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Aaron Rouser
  • Real Estate Agent
  • Saint Paul, MN
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Seeking Advice on Entity Creation for Growing Portfolio

Aaron Rouser
  • Real Estate Agent
  • Saint Paul, MN
Posted Feb 14 2023, 20:14

My wife and I own two properties in the Saint Paul, MN market - a SFR and a duplex - that are fully rented. We want to transfer both properties into LLCs, but we want to do so properly, and in such a way that sets us up for success in the future as we grow and scale our business. We're familiar with quick claim deeds, but aren't sure if that's the best route given our situation. We're looking to partner with professionals who have experience in strategic entity formation as we know little to nothing about this side of REI. Thanks to anyone who can point us in the right direction!

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Mike Hern
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  • Scottsdale Austin Tuktoyaktuk
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Mike Hern
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  • Scottsdale Austin Tuktoyaktuk
Replied Feb 15 2023, 01:09
Quote from @Aaron Rouser:

My wife and I own two properties in the Saint Paul, MN market - a SFR and a duplex - that are fully rented. We want to transfer both properties into LLCs, but we want to do so properly, and in such a way that sets us up for success in the future as we grow and scale our business. We're familiar with quick claim deeds, but aren't sure if that's the best route given our situation. We're looking to partner with professionals who have experience in strategic entity formation as we know little to nothing about this side of REI. Thanks to anyone who can point us in the right direction!

Some quick pointers, if you set up an LLC, have a reason. Just owning properties is not a good reason. If you were to sell your properties and you would wind up with $100,000 cash after all expenses, it's a good time to Properly set up an LLC. (It's a lawsuit test, attorneys won't sue you if you don't have much equity.) Don't use an on-line service. Make sure your attorney will represent you in court if need be. Make sure you have an Operating Agreement. Make sure you follow the Operating Agreement Precisely.

Otherwise, simply get umbrella coverage and be better off and relax.

 Your Comment: "We're familiar with quick claim deeds," The Term is actually quit claim Deeds

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James Hamling#3 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Twin Cities, MN
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James Hamling#3 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Twin Cities, MN
Replied Feb 15 2023, 09:50
Quote from @Aaron Rouser:

My wife and I own two properties in the Saint Paul, MN market - a SFR and a duplex - that are fully rented. We want to transfer both properties into LLCs, but we want to do so properly, and in such a way that sets us up for success in the future as we grow and scale our business. We're familiar with quick claim deeds, but aren't sure if that's the best route given our situation. We're looking to partner with professionals who have experience in strategic entity formation as we know little to nothing about this side of REI. Thanks to anyone who can point us in the right direction!


 Well lucky you Aaron, this just so happens to be my day job. 

To start with, all the disclosures; I am not a R.E. attorney, an estate attorney, or any other attorney, the following content is for entertainment uses ONLY and is NOT constituted as legal advice, medical advice, automotive advice or any other advice or advisory AT ALL. Explicitly sharing experiences, observations, for entertainment purposes yada yada blah blah blah you get the point. 

The FIRST STEP in entity structuring is to understand it's a process. I see far too many getting too focused on "perfect" for there end point and trying to build today for what will fit way down the road. No, it's about having a solid game-plan, a road-map, and each thing evolves along the way, right. 

What i most often see, and I personally really love as an end-point entity structure, addresses a slew of issues from how things move forward after we pass, legally avoiding any "death-tax". Mitigating suite risk. Efficiency for tax fillings and operations etc etc. 

How I most often see this deployed, and my personal favorite is: 

A trust, often irrevocable trust, is formed in WY. This trust forms a WY LLC. That Wy LLC forms a LLC in the state of operation, let's say MN. The WY LLC forms a domestic LLC in every state it has holdings and operates, this way tax filings can more cleanly and easily be completed per LLC per what state impacts there is, and the federal level is done at the WY LLC level that all items roll-up to. The domestic MN LLC is the "seen" entity that is the landlord, operating the rental.

yes, each domestic LLC per state is ran fully independent of the whole. Each having it's own bank accounts, accounting books etc.. The profits, and the profits alone roll up to the WY LLC. This creates a division between the various state LLCs because each is it's own independent entity that happen to be owned by the WY LLC.

Now interestingly enough, the WY trust can form a separate WY LLC (call this Asset Island). This separate WY LLC, kept 100% separate from all other LLC's, is for purpose of holding ownership of assets. This again follows the chain of forming a domestic LLC in each state of operation BUT it only OWNS the assorted assets, that's it, nothing else. Now, this ownership entity takes ownership over and than LEASES the assets unto the operational leg, the other public viewed entities, giving them right to sublet. Now, these operating entities, who have all this exposure and carry all the liability, they are asset poor, they have no assets, they lease the assets and sublet them for profit.

As you can see, there is some complexity. One can evolve into this point. The underlying ethos stands that the operating entity is void of attachable assets to protect against exposure to suites. A separate entity holds all assets but has no public exposure, thus protecting assets. And everything is top-line owned via trust, to create an enduring structure for the continuation of organization person to person, generation to generation, free of tax impacts because at passing there is no transference of assets or entity just a change of managing members and beneficiaries. 

I have seen some go a step further and have the trust form a 3rd LLC that then owns all software and support services for things such as accounting etc., that the other entities contract services from. I think this is a bit much, and may throw some red flags but I have seen some do this.

Why WY one may say, to best answer that I can only say research it because there is many reasons actually. My primary is the anonymity factor, case law in WY around such, and the ability for options when it comes to investment/investor capital. End of day it is a REI organization so one should never close that door of OPM, because REI runs on OPM.

A last bit of advice. Many talk about LLC's and there "protection" status they give. In many cases that is not so true. In MN for example it is clearly stated that a single member LLC is a DISREGUARDED ENTITY. That means it does NOT create that vail of protection many say it does just by having one, because it's very existence is DISREGUARDED. Meaning yes, everything you have and own CAN be attached and gone after in a suite. This is not legal advice it is simply pointing out whats clearly stated and so often overlooked.

By using the above method, any action of suite comes back to the MN LLC and it's holdings which are, in above example, no assets. Than it's ownership/ parent LLC which is a WY LLC and again, no assets just operational revenues and reserves. If structured correctly, since each domestic LLC is ran independently a good attorney should be able to keep it moving up to the WY LLC but IF it were to ever happen, there is little to get there anyways. And lastly the WY trust, which a person would have to make a lot of big no-no's to allow it to travel that far up stream such as a lot of co-mingling funds etc., but again, no assets BECAUSE all assets are held in ownership via a completely separate domestic LLC owned by a WY LLC, owned by the trust. That's roughly 6 degrees of separation, so a person would have to invest crazy legal $ to get that far along things.

Again, that's what I call "The Full Monty". It is complex yet simple. Complexity makes suite more expensive, and the best defense is to not be a juicy target. The "asset island" method has been long used by the elite of the world operating in the U.S.. If holdings get to a certain level they add in more layers going international where a person has to start traveling borders to follow the chain, and a suite would take decades if even possible. That is the #2 best defense, make it costly in time and $ for one to follow through on a suite so the expense of such exceeds the potential gains from such. 

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