Structuring real estate for cost and protection in California

[Alvin Ng]

Hi BP,

Although I’ve only started in real estate investing, I’ve been reading books on tax and legal protections. In protecting my investments, I’ve learned the importance of the first and second defense, home owner’s insurance and umbrella insurance. The third defense is minimizing your attractiveness to creditors/lawyers and lastly, isolating assets through liability separation. I also know to differentiate between inside and outside ‘attacks’. Inside relating to the property itself like tenant injuries and outside relating to my personal life like car accidents.

The book I've read suggests that an ideal structure of real estate assets in CA is to hold each property in an LP and have an LLC formed in Wyoming or Nevada as general partner - for cost and protection reasons. Unlike a CA LLC holding, outside ‘attacks' may not force sale of real estate and are limited to charging orders in Wyoming/Nevada. The rationale is that lawyers/creditors will be less inclined to spend time reaching for charging orders in different states, ie: third defense. Also LLC formation in those states are low cost.

I’m not even close to getting to this type of structuring but as an exercise of academia, I wanted to get opinions of BP members on the cost and protections of this type of asset structure.

Other forms of third defense I’ve come across include:

-Keeping LTV high

-Taking out LoC (creditors will not know the utilization of LoC until winning the case)