pushing their services on me will even say that simpler is better --- as always, it depends on your personal tastes too. It might be a bit tough to find, but there are bp threads where "experienced" investors have come back to ask for helps because they have tried using LLC's but its gotten all screwed up because they didn't operate them correctly. They realized it and wanted to figure out the best way out. Meanwhile, they realied that if they had to do it all over again, they would have skipped it out. There are investors on BP who have as much as 50 sfh as rentals in their personal name. Unless you are doing large deals or with non-spousal partners, its really not necessary.
good luck.
- 4yJoshua MessingerBusiness MemberProperty Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes
@Marcus Auerbach and @Joe Villeneuve really nailed this one on the head! Great advice guys!
- Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes4y
@Jeremy Suffel
I created an LLC in order to separate my assets from business assets.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes4y
Quote from @Joe Villeneuve:
"If you buy a duplex and you have 50k in equity and the rest is financed... you are not an interesting target for an attorney to take on a commission only case. ...A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!"Quote from @Marcus Auerbach:
It is very easy as a new investor to get caught up in the topic of asset protection - it just sounds like the professional thing to do. Most of what you read here is complete overkill for starting out. Asset protection comes in when your asset worth is in the 7 or 8 digits - at that point you are becoming a target for frivolous lawsuits.
If you buy a duplex and you have 50k in equity and the rest is financed (what @Joe Villeneuvesays!) you are not an interesting target for an attorney to take on a commission only case. For that reason I question weather it is worth to hold your first few residential rentals in an LLC. A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!
Going commercial (LLC) also means that you can't use conventional 30y financing. I know some people are comfortable to deed after financing into an LLC, which is technically mortgage fraud, because you remove the collateral from the bank... Both options not worth it IMO.
If you want to flip houses an LLC will work, so you are not buying and selling in your name. S-corp selection to save on self employment tax only makes sense if you are exceeding a certain income level, talk to your CPA!
If you have an expensive personal residence with a lot of equity you can hold that in a trust, but for most people its better to focus on getting a few deals done to first create some net worth before asset protection becomes a thing.
You see that all of these tools have a down side (time, cost, energy) and you have to decide if the juice is worth the squeeze.
Not sure how a "good lease" or a "building in good repair" gets you good asset protection.
Also, you can have the greatest insurance in the world, and that doesn't keep you out of court.
However, if there is nothing to gain from winning in court, that is the greatest asset protection since that will keep you from having to go to court. You can't lose your asset if a court case never happens. The greatest asset protection is to keep out of court...not to win if you go to court.Absolutely. Keeping your properties in good repair is asset protection 101! If you have broken hallway lights, missing handrails or uneven concrete - some trips (of says they did) - you are just providing an opportunity for someone to make claims. Asset protection starts actually when you are screening tenants, how you manage tenants (someone who is angry with you is more likely to go after you), what's in your lease agreement (rights and responsibilities), all those things make a difference - call it proactive lawsuit avoidance. The best defense is to not get sued in the first place.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesAll the items you mentioned are important, but prevention isn't the same thing as protection. You can do all of them, and more, and still get sued if you have a large equity number. You're right when you say "the best defense is to not get sued in the first place". However, just because you've controlled 3 reasons for a potential lawsuit, doesn't prevent a lawsuit. There are many, many other reasons to get sued. Eliminate the value, and you've eliminated reward for winning a lawsuit.
Quote from @Marcus Auerbach:
Quote from @Joe Villeneuve:
"If you buy a duplex and you have 50k in equity and the rest is financed... you are not an interesting target for an attorney to take on a commission only case. ...A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!"Quote from @Marcus Auerbach:
It is very easy as a new investor to get caught up in the topic of asset protection - it just sounds like the professional thing to do. Most of what you read here is complete overkill for starting out. Asset protection comes in when your asset worth is in the 7 or 8 digits - at that point you are becoming a target for frivolous lawsuits.
If you buy a duplex and you have 50k in equity and the rest is financed (what @Joe Villeneuvesays!) you are not an interesting target for an attorney to take on a commission only case. For that reason I question weather it is worth to hold your first few residential rentals in an LLC. A good lease, a building in good repair, your regular insurance and an additional umbrella go a LONG way!
Going commercial (LLC) also means that you can't use conventional 30y financing. I know some people are comfortable to deed after financing into an LLC, which is technically mortgage fraud, because you remove the collateral from the bank... Both options not worth it IMO.
If you want to flip houses an LLC will work, so you are not buying and selling in your name. S-corp selection to save on self employment tax only makes sense if you are exceeding a certain income level, talk to your CPA!
If you have an expensive personal residence with a lot of equity you can hold that in a trust, but for most people its better to focus on getting a few deals done to first create some net worth before asset protection becomes a thing.
You see that all of these tools have a down side (time, cost, energy) and you have to decide if the juice is worth the squeeze.
Not sure how a "good lease" or a "building in good repair" gets you good asset protection.
Also, you can have the greatest insurance in the world, and that doesn't keep you out of court.
However, if there is nothing to gain from winning in court, that is the greatest asset protection since that will keep you from having to go to court. You can't lose your asset if a court case never happens. The greatest asset protection is to keep out of court...not to win if you go to court.Absolutely. Keeping your properties in good repair is asset protection 101! If you have broken hallway lights, missing handrails or uneven concrete - some trips (of says they did) - you are just providing an opportunity for someone to make claims. Asset protection starts actually when you are screening tenants, how you manage tenants (someone who is angry with you is more likely to go after you), what's in your lease agreement (rights and responsibilities), all those things make a difference - call it proactive lawsuit avoidance. The best defense is to not get sued in the first place.
- 4yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
How does an LLC Logically Protect a Landlord?
A lot of landlords are advised to put their properties in the name of an LLC for asset protection.
While this is basically true, the reality isn’t what most landlords think.
If a legal issue occurs with your property resulting in a lawsuit, there's a decent chance the plaintiff's attorney will be successful in "piercing the corporate veil" of your LLC and being able to sue you directly.
Why? Because most landlords don't follow all the legal requirements to maintain their LLC as a separate entity.
So, what else can a landlord do to protect their personal assets from a business lawsuit?
Well, what types of lawsuits is a landlord most likely to face?
Lawsuit from tenants for personal injury!
How many tenants have the funds to pay a retainer fee to an attorney to handle the lawsuit?
Not many! Most will find a personal injury attorney that will take their case on contingency – meaning the attorney will charge very little, if anything, upfront, but take a third or more of whatever they collect.
And here is the secret of using an LLC to protect your personal assets – by "hiding" them!
You see, there’s nothing worse for an attorney taking on a contingency case, fronting all the legal expenses and investing their time to win a case and obtain a court judgment – then NOT be able to collect on the judgment.
So, astute attorneys will research the available assets and insurance before accepting a case on contingency. If they can’t find either, why would they waste any resources on the case?
If all they can find is the property in the LLC, it may not be worth the additional hassle of trying to force a sale of the property to collect on their judgment.
So, they'll research who owns the LLC and what assets that individual has.
If you act as the agent for your LLC and use your personal address – guess what? You've just made it super easy for them to find you and now they can research your other assets and probably sue you!
So, if you're going to go through the effort of setting up an LLC, be sure to take the extra steps to find an attorney, CPA or other professional willing to act as the agent for your LLC and allow you to use their address. Most will charge a reasonable annual fee, but think of it as insurance.
Lastly, consider just getting more insurance, typically an umbrella policy to cover your entire portfolio, instead of OR in addition to an LLC.
Of course, discuss all this with an attorney!
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