All Forum Posts by: Costin I.

@Zachary Barton @Diego Corzo FYI - next meeting will be Sunday Apr 22nd 3-5pm at Round Rock Library.

There are ways to break the corporate veil, but that depends on how you maintain your LLCs and operations and how strict or supportive of enterprises is your state. Co-mingling of funds is one way to break the separation.

If the LLCs are $700 a piece and you are looking to setup multiple, I suggest to look into Series-LLC (if your state supports them).

Also, I suggest to separate in two sections your LLCs - holding entities to hold the assets (but no operations, no public facing) on one side, and one LLC for operations, property management, leases, contractors, etc (on the other side).

There is no absolute answer and unique tool/strategy in anything real estate. You need to learn how to use all the tools available to you (financing, insurance, management, etc.) and to understand how they fit together in your toolbox, as none will give you everything (e.g, insurance is required and it will cover you for many situations, but not always; asset protection (LLC) is litigation insurance and complements regular insurance, by minimizing the target and making it unappealing).

If you are a new investor, probably you will not have a lot of assets and/or equity to worry about (but even that is relative and subjective to each person tolerance to risk) so I would not worry about that till you pass that risk threshold (in my opinion 100K+ in equity, maybe 50K if you are really risk adverse) and you should be primarily concerned with finding good deals and growing your business first. Regardless, you need to implement insurance and proper management procedures, regardless of how many assets and equity you have. So, learn about that first - and a good point to start is a Nolo book (https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000/) mentioned in the doc, it will explain about insurance, how to evaluate insurance, and then about property management, property code, proper leasing and all the way to LLC and hiring.

Think of it as levels of protection. Kinda like, one house, get good insurance and umbrella policy. Two houses, make sure you don't have holes in your property management. Three houses and 100K equity, start looking into strategic asset protection. Four houses, establish holding LLC and separate operations into a management LLC. Then couple it all with your estate planning and protection from outside attack.

You can do that from the begining, but might be overkill (since you'll have to learn to properly manage an LLC and there will be some costs associated). Of course, you'll be better protected, but will it be neccessary if you don't have much equity to protect?

Things change if you have a profession where you need to worry about asset protection from the beginning (like a doctor where you can get sued and lose your rentals too). Also if you are doing flipping, in which case I suggest you look into Series-LLC and you operate each flip in its own child-series (if not clear why, ask for more details).

I spent numerous hours researching from multiple sources the whole LLC question and asset protection matter and all the rabbit holes it opens. I gathered all my notes in a 50+ pages document touching on formation and maintenance of LLC and business structures, transferring assets, protection strategies, trusts, anonymity, insurance, levels of protection, etc. including when you should do it, how many properties per LLC, due on sale clause, selecting an attorney, fees, checklists and resource materials.

My notes file are primarily on asset protection, and primarily for buy&hold, but they touch on many other rabbit holes that opens from that (insurance, property management, DOS, transfers, etc.). It should save you many hours of research and hopefully clarify a lot of concepts (or at least I hope it does :>) as to why you want it and when and how.

Let me know if you are interested, and I can send them to you - just send a colleague request (to exchange files need to be colleagues) or your email. And I can give you a referral to a good asset protection lawyer too.

@Derek L Deleon, we have one scheduled for Apr 22 at Round Rock library, not close to you in San Antonio, but maybe worth to check it out? First meeting will be April 22nd. See the event details.

My 2¢...

Like many said before, if you pay yourself through a separate LLC, you would have to pay income tax, state and local taxes (if any), and social security taxes (which might be of interest if you want to accumulate the annual points towards SS...and of course, believe SS will be there to pay you at retirement any relevant amounts).

You can setup things such way to pay the least amount of taxes, for specific gain and interests. But you have to run the numbers specific to your situation and scenarios with an experienced CPA to see if you gain any advantage and when/how.

Depending on how much income you have, you can set up retirement plans (checkout Solo 401K) that would give you more (higher contribution limits and more flexibility) than regular job plans. 

You can also set up medical reimbursement plans and pay for medical insurance that way, thus transforming personal expenses into business expenses. You can also hire your kids.

If you have a lot of rental losses: another reason might be to make it clear in your (or your wife) qualification as a real estate professional - although not dependent on a LLC as that is mostly a minimum 750 hours annually spent on real estate matters, if no other job - in which case you can deduct more then 25K in rental losses.

So, it all depends on your and your wife situation - if you have a job or not, with or without retirement plans and medical insurance, etc. - and what is more important to you.

There is another aspect to consider to set up as a different property management entity (LLC) from the holding entity - asset protection - you separate public facing affairs and all the interactions with tenants, contractors, etc. through this operations LLC and act as property manager, not owner. If properly done, is one half of common asset protection strategy.

One thing you might want to know - the free credit scores reported by Credit Karma and various online banking institutions (as many of the banks and credit cards offer free FICO scores) are in fact higher than what a lending institution uses. If your score is, let's say, 775 in Credit Karma, you can expect your score in the report run by a lender to be 25-35 points lower (or more strict), like 740.  And you need 720 and above to get the best terms.

I don't think you can get less than 5% for an investment property, without paying points to lower the rate. More likely 5.25 or 5.5% - I would call that good rate currently.

Yes, if your state supports them, and you plan on having multiple properties or doing flips, Series-LLC is a good way to solve the multiple LLC question.

There is no such thing as HELOC on investment properties...but there is Line of Credit (aka Portfolio Line of Credit or Asset Based Line of Credit) that you can get on one or more rental properties. You just need to find the right person at the bank (a commercial lender, not residential one) and ask them about the right product (don't ask about HELOC on rental, if residential lender they will tell you NO, if commercial they will send you to residential officer). Many banks and even local credit unions offers this product, so I suggest you shop around to compare the terms (some lend based on a LTV %, others on LTC %, closing costs and APR will vary wildly, duration and renewal conditions also).

We have one such line of credit secured by the equity in two rental properties that we use to place cash offers and acquire properties that we refinance into long term loans after rehab.

If you are a new investor, probably you will not have a lot of assets and/or equity to worry about (but even that is relative and subjective to each person tolerance to risk) so I would not worry about that till you pass that risk threshold (in my opinion 100K+ in equity, maybe 50K if you are really risk adverse). Regardless, you need to implement insurance and proper management procedures, regardless of how many assets and equity you have. So, learn about that first - and a good point to start is a Nolo book (https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000/) mentioned in the doc, it will explain about insurance, how to evaluate insurance, and then about property management, property code, proper leasing and all the way to LLC and hiring.

Think of it as levels of protection. Kinda like, one house, get good insurance and umbrella policy. Two houses, make sure you don't have holes in your property management. Three houses and 100K equity, start looking into strategic asset protection. Four houses, establish holding LLC and separate operations into a management LLC. Then couple it all with your estate planning and protection from outside attack.

You can do that from the begining, but might be overkill (since you'll have to learn to properly manage an LLC and there will be some costs associated). Of course, you'll be much better protected, but will it be neccessary if you don't have much equity to protect?

Things change if you have a profession where you need to worry about asset protection from the beginning.

I can send you my notes from the rather lengthy research into the question of asset protection.