All Forum Posts by: Jerry W.

@Alvin Ng, when it comes to under capitalization it depends on whether it is fake. if you have a company and take a 2nd mortgage out to buy another rental cool. it is normal business. If it is the only property in the LLC or it is a series LLC how do you rationalize why you take money out of one corporation in order to give money to a different series or or different LLC? They are supposed to be legally and financially separate. If you take $100K and give that LLC a $100K and mortgage made out to you personally doesn't that suggest fraud a little bit? Can you prove you wrote the LLC a check for $100K? what happened to the money? Is it still in a bank account in the name of the LLC? If so great, if not where is it? If it ended up in your account as wages or a dividend it looks like you intentionally under capitalized it. What value did the new LLC give to the old one? Now if it used the $100K to buy another rental in the same LLC you are fine, but that is not what the GURUs want. The bank probably won't loan you the $80% for the new property if they know the 20% down payment was also borrowed money. Think about it. If you have a property worth $200K and only owe $50K how do you extract the $100K without the deal looking like you are purposely stripping off the equity? They make it sound good when selling liability protection schemes, but most look like fraud in front of a jury if you are not honest about it.

@Ryan Pozzi, I think it matters a lot where you are at.  If you have several thousand sitting in savings why cut back?  If you have 3 unpaid credit cards owing $10K each you really need to cut back.  If you are in your 60s and well set compared to being in your 20s or 30s it matters a lot.  If you don't have a lot saving now and having your investment grow for 30 more years can a major source of income later.  Having only a few years until retirement a few thousand might not mater much.  I have done buy and hold for well into 20 years.  I started slow, and had very little to invest.  We added when we could afford it, and often sold to be able to put money down on several more properties.  Despite turning 60 next year I am still buying.  I am more interested in gaining sudden equity or good cash flow rather than long term payout now.  If I can value add $20K, then I go for it.  I no longer think about a good payoff in 20 years.  I am beginning to pay properties off.  Your investing strategy depends on where you are at financially and time wise.  You won't see me not eating out or not buying the new tool I really like.  I did that over 30 years ago to graduate with less than $10K debt after 10 years of college.

@Alvin Ng, the first problem is you live in CA. Their franchise tax of $800 and up on every entity that even looks west is pretty bad juju. You really need someone who knows CA law and taxation to advise you on that. I think you have the cart before the horse. You need real estate before you worry about protection. I have VERY little faith in putting LOCs on properties or artificially keeping mortgages high just to protect from liability. Those are reasons that courts can pierce the corporate veil and disregard the corporation or LLC and hold you directly responsible. I would do a basic LLC or at most an LLC as manager of another LLC for liability purposes. The guys touting trusts and series LLcs disagree. If the overhead of multiple entities renders you profitless from investing what is the use? Can your investing afford this kind of entity and the time and extra book keeping that goes into it?

There are those that disagree, and you should hear their view.  I know that @Scott Smith has a program he suggests.

There are several thoughts @Brett Rounkles. First by owning one LLC with another you can create anonymity in ownership to a limited degree. I think anonymity is over rated and easy to figure out in a real case. Another method is to have one LLC own the property and another manage the property in order to siphon off the income and again separate liability away from the company that holds the property. It is probably too complicated and expensive, mostly in time in the beginning. Once you big enough that the cost is won't break you can add that on.

@Brad Larsen, while I as a landlord would not agree to a clause that says the manager gets to set the rates, I think you are a fool if you are not local to not listen to your PM>  No I have reasons on some of my rentals where I will not lower the rate to get a tenant.  I have a 4 plex that almost never had a vacancy sit empty fr a little over 3 months recently.  Yes I could have lowered the rent and rented it quickly, but I didn't want to risk having long term tenants hear the new guy got rent at $50 or $100 per month less than them.

As to "firing" your owner, about 5 or 10 years into private practice I was running a solo firm.  I went to a time management class to help manage time and deadlines to hopefully reduce stress for me and my staff.  That is where I first heard about Parettos(?) Law.  80% of your headaches are likely caused by 20% of your clients.  Upon returning from the seminar and thinking about it I fired my 5 most troublesome clients.  The quality of my time at the office jumped about 50%.  If they are a small part of your business and they cause you 80% of your headaches, fire them.

@Shiloh Lundahl, congratulations.  One of the few good things about doing taxes and yearly corporation renewals for the state is you can look at your outstanding debt on your portfolio and your book value at the local county assessor at the same time.  While it was gratifying to see the net worth of my main company top the $1 million mark in actuality it was meaningless from a lifestyle viewpoint.  I have taken out about $4000 in income off of my real estate investments over the last 20 years.  I don't use it to buy lunches or new trucks or nice cars or go on vacations.  I use the income to buy more houses and fix up the ones I have.  Where it makes a difference is that as of last month I went from working at the office about 50 hours a week to about 30 hours a week now.  I lost my main job, and while my private job has increased a bit to help offset the loss, the fact is my lifestyle allows me to live pretty well for not a lot.  My wife and I eat out about 6 or 7 times a week, sometimes more.  We paid cash for my wife's new vehicle, a 6 year old SUV with 50K miles, we spend a lot on Christmas presents for kids and grand kids, We take off when we are needed to babysit or go on shopping trips.  It is the freedom from worrying about retirement anymore or having to look for a full time job to make monthly payments that makes that number important.  While my work truck in 27 years old it has new tires and only 89K miles, it runs like a champ.  I will probably replace it, but it may take awhile.  The thing is I can write a check if the transmission blows out or something like that.  I am not one ruined tire from missing my rent payment.  My house is paid for, all my vehicles are paid for, none of my kids left college owing any loans.  That is what net worth does for me.  Freedom from worrying about the smaller things, that can become scary things if you lost your job.  Next year after I turn 60 I plan to cut back to 20 hours a week and do more traveling after I begin receiving 2 small pensions that will make me able to pay all incidental expenses except  health insurance without really working much.  Volunteer fireman pension, etc. 

Don't forget the peace of mind that comes from wealth, not just the big cars or houses.

@Kris Abejuela, when you mention the magic word California it opens a huge can of worms.  While I am not  a fan of anonymity, @Scott Smith has often talked about a thing called a Delaware Trust. I know practically nothing about them, but it is my understanding they do get some protection from liability like an LLC, but they do not trigger the $800 franchise fee California charges for every LLC or Corporation you own. I would presume that it has pass through tax status or he would not be promoting them. He would be the one to give you more information about them. The $800 franchise tax may make an option like a Delaware trust more affordable.

@Kris Abejuela, lets compare your corporate protection to buying a toilet for your bathroom. When you buy your first rental you need a toilet in it. It needs to be functional, it needs to look properly, you need to know and understand how it works so you can fix it if needed. You might pay $50 to $120 for that toilet. Now after you own 4 or 5 rentals you might need to buy taller toilets or handicap accessible toilets that are $200 or $300 each. They will be very good toilets. Now you may need to put a beday (no idea how to spell it) into a rental that may cost you a few thousand dollars. That will be high end and only needed if you have top of the line clients. Eventually you may want to buy a $30K toilet that you can flush bowling balls down the toilet. It would be crazy to do that in the beginning and in fact you will probably never need it. Some of the anonymity schemes and trusts and multiple LLCs are going to require a lot of paperwork and money. If you don't keep great records they will be useless. If something truly bad happens they will likely be able to find you with a few depositions or interrogatories anyway. Usually an LLC going through a managing company is great protection. if you need more then you can add another layer of LLc for a managing company and owning company are separated. If you run them right they should be fine. If you are hands on in any way you will never really be anonymous. There is a reason NONE of the big players on this site use anonymity in investing. If you truly did something bad they will get to you, period. Barring that you should be OK.

@Scott Smith, the part that addressed some of my concerns is helpful. Do not use the term "Land Trust" relating to property in Wyoming. Here Land Trusts are simply trusts holding large amounts of property. probably 90% of them are permanent trusts for holding large amounts of land or other real estate rights. They will invoke the due on sale clause. What you described is not a land trust under Wyoming law, it is an intervivos trust which the owner must be the beneficiary of. They normally contain clauses for passing the property to the next generation or or at least the spouse. I have no idea what you refer to as an Agent Trust. I have never heard of one, and the phrase does not even exist in the Wyoming statutes that I could find. I agree with the concept that you can have an attorney, or actually anyone, even your registered agent you pay $50 to for the purpose of forming an LLC, sign to create it giving you brief anonymity. Now in order to file the deed the buyer MUST file a statement of consideration. Guess who signs it? There are ways to get an agent to sign for you, but it is pretty hard to justify it in a transfer to yourself, and you will run up a pretty good cost. There is an exception to the document if you certify that the land is in effect being transferred to yourself. You don't want to file that because you then admit under oath to still being the constructive owner to the property that was in your name just a minute ago. While there are statutory protections on disclosing the document, there are also ways around that. Even if you clear those hurdles, and put the LLC as Trustee, Aaron is not going to be anonymous. He will be at closing signing documents and exchanging keys with the Seller, he will also have to be the one to sign the 72 hour notice to quit, or the tax appeal, or the one who meets and shows the property to the tenant, he is the one they call for repairing the furnace, or filing the small claims for keeping the damage deposit. He must write the 30 day deposit disposition letter and sign it. Who will sign the water payment guarantee for getting city water? If he is a hands on investor he will not be able to be anonymous. Now if he uses an LLC to buy it and uses a different LLc to manage it, how is his protection any less than using a trust? Your system can work for a small percentage of folks who do not self manage. If they bought the property through an anonymous LLC and managed it through a paid management company, they would have very little liability, however when you self manage as most owners here do, anonymity just won't work.

Sorry I must break for sleep.  I will try to get back tomorrow.

You might try the VRBO site.  They have worked well for me.