Hold out of state properties in Land Trust and LLC

14 Replies

After reading posts after posts of land trust, LLC and asset protection, etc, my head is spinning. So I thought I'd start a new discussion on my specific situation and solutions.

I am closing five out of state REO properties, spread out in different states (IN, OH, MI, TX and AR) in two weeks. This is my first investment deal, I plan to sell them seller-financing, sell notes or outright for cash asap. I am thinking of holding them in land trusts with LLC (or S Corp) as the beneficiary for identity and liability protection.

Can the LLC be formed in out states such as Nevada, Wyoming or Delaware for less cost or it must be CA LLC because I live here? I've received different advice. One attorney suggests it's better to form my LLC in CA as CA is cracking down on out of state LLC, while another investor suggests forming a LLC in another State with less cost and using it just as holding entity (not operating entity). Also is single member LLC considered disregarded entity, hence losing the liability protection? Again I have limited understanding of business entity and asset protection, and might not even be asking the right questions. Any suggestion, advice or thoughts are appreciated.

Jesse,

I am also new to RE investing. I have done 2 flips here in greater Sac (3rd in contact) and own a rental about 45 mins North. I operate with 5 other family members so it happen to work best in our case to form an LLC. After doing a little research and contacting few attorneys, etc I ended up making a Nevada LLC for pretty much a holding entity. Nevada is one of the few states that does not require you to live there to operate from. Also I hear they are more private. Keep in mind even if you do this you will still need to register in CA to operate in CA and are still liable for the $800 yearly tax. All in all, with not much to protect (in my case) I'm not competely sure if I accomplished anything opening it up in Nevada besides more paperwork for myself. Also I habd heard a single person LLC (that's pass through taxed) is pretty much the same as doing it personally. Hope my experience helps and please post any information you find as I'm interested in where you land!

Also, you mentioned you are closing and looking to turn your properties quickly. I am getting heavy into out of state buy and holds and would be very interested in what you plan on doing. I am dealing with cash and can close quickly. PM me or please feel free to email and Id be happen to discuss any potential win-win situations.

Good luck!

[email protected]

@Brennen Cook undefined Thank you for sharing your experience. 

"Holding Entity": How do you define "holding entity"? When you formed your Nevada LLC, did you set up a bank account for the LLC? If you do, does money (rentals, etc) go through this bank account or comes directly to another bank account not affiliated with your LLC.

"Forming Neveda LLC": if you still need to pay $800, what is the purpose of forming your LLC in Neveda instead of CA besides being more private you heard?

I'll PM you regarding out of state investing.

Originally posted by @Jesse Zhu :

@Brennen Cookundefined Thank you for sharing your experience. 

"Holding Entity": How do you define "holding entity"? When you formed your Nevada LLC, did you set up a bank account for the LLC? If you do, does money (rentals, etc) go through this bank account or comes directly to another bank account not affiliated with your LLC.

"Forming Neveda LLC": if you still need to pay $800, what is the purpose of forming your LLC in Neveda instead of CA besides being more private you heard?

I'll PM you regarding out of state investing.

 As I am sure you know, self education only takes someone so far and then your experiences mold and shape things. To me active real estate is more of a living thing that changes as we grow. I initially started out wanting a holding company. One where I loan my own money to another entity that will actively be working. As I have found,  you can only research so much and then you have to make the step. I started with one idea and it has definitely changed and molded over the last year.

As for as your comment of forming a Nevada LLC I am pretty much agreeing with you. Even if you are a Nevada LLC every state requires you to file some sort of documentation. It's a registration of a foreign entity here in CA Which then requires you to pretty much file every document you would have if you opened it up in CA! Keep in mind I by no means claim to be fluent in this. To be honest I formed it in NV on advise of a lawyer friend aND a few BP investors. I can say Nevadas user interface is extremely useful as almost everything can be done entirely online unlike here in CA.

My current LLC is active with bank accounts, but I have a separate trust that "holds" my funding. In my opinion I like the write offs of owning an LLC warrants you. Although I also know personally (met from BP), an experienced investor here in Sac, that almost never uses anything other than his personal name and a great umbrella policy.

Jesse,

I just attended the Los Angeles Meetup 5/16/15, and the topic of how to hold property came up. Of the experienced investors in the group, at least two said they hold title to properties (quite a number of properties) in their own name or equivalent (ex. revocable living trust). Another said all properties are in LLCs so that he can deny ownership, yet control them. A close friend of mine discussed this issue regarding a few SFH rental properties and her CPA reviewed her overall situation and concluded no need for LLCs. I've struggled with this question and here is my thinking for a California resident about to own and already owning rental property:

1. When buying property in future with multiple owners or partners consider LLC (or some other business entity) to limit liability and protect all involved.

2. When buying property in future for yourself or with one significant other (ie. without multiple owners) then it depends on how much you are worth...

2.A. If your total net equity of assets is less than $250,000 (or pick whatever "low" figure you want), then use insurance policies to cover liability (property liability insurance, umbrella policy insurance) instead of LLCs. Umbrella policy insurance 1- 2 million dollar coverage is not that expensive (commonly less than $500/yr) . Annual cost of LLC in California (direct or foreign entity) for multiple properties adds up fast relative your net worth. Ex. your worth is $250,000, you own 6 LLCs which is $800/yr x 6 = $4800/year. That is almost 2% of your net worth each year. (That does not take into account tax filling costs, other state filing fees, ongoing record keeping costs, etc.)

2.B. If your total net equity of assets is higher than 1 million dollars (or pick whatever "high" figure you want), then consider LLCs as a way to segregate assets from each other in the event of a law suit inside any one LLC (ex. tenant or contractor sues you) or out side of all of the LLCs (ex. your car hits some kids at an intersection) . You will still want umbrella insurance policy. Your relative cost of same LLCs as above is less than 1/2 of 1% of your net worth (for the LLCs direct and foreign entity costs).

Special circumstances:

3. If you already own property in your name or equivalent (ex revocable living trust), then consider changing title to land trust first. This move does not trigger due-on-sale clause of any mortgage on the property. If you have no mortgage on property, then OK to go directly to LLC. After the land trust is holding title, you can change trustee and beneficiary to your LLC off the record. That usually is less discoverable by lending institution. But there is still the issue of changing the insurance policy of the property to the name of the LLC in order to have an enforceable policy. Insurance companies will report change of ownership to any existing mortgage company. That is an issue which may then still ultimately trigger due on sale clause for mortgage.

Practically speaking:

I have not heard of anyone reporting that change of ownership to LLC had triggered a due on sale clause with an existing mortgage. Even on BP I have yet to hear of an investor claim it did indeed happen to them. Even if it did, I would want to know if it happened with or without a land trust in place first (for previously owned property), or if it happened as a result of the insurance company notifying the lending institution after using the land trust first. If it has never happened as a result of an insurance company notifying the lending institution, then even more reason to use the land trust as a first step of a previously owned property.

I have no knowledge of the benefits of S or C corps so I cannot give comment on those entities.

Nevada isn't any more private than a CA LLC. NV still asks for member information to be listed on their articles. Besides, having both NV and CA can be expensive. NV requires you to pay the initial list of managers ($125) and business license ($300). Plus you have to pay the $800 CA minimum franchise tax.

There are several states that don't ask for member info.  WY, DE come to mind.  There are more.  

Thanks

Yooch

@Brennen Cook undefined I agree with you that RE investing is an evolving process, we learn by education as well as making hands on deals. The attorney I talked to at a workshop said he would suggest out of state LLCs 10, 20 years ago but not now. CA state is tightening up the regulations. Thank you so much for sharing your knowledge and experience. Very helpful!

@Hugh C. Thank you for the detailed sharing of your thoughts on the topic. Appreciate your input. Land Trust seems a good title holding vehicle. I am researching on land trust and considering purchasing Mr Land Trust Randy Hughes' home study course. I called him on Skype tonight and surprisingly he took my calls and answered my questions.  (Anybody who bought the course or attend Randy's seminar? can you also share your experience please?) Also I need insure those five out of state properties and does anybody know of an insurance company which can insure properties nationwide.  I'd really appreciate if someone can refer some good real estate investor friendly CPAs, attorneys, corporate forming services and insurance brokers in LA area.

@Yoochul C. Thank you for the info. If that's the case, it's better off just forming CA LLC. It doesn't make sense to have to pay double fees (Neveda and California).

Originally posted by @Jesse Zhu :

@Yoochul C. Thank you for the info. If that's the case, it's better off just forming CA LLC. It doesn't make sense to have to pay double fees (Neveda and California).

 Nail on the head, in my opinion.  Unless you have a couple million cash or many properties. 

Yikes. I just searched Due on Sale (DOS) Clause and found the huge thread about several DOS demands sent to owners who changed beneficiary to LLC. Several cited insurance notification of change of ownership/beneficiary as the triggering event. If you are able to buy with LLC at the beginning with bank approval, then you are likely OK. But if you try to switch the title of deed to LLC after you close, beware of DOS action.

Great thread @Jesse Zhu . I'm in a similar situation as you.  I listened to Scott Smith's insightful BP podcast #109 twice. However, he's Texas based.  I'm California based flip & buy and hold investing in IN, and eventually in FL (Vacation Rentals), and maybe Texas.  

Which entity route did you take? I'm leaning towards an LLC in CA within a Trust.

@Anu Gunn I ended up holding the properties in Land Trust. I do not have a LLC so I just put myself as beneficiary. If you do have LLC, it's better to use LLC as beneficiary as an extra layer of protection. I am still learning, so do some more research and ask for expert opinion.

@Jesse Zhu , Do you have a recommendation for an (investor friendly) attorney in the LA area? I'm looking to exactly what you're doing but would like to speak to a couple of attorneys first. Thanks!

(805) 404-1789

@Jesse Zhu This is similar to the kiosk business. Shopping malls here in Portugal have lease contracts for shop owners 200+ pages long. So, what you do is form a LLC per store, do in case something goes south only that one is on the hook. Same thing for you. Form a LLC per asset/deal.

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