All Forum Posts by: Jenifer Levini

A frequent error made by people who do not have a good grasp on benefits of forming an entity is to think that an insurance policy provides the same sorts of protections and benefits as forming an LLC. The analogy I like to use is that of a bumper and a windshield on a car. An insurance policy is a type of protection like a bumper. It might reduce the impact when someone rear ends you, but it doesnt keep the bugs out of your teeth as you drive along. That's why you need a windshield. An entity like an LLC is the windshield. It creates the contract protection every day, every time you form a contract, not just when something goes wrong. There are way too many benefits to list here. But a big one is that under Trumps new tax laws LLCs can pay lower taxes than an individual, depending on their tax bracket.

One big problem with this idea is that it really hurts the liability protection which is a major purpose of an LLC. For example, imagine that one LLC is the owner of 5 houses. Then imagine there is an accident at one house and the victim sues the LLC. All of the houses are available as the property of the LLC, that can become the damages payment to the victim.

Then, imagine that there are 5 LLCs that each own one house. If there is an accident at one house and the victim sues the LLC, the most compensation that he can get is all the property owned by that LLC...just one house.

I cant see any benefit of having one LLC own multiple houses when, as someone else pointed out here, the cost of an LLC is $125 and potential downside is the combined value of all the houses.

Call your local bar association to see if they have a lawyer-referral service. Ask for a referral to a few real estate lawyers. "local" will mean the location where the contract was formed. CAll a few real estate lawyers and see who seems trustworthy and you click with. Alternately, look up real estate lawyers on yelp and read their reviews.
Do it right away. This sounds problematic.

Hi @Kevin Lefeuvre, there are a lot of non-lawyers guessing at the law here, as usual on this site. But I am going to take a stab at what I think you are asking. I think you are asking whether you can form an LLC to manage real property, which is a different LLC than you may or may not have formed to hold property.

This is a tricky area of brokerage law. In California, a company that manages property must employ a real estate broker whose license is associated with the management activity. There is a loophole here in that the company is not receiving compensation because the LLC member is actually the owner of the property. And a brokers license is required by definition when there is compensation for property management. What happens when the company is not paid for the management? This is where the discussions about piercing the corporate veil become real. Because if the company is not paid, then it appears to be a shell where the owner is hiding. But maybe not. it really depends on how the operating agreement is written.

However, to avoid this ambiguity, its usual that the LLC own the property. (I'm assuming that youre not a real estate broker)

Hi @Kevin Lefeuvre, This is an interesting question. As a landlord I definitely would make sure to beef up the sections of the lease regarding the purpose of the rental, the number of  people who can live there, the restrictions on subleasing, personal responsibility...maybe more. For example, can the corp move different people in and out every week? Is it a long-term housing for one family or short-term housing for many different people? Can they engage in business activities there? Will it become their corporate office? Is that allowed in your zoning? Can they turn it into an airbnb?

Remember too that a corporation is a liability shield. So if they destroy something, no one person has responsibility. I'd add something to the agreement making an individual person take responsibility. This is what banks have in the mortgage papers when they lend to LLCs or Corps, making one or more individuals take responsibility.

And, as far as paying for the whole year in advance, that almost always ends badly because it makes it difficult to get the tenants out if there is a problem.

These are just the things I thought of off the cuff. If you want real legal advice and help with your lease, feel free to PM me.

Jen

@Charles Cooper

Hahaha, yes, that's what I though about 5 years ago. Unfortunately because of the severe rent control San Pedro never gets gentrified. I mean improved.

Hi @Sam Bauman I'm a real estate attorney in Santa Cruz working with a lot of the real estate investors around the bay area. It seems to me that your question has two parts. One is about the financial viability of combining funds to get a piece of this very expensive real estate. I'm going to leave that analysis to others. The second part is whether it is wise to invest with family and what sort of agreements should be in place to help keep family harmony. I write a lot of these sorts of agreements. There are several kinds and they have different tax consequences. There are basic partnership agreements that are an opportunity to plan out how youre going to handle day-to-day decisions and also infrequent decisions like what to do when someone wants to sell their share. There is the possibility of forming an LLC with an operating agreement that governs how the property is managed. And then there are hybrids like Joint Operating and Management Agreements. Under the new tax laws forming a partnership puts you in line for the highest taxes should you ever rent it out or sell it. But whichever form you choose, I think it's important to come to some ground rules and put it all in writing at the beginning. It will definitely become an issue since it sounds like you have different amounts available for your down payment which could mean that you will not have equal percentages of ownership (not 50/50 ownership). And then equity would not build equally. This is a frequent area of fighting among partners (whether family or not) when it comes time to sell.

@Davido Davido your doubts in lawyers may be well founded. However your justification because they dont all agree is not. It's definitely true that lawyers dont agree. That is the entire reason that there are multiple justices on appeals courts and the Supreme Court. The disagreement among lawyers, the ability to peer into the cracks to find the details and different solutions to a problem is what makes hiring a professional worth it. The law is not stagnant. It is not a set of codes. It is a series of precedents that change each time new decisions are made in court. That's exactly why laymen dont understand the law. Because they think it is a static series of rules to which there is only one right interpretation. Just like there may be many routes to get to your destination, there could be many legal processes to get to your desired results. People who fail out of law school frequently do it exactly with your thinking - that there is one right answer. 

Once again, it's difficult to believe that you'd risk losing $50k but not willing to spend a few hundred bucks on a local real estate lawyer to  find out the actual laws in your jurisdiction. This sounds pretty straightforward to me. Go to a local real estate lawyer. Spend one hour going through all the details. She will tell you exactly how to proceed. All these arm-chair lawyers' guesses are worth exactly what youre paying for them.
Real estate investing is a profession. If youre unwilling to get professional help when you need it, you'll in for a rough road. A good lawyer will be your partner to making a lot of money and protect you when the trouble hits the fan.

I have to admit that I am confused by your response @Jonathan Minerick. It looks like Homecoin saves money for buyers and sellers by eliminating real estate agents and brokers from the process, allowing FSBO-sellers access to the tools like MLS and lock boxes. How do you, as a broker, fit into this process? Are you receiving any commissions?