Hey everyone. I'm new here to BP and hoping to get some great advice and encouragement. I'm looking into the BRRRR strategy and currently building my team. I have run into a few questions, really just wanting to make sure I'm doing it correctly. Any help would help.
- setting up a business entity. I have interviewed 4 asset protection firms. Which way do I go? One says to get an LLC for every property and have a holding company manage those llcs. While the other says just use a Nevada LLC to hold all your properties as you put them each in a land trust. Any pro or cons to these? Any work better than the other?
- I plan on using a PML to fund the deals and repairs. Should the money from the PML pass through to my "business entity" that is set up to hold properties or should I create a separate entity to purchase and repair or just have all the money go to me? Which way would be best practice and what does that look like?
- PML calculator available? New here and not sure if one exists already or if just using the deal analyzer will do the trick. I think I'm thinking too hard about how I calculate this. Example, let's say I offer a PML a 12% annual rate of return. I finish the deal and refinance in 4 months. Do I pay only 4 months worth or a straight 12% profit? Or is this just however the deal is structured? What does each look like?
Thanks in advance for any advice on these!
1. How many assets and properties do you have? How much equity are you trying to protect? Unless you have a lot (and that is a subjective measure), setting up all that might be overkill. I suggest to use the 2% rule - your cost to setup asset protection and maintain it (you'll have initial costs and then additional overhead because of it, in a rough proportion on 75%/25% - e.g. let's say it costs you 3K to get the LLC structures in place, you should count an additional 1K annually in bookkeeping, CPA and lawyer costs to maintain it) should be less than 2% of your equity to protect (and again, using the 4K costs, that means you should have at least 200K in equity). Before that, concentrate on getting your deals and building some wealth, learn about correct insurance and proper management and get that solid in place - none will give you total protection and you need to combine them as resources in your toolbox. I can send you more info on all this.
2. If you decide to proceed with implementing asset protection, you should have an asset holding entity (an LLC or better, since you are in Texas, a Series-LLC) (eventually with a land trust as a layer of anonymity) and an operations entity (an LLC that is the public facing entity that handles the repairs, hiring contractors, dealing with tenants and property management, etc.).
3. It depends on how you structure the deal. Some require a minimum period, and even if you finish sooner, you'll have to pay them (for example, they want 6 months of guaranteed interest - if you finish in 4 you'll still pay them monthly interest times 6 in total). Some requires points (%) at the beginning, some at the end, some both. I can send you a table to use to bring your PML/HML's to an apple-to-apple comparison.
Yep Corstin has all good answers, depends on where your assets are being held as well.
What is an asset protection firm? Is it a law firm or CPA?
It is just a law firm. An attorney/s that focus on asset protection and real estate. They also offer CPA services if needed.
Thanks for the advice. I understand the holding company assest protection strategy more so than just the Nevada one with land trusts. I currently own 6 rentals, yet going off the 2% rule, i am not there yet.
@Wendell Burris It's never too early to have an asset protection plan. Especially if you plan to grow within the next 5 years. It may be more cost effective to have a foundation, rather than waiting down the line and having to complete several transfers. Have you heard of a Series LLC? You can read more about it in the articles I have posted here and here.
A Series LLC can offer compartmentalization, which will separate your assets, and asset protection through anonymity. Message me if you are interested in finding out more.
Best of luck!
@Scott Smith I have heard of series LLC. The only issue I see here is it may take more work as far as documentation and also everyone I have spoken to says, that it hasn't been tested in court. So it's not tested as far as being safe or any good.
I have spoken to and interviewed these companies: Nevada Corporate Headquarters, Anderson Advisors, and KKOS Lawyers. All 3 advise against series LLC. Anderson and KKOS go with the multiple LLCs and a Holding Company Strategy. Nevada just goes with the single LLC and it holds all properties in a land trust.
@Scott Smith can speak better about the Series-LLC, but I would say the fact it was not tested in court is more of a FOR testimony than against, given the long duration now they been adopted (born in 1990 with the Delaware Business Trust act, in Texas since 2009).
Also, keep in mind, a lawyer recommending individual LLCs has a direct interest in that recommendation. With a Series LLC, you might have more cost initially, but after that you can create child series with an internal document. That hits directly on the bottom line of a lawyer looking to charge you for each LLC you create for each property.
@Costin I. Thank you for the mention! And the great information you added. Costin is correct regarding the fees and the lack of case law. Thanks again, Costin!
Hey, fellow Lubbockite!
We went with an asset protection firm that charges one upfront fee with unlimited LLCs. There is a small monthly agent fee for out-of-state LLCs though. Each individual LLC is a "disregarded entity" that holds each property and reports up the holding company, which reports up to the trust (for anonymity). I know some people think one LLC per property is overkill, BUT you can transfer the LLC to another investor purchasing inside an LLC, thus avoiding closing costs and the 2 year seasoning period.
At least, that’s how it was described to me; I’m excited to give it a try. :)
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.