Good holding options besides an LLC?

Question

Hi folks,

Wowwww I am so pissed at my home state of California right now:

I am planning out of state investments in buy-and-hold multi-family properties. (Insert standard California refrain: "It's too expensive here")

I was planning to form an out of state LLC to avoid California's annual $800 LLC fee.

However, California law requires that if an out-of-state LLC is managed from within California, it still has to pay the $800 annual fee!

This will destroy CoC return on my first property. And it means that I have to hold all my properties under the same LLC unless I want to pay the $800 fee for each of them.

Are there other options I can consider besides an LLC, which would avoid this fee?

Thanks!

Michael Plaks · Answer

@Norman Berman

Your question is flawed because it does not specify what "good" means to you. Good for what?

You're always allowed to hold any properties in your own name. There's no extra CA punishment for that, but you and your properties are potentially exposed to legal risks, so you might lose the properties if things go wrong. What exactly are the legal risks is the lawyers' domain, and I'm not one of them. Worse, lawyers do not agree between themselves.

If you believe that asset protection is important to you, then you need some entities. The moment the word LLC enters the picture, your lovely state will want $800. You can create Land trusts that do not change anything for taxes, do not trigger the $800 extortion, provide some anonymity, however they do not really provide any asset protection, from what I understand.

Some investors and lawyers believe that a more complex structure combining land trusts with out-of-state LLCs can defeat the $800 CA ransom while still providing asset protection for the out-of-state properties. I cannot say anything on this topic, not being an attorney. Just keep in mind that these structures are more complex and therefore more expensive, so you will be trading $800 tax for a higher cost of setting it all up and possibly some annual compliance costs on top of it.

Maybe accept your $800 sacrifice to the Evil Lords of the West Coast as the cost of doing business and focus on increasing your cash flow.

Andy Eakes · Answer

@Norman Berman Are you not making at least $800/year in positive cash flow out of state with multi-families? I feel that the whole reason for investing out of CA is to have that really good positive cash flow coming in every month. I am not sure where you are investing in the US, but you must be making more than $67/month ($800 / 12 months) cash flow.

If the $800/year is going to kill your cash flow on this deal, I wouldn't blame CA. I would look elsewhere. Find a multifamily that is going to add that extra rental income that is going to drive your profit. And the rates are at historic lows. There are plenty of people making more than $67/month on rental properties outside of CA. Don't let this be a road block!

Cal Dunagan · Answer

@Norman BermanYikes, California is a tough real estate market. The LLC is likely not your best option in California. I found a pretty good article here on BP about what is known as a Delaware Statutory Trust (DST). This may be a good option for you. Don't let the name of the trust fool you. Delaware is just where the trust was first used. It appears to be eligible in California.

Cody L. · Answer

While I have my multifamily all in their own LLCs, I still have 10 or so single family homes from when I started all in my name.  No LLC needed.  It doesn't do what people think it does.  Just leave them in your name and get liability insurance.   Or hire someone to manage it in Houston and argue to CA that they're the ones operating the LLC.  Or change your primary residency out of that hellscape.

John Underwood · Answer

LLC is best for asset protection.

you could use a trust which helps hide ownership but doesn't give you any protection.

You could just keep in your name with a mortgage and insurance on each property and an umbrella policy.

Good holding options besides an LLC?

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