All Forum Posts by: Jonathan Twombly

Yes, you need both. Insurance and an LLC serve different purposes. One protects you from some out of pocket costs. The other limits the assets that are at risk. You absolutely need both.

Another thing that is left out of these discussions is that if you don't have insurance, courts may view this as evidence that the LLC is undercapitalized and not being used properly. If you have insurance, and a injured person can collect some compensation, the courts will be even more likely to respect the LLC protection.

But @Account Closed , just because courts are properly piercing the veil in cases when people abuse it does not mean that it is worthless for people who don't abuse it.  If you don't abuse the corporate form, there is no legal basis for piercing it.  Last I heard, Texas was still a State of the Union with the rule of law, and courts operating under the rule of law don't just go willy-nilly piercing the corporate veil for entities that respect the corporate form and operate with the appropriate formalities.  Just because the courts pierce the corporate veil for fraudsters doesn't mean that they will pierce it for non-fraudsters.  And, if they do, that's what appellate courts are for.

@Charles Press Is exactly right. If you act like there is no LLC in practice, then the courts will ignore the existence of the LLC. So, if you plan to abuse the LLC, there is no point in creating one.

However, if you make a good faith effort to respect the corporate form and really treat it as a separate entity, this in most cases will be enough for a court to accept that liability should be limited.  

Also, please, please, PLEASE don't listen to those people who tell you to go form an LLC because you can then run all your personal expenses through it and pay for your life out of pre-tax money. Those are the people who wind up not only getting their LLC veils pierced, but wind up in trouble with the IRS as well.

@Account Closed 

There is a lot of discussion on these threads about piercing the veil of the LLC. Yes, this is possible. But this is really an academic discussion. In practice, it is very difficult to pierce the corporate veil. Courts don't like to do it. The plaintiff has a high burden to show that the defendant did not respect corporate formalities. Does it ever happen that a court pierces the corporate veil? Of course. Does it happen often? Not at all.

I don't say this just as a guy with an opinion.  I say it as someone who litigated cases for 12 years.  I've been on both sides of claims that the corporate veil should be pierced.  I never saw a successful one.

@Vicki K. 

As @Charles Press says, there are many ways to skin this cat, and many reasons. Since Charles was good enough to share his structure, I will share ours. Each property is owned by a separate LLC. The investors in the particular deal are shareholders in that LLC. The property-level LLC has a management contract with my asset management company, and pursuant to the contract pays the asset management company an asset management fee. We are also compensated by part of the upside, known as a "carried interest." The carried interest is in the form of a subordinated, profits-only membership interest in the property LLC. We hold those carried interests in a separate holding company. I also have my real estate brokerage firm, which is a separate LLC, as a wholly-owned subsidiary of the holding company LLC. I do the latter so that I can legally share the profits of any brokerage deals we do with my partner, who is not a licensed real estate broker, since he is part owner of the parent company of the brokerage LLC (i.e., the holding company LLC).

It's somewhat confusing, but this structure protects each property interest from each other, protects our carried interests from claims based on property management, etc. Nothing is perfect, obviously, and nothing can prevent us from getting sued by someone who wants to sue every entity we have. But from my experience as a litigator for 12 years, I know that it is pretty difficult to pierce the corporate veil. Those claims don't succeed very often, because there is a presumption that an LLC is legitimate, and the courts don't disregard the presumption lightly. The burden of proof is on the plaintiff to prove that the corporate form was disregarded by the owners, allowing the courts to disregard it too.

Hmmm. I'm not familiar with any companies that manage SFR.

There are several other posts here today on this very topic, and you should check them out. But to make a long story short, you need both insurance and an LLC. You need insurance to protect you against a large, unanticipated out of pocket expense from damage or an accident. But you also need your properties under at least one LLC to protect your personal assets from a claim against the property that exceeds your insurance coverage or is not covered by insurance. If you own the property in your personal capacity, then your personal assets can be reached by a creditor, including a plaintiff who wins a suit against you. If you have an LLC, then your liability will be limited to the LLC asset themselves, assuming that you properly respect the corporate formalities of separateness -- that means adequately capitalizing the LLC, not using money from one LLC to pay bills from another LLC, not mingling LLC money with your personal money, etc.

Hope this helps.

Jonathan

Analyst jobs are quite competitive, but if you love real estate this may be a good way for you to go.  Rather than a certificate program, though, I think you are more likely to get a good analyst job with a full master's degree in real estate or, better yet, an MBA with a real estate focus.  Doing a CCIM degree or a CFA on top of the MBA or Master's would also give you an impressive credential.  And investing on your own can't hurt, obviously, but institutional players tend to want people with institutional mindsets, which is why it's good to get a degree that institutions will respect.

Several years ago, when I was thinking about changing jobs from law to real estate, I sat down with a college friend whose family owns one of the world's biggest development firms.  I was contemplating doing a masters in real estate at a school here in New York.  My friend told me, frankly, that his firm did not even hire people out of real estate programs.  They preferred to hire people out of the good MBA programs instead.

So, it really depends on what you are shooting for, but I would suggest at the very least going to a full Master's program or preferably an MBA program.

@Account Closed I have no doubt that is true!

@Nicole Mercer Nicole, I would say look at every deal you can.  Even if you are not yet ready to buy something that big, it will only help you to start familiarizing yourself with these deals now, even if you think that it will be years before you are ready to take one down.  Keep looking at deals, keep analyzing them, even if you don't plan on making an offer.  Not only will you start developing the skills you need to be a good investor, you may also start to develop some relationships with brokers along the way, which will really help you once you start moving in that direction.  It will also help you learn the market where you are, which is something that will keep you from making bad deals in the future.  The more you learn, the better.  Learning is always good, and the best way to learn is through experience.  Don't be afraid, and go for it!  You have nothing to lose but a few hours looking at a property and analyzing it!