What is the best way to shield assets from foreclosure?

Question

I'm looking to start REI with a partner and was wondering what is the best way to shield assets from potential foreclosures? Are LLC's still the best way to go? I know that it's difficult to get a bank loan if it's a new business with no credit. If forming LLC:

1. How long would I have to season funds in the LLC bank account?

2. What are the fees like to purchase property as an individual and then transfer to the LLC?

3. Is it still recommended to form LLC in the home state (CA) vs foreign LLC to avoid the hassle of double LLC paperwork, fees, etc.?

I'm also aware of self-directed IRA, but the requirements for non-recourse loans really limits our options in terms of leverage. Not to mention the same withdrawal limitations apply and we'd like to be able to take out the funds when we need them. Thoughts, BP fam?

Brent Coombs · Answer

Best way? Don't default! [Along with: Only buy bargains! ie. Never allow yourself to be underwater!]

ie. So what if your lender/circumstances force you to sell? Rake in a profit anyway! Cheers...

Max T. · Answer

Yeah avoid foreclosure by paying your mortgage every month.

Brett Goldsmith · Answer

Avoid foreclosure by not defaulting on the note or letting the note come due.  Entitys have nothing to do wtih preventing a home from going to foreclosure. You should be speaking to a lender about seasning funds ( depends if you're going private money or not ).

Typically I setup entity's based on the state I am purchasing in.

Ned Carey · Answer

You are normally going to have to personally guarantee any loan to your LLC. So in theory the bank could go after your private home for the shortage if they foreclose and don't get enough at the auction to cover the debt. In reality banks typically don't go after shorages but they have the right to.

James Miller · Answer

Pay off the loan? A competent lender won't lend to you or your entity without the ability to foreclose the collateral. Non-recourse just means that if there is a deficiency after the foreclosure, they won't come after for the deficiency.

Eamonn McElroy · Answer

Legal entities aren't a fool proof way to protect your personal assets.

Always carry appropriate and adequate insurance.

Brett Chien · Answer

Thanks for the answers all, I should have reworded my question. Is LLC still the best way to shield your primary residence from investment properties being foreclosed?

Katie L. · Answer

@Brett Chien

LLCs will not protect you from foreclosure.  Pay timely if you want to avoid that.  LLCs are used mostly for protection from unsecured creditors in the event of something like a tort case or a contracts case.  The lender usually has a secured interest.  You'll want to be careful about triggering due on sale clauses if you transfer the property from one owner to another.  The lender might require a personal guaranty  if they are willing to accommodate you transferring it to your LLC from an individual.

California is a sort of beastly state when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will be deemed to be "doing business" in California and therefore subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you will need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will need to pay registration and filing fees in at least 2 states if you don’t buy CA property. Be sure to tell your accountant that you now need to file non-resident income tax returns in each state where you own property as well. Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts in case of contract disputes.  I would advise against forming the LLC on your own. Good luck!

*This post is informational only and is not to be relied upon.  Readers are advised to seek professional advice.  This post does not create an attorney-client or CPA-client relationship.

Andy Mirza · Answer

@Brett Chien Actually, it would probably be easier to foreclose on an LLC than a regular owner occupant. Dodd Frank put in place additional requirements before proceeding with FC on an owner occupant. I doubt that those would apply to an LLC so FC could happen quicker.

Anthony Dooley · Answer

If you buy the property right, you will have enough equity to sell it if you get into a bad situation. LLC have nothing to do with protection from foreclosure. If you don't pay, you get foreclosed. If your partner runs out on you, you are stuck with the bill. An LLP would be better if you have a partner than an LLC.

What is the best way to shield assets from foreclosure?

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