New Real Estate Investors - What Entity?

Question

Hi folks. New to the site and new to real estate investing (although I just finished with The Book on Rental Property Investing).

My uncle (age 57) and I (age 48) want to start investing in residential single-family real estate.

Being that we both have individual assets to protect, an LLC would seem like a no-brainer, except for the fact that setting up an LLC would rule out conventional loan sources. Should we set up an LLC and forego conventual loan sources? Or should we operate as sole proprietors and use liability insurance to protect against lawsuits and have access to conventual loan sources? Or should we create another entity like LLP or an S-Corp?

Shawn Regnier · Answer

@Costin I. @Scott Smith thank you for the links. They are now bookmarked for future reference.

Eric B. · Answer

@Scott Smith WOW you couldn't have answered my question any better and offered a great amount of clarity.  I thought you were quite succinct actually given the amount of info you provided.  Honestly, as I was reading it I thought to myself, "He should really write this up into an article."  In my opinion it would complement the articles that you have already written.  I'm actually going to copy and paste your response into a document so I can keep it for easy reference.

Thank you again for your response.  I appreciate it very much. Hope you have a good weekend!

Scott Smith · Answer

@Eric B., That's a question I have spent years refining. You are correct that you can set this all up yourself, with the exception to needing a signature by a Registered Agent - which can even be purchased for a small fee.I want to preface this explanation by stating that this is a system that I find is my "go-to," but there are stronger entities that cost much more as well as cheaper entities that don't protect you as well. This isn't legal advice, but simply my personal opinion on these issues. None of this is set in stone because of all the variables that can play into the formation of these entities, which is why it's important to meet with an attorney who is experience in real estate investing to get advice based on your specific needs.To start with, I want a quick explanation of what the Series LLC actually is. A Series LLC is a type of limited liability company that is utilized to protect and separate assets.  Assets can include real estate (residential and commercial properties), promissory notes, and ownership interests in partnerships. The Series LLC structure allows the creation of separate entities, or individual series, under the umbrella of the Series LLC.  For ease, think of the Series LLC as the parent LLC and the individual series as the children. Each individual child series holds an individual asset, such as property, a promissory note, or ownership interest, thus creating a separation of assets.

1. Discuss your portfolio and come up with a strategy with an attorney *who has real estate investing experience*

-  Sure other attorneys can help, but they often don't know the niche ways to optimize these entities. I would recommend the sale disclaimer for your CPA and banker - those with experience have better advice for you!

2. Certificate of Formation is filed with the Secretary of State

-  Additional later of defense: file it under an Agent Trust with yourself as a member - your name does not appear on the public filing, making it a needle in a haystack for anyone trying to find your assets.

3. "Parent" Series LLC is officially registered with the Secretary of the State, becoming a publicly filed entity, and is governed by an Operating Agreement

4. At this point I recommend a client buy the property in their own name prior to moving it into the series LLC, allowing you more financing options.5. And.... "Since securing a conventional loan on in an LLC is difficult, I should buy a house in my name with a conventional loan, Transfer from "Eric" to "land trust" and Transfer from "Land trust" to "SLLC XYZ"."

6. PROFIT! Unless you purchased properties that lose money... Then you have very well protected money-sinks!

You essentially have the bones marked out for it. The land trusts remove your name from public record for the "child" series, while the Agent Trust will remove your name from public record on the "parent" Series LLC - which makes this entity insanely difficult to "discover" from the outside. Also, when you have an attorney file the private documents for your land trust, those documents become protected under client/attorney privilege, another layer of protection. Due to the use of land trusts for partners on deals, it will also throw doubt into the suitors confidence that you own the entire property - for all they know you might only own 25% of that property... Essentially you are trying to remove their will to sue you, and any attorney who knows what they are looking at will realize this entity is going to take lots of time and money to even try and breach, not to mention actually getting a settlement or judgment out of.

Beyond that you need to account for corporate management and having some solid bookkeeping to ensure the different "child" series don't commingle their funds.

Can people do this themselves? Yes. But many do it wrong, and they end up paying for it. Whenever I attempt something new I always try take on partners who can help me curb the learning curve and guide me through the process. With how many different aspects are involved in real estate investing I always recommend people getting into it seriously to establish a "real estate investment dream team," a group of professionals they have access to for any time they have problems. Sorry for the long winded response. I should probably just come up with an article in BP so I don't have to type this out each time.Thanks for the question.

Eric B. · Answer

@Peter Hynes - Thank you for posting this.  I have the exact same question and feel we are likely in similar spots.  I am trying to start my real estate business properly.  I want to get into buy/hold for cashflow and am planning on getting a SFR in 2019.  However, I want to make sure I have properly structured my business so that I don't have to rearrange things as we move foreward in time.

@Scott Smith- I have read many of your articles.  I feel that each of them has some value to offer.  I struggle with how best to implement the value.  What is the order of events that someone like myself, who has yet to make their first purchase, should follow in order to start off on the right path to success? This is my general impression based on what I've read.

• Contact an asset protection lawyer (It doesn't seem hard to open a single LLC by myself online but I imagine it would be difficult to get much past this without some professional help?)
• Set up a holding company LLC
• Set up a SLLC (Series LLC)
• Since securing a conventional loan on in an LLC is difficult, I should buy a house in my name with a converntional loan
• Transfer from "Eric" to "land trust"
• Transfer from "Land trust" to "SLLC XYZ"
• ???
• Profit?

Scott Smith · Answer

Thanks @Costin I.@Peter Hynes - nice to meet you! Many of the clients and investors I work with have had these concerns. Usually you get your financing in your personal name then use a land trust. Land trusts are viewed as estate planning tools and will not trigger the due-on-sale clause. The logistics of using a land trust to secure financing, while enjoying the protection of an LLC, are laid out in this article: https://www.biggerpockets.com/renewsblog/llc-lendi...Ultimately the goal should be to keep as many financing options available while ensuring your asset protection is solid. Using the land trust within the structure of an LLC, or a Series LLC, makes that possible.

Costin I. · Answer

@Peter Hynes - A partnership also might rule out conventional loan sources - lenders might not like two people on the title unless both qualify for the loan. Also, insurance and LLC are not replacements for each other, but complement each other.

Since you seem to have assets to protect and also want to enter a partnership, establishing asset protection would be wise. Read this threads on partnering:

• How to Effectively Conduct Joint Venture Agreements as a Real Estate Investor
• how-do-i-properly-construct-a-purchase-with-a-partnership
• https://www.biggerpockets.com/forums/51/topics/591...
• Taking-on-partner-s-and-limiting-our-liabilites
• Questions-for-capital-partners/
• Real-estate-partnership-questions/

And here is a diagram to help guide you on this quest - talk with @Scott Smith to get implementation details:

Scott Smith · Answer

I do agree that there are costs involved with running a business, but there are multiple reasons to place the property into a Land Trust rather than directly into the [Series] LLC. On the financial side, this method allows you to have all the regular financing options you get when purchasing a property in your own name - since that is how you are conducting the transaction. This offers favorable routes and a straightforward transaction. At that point you transfer the property into a Land Trust, which is a type of trust that is created by a trust agreement for the sole purpose of owning a specific piece of property.  The trust agreement is a private document and will not be recorded or filed in the public records.  Since the trust agreement specifies the ownership structure of the Land Trust and that trust agreement is not made public, your name remains anonymous. You just make sure the Land Trust is not in your name, essentially. Therefore, once the property is transferred into the Land Trust, another layer of anonymity is created as your name will not appear as the current owner in the public records.As for your second point - you are correct. And I would argue that there is no "perfect" asset protection strategy that would exist inside the law. As long as you own or benefit from an asset, there will be some form of liability that attaches you to it. My goal is to help people (1) protect and hedge themselves to provide security in case the worst does happen, and (2) through that level of protection prevent the suits from even happening. Ultimately, law suits are a business when you dig down to how they function. Attorneys are out to find the money they can win through litigation for both their clients and themselves. If you can provide a solid wall of defense, you realize that most attorneys realize how challenging it will be to bring litigation against you and will look for the next guy who has all his properties in his own name or in an LLC with his name written on the title. And some of the best tools can actually save investors money as they scale up.

Peter Hynes · Answer

Thanks, Nate, and everyone else. I appreciate all of the great feedback!

Ned Carey · Answer

@Peter Hynes

• You can get loans for LLCs, It is just going to cost a little more.
• LLCs are not going to give you perfect liability protection

Regarding point one, I look at it as just one of the costs of running a business. There are certainly people who owning in their own name is fine more real businesses are held in an entity.  To me to be less conventional and less professional to save a little money is silly.

An LP or S corp is not going to be any easier to get a loan. The reason many loans are not available to LLCs is that loans are sold to the secondary market and that is one of the rules of most secondary buyers - no commercial loans. Fannie Mae and Freddie Mac are designed to help people buy homes to live in, not to help finance businesses.

Regarding point two, I don't know an attorney who would own real estate in their own name that should tell you something.

Jack Bao · Answer

Thanks @Scott Smith. This is awesome information. very informative, and very helpful!!!

New Real Estate Investors - What Entity?

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