All Forum Posts by: Scott Smith

As mentioned above, you would still be subject to the CA franchise taxes. If you were hoping to avoid those by creating an out-of-state LLC then I would recommend looking into the Delaware Statutory Trust. The DST is not obligated to pay the franchise tax mentioned above, and can contain as many assets as you like. The DST is viewed as an estate planning tool, and therefore exempt from the far-reaching corporate tax laws set forth by California's FTB. A properly set-up DST will both protect your assets and bypass the burdensome franchise tax that would be levied against a Series LLC.

The Delaware Act expressly provides that “[n]o creditor of the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust.” 12 Del. C. §3805(b). The title to trust property may be vested in one or more trustees, but shall not be subject to claims against the trustee which are unrelated to the statutory trust.

Just an option. I am not sure if that was what you were trying to get at with trying to form an LLC in another state. If you are wondering which state offers better protection, then I would agree with the stratgy laid out by @Katie L. above.

There are strategies that would utilize both options. If you were going to finance through the LLC by getting a commercial loan, then you would form the LLC first. This would be difficult in your situation since you wouldn't have time to season the LLC, so pretty much all lenders would require you to personally guarantee the loan. This means the LLC doesn't offer it's full value in liability protection.

The other option is to finance the purchase in your personal name and then transfer it into the LLC after the fact. The issue is this that lenders might use the due-on-sale clause to recall the note, since historically that has been viewed a prohibited transfer (though they rarely take action on their threats if you are paying the note off.) To entirely avoid this issue you could just create a land trust, as described in this article. It is an excluded transfer that allows you to both have the beneficial financing through your personal name without the lender being able to recall the loan through the DOS clause while still offering you the full liability protection of the LLC.

Sounds like you are pretty new to all of this, so I would really recommend sitting down with an experienced attorney who can assess you situation and give you some recommendations. They can form the entities for you at a price, but you will have confidence the entities were formed correctly - some of the DIY LLCs I work with are basically just an added business expense that offers nothing useful because the investor formed it wrong or never learned how to operate an LLC correctly. If you want to do something, best to elarn how to do it right.

Just some ideas! I personally work with land trusts on all the properties I own because they can also offer anonymity and help you roll them into your future estate plan very easily.

Hey Jewel,

As Terrell mentioned above, it is an asset protection tool. If you are just starting out and don't have much personal exposure it isn't such a big issue. While you are more likely to make mistakes early in your investing career that could place you in court, you are also risking less. I personally place all of my investments in separate LLCs in order to protect myself as much as possible, but I have seen the stress of lawsuits and just never want to get too wrapped up in courts personally. Each investor needs to decide on what risks they find as acceptable or not. The general flow of how to grow into an asset protection plan is outlined in the article 5 Pillars of Asset Protection, so that can give you an idea of how to progress and what is the usual progression of strategy.

Good luck moving forward! If you have more questions feel free to just reply!

There are many options available in a situation like this. Ideally you want the LLC to be in the state with optimal laws supporting liability protection while paying the minimum in annual fees and requirements. Generally it would be more convenient to create the LLC in the state of the property to avoid foreign filing fees, but if you end up holding the property in a land trust (which can be beneficial both for financing, anonymity and estate planning) you don't even need to pay foreign filing fees [because it is the land trust conducting business in that state rather than the LLC.]

If this is your first time investing across state lines the best bet would be to connect with and experienced attorney and CPA to discuss your options and find what fits your portfolio the best. After you've done it once or twice it is pretty straightforward, but there are so many different strategies out there that you can end up getting lost trying to do the right/best thing.

@Jacob Sugar,

I think all the people above have great points. In the end you need to measure the pros and cons of the decisions and make a decision about how you want to grow your portfolio. Some people will cut corner to grow quickly and many find success that way - but those who don't often get really beat up over the corners they get caught up on. The other option is more of the "slow and steady wins the race" approach, but that requires a lot of patience and you can also miss out on opportunity value. In the end you need to identify your own strengths and build a strategy that will allow you to excel.

You always want the most protection you can get your hands on, but there is a cost involved with that. Ideally you would place each asset in it's own LLC, or just set up a Series LLC as @Costin I. mentioned. But that can take money and time to do right. I wrote the general approach I come at asset protection in my article "5 Pillars of Asset Protection," so you can check that out for more of a high-level approach to asset protection.

The second two questions are more based on how you want to approach investing - and generally I would encourage people to just imagine and compare the best-case-scenario versus the worst-case-scenario. If you can accept both and think you are willing to accept either outcome (obviously aiming for the prior,) then I say go for it. Waiting only eats away at your motivation.

 Hey Ari,

Great to see you are growing and expanding your portfolio! The fannie/freddie loans are changing by their structure to be more LLC friendly, but due to how much they are changing I still don't like relying on that alone. The best strategy I have seen to utilize these types of financing is through the use of a land trust. While you can trigger the due on sale clause if you purchase a property into your personal name and transfer them into an LLC, you do not trigger the same red flags by transferring the property into a land trust. The reason for this is because the land trust is considered an estate planning tool and is exempted transfer from the DOS clause thanks to the St Germain Act. After transferring the property to the land trust you would assign the LLC as the beneficiary to ensure it remains protected. This article goes over the process a bit more.

Ideally you want it to be a 1:1 ratio. As you grow there are entities that help enable you to operate this way without being overwhelmed by 10, 20, 30+ LLCs, such as the Series LLC. But some people are fine place several properties into a single LLC. I would just encourage you to chat with an experienced real estate attorney so you can see the risks you face - once you see that you can decide for yourself how much protection you would like to invest in.

The only real problem with asset protection is that you don't know you need it until it is already too late. Once you are served, or even if someone tells you they will sue you, then you can get in trouble by trying to restructure your assets. Once a law suit is initiated you cannot restructure anything until after it is over. Better to do your research and commit to a solution before you run into the problem, and best case scenario is that you never have to utilize that protection.

In the end you can prove the chain of ownership, which is what matters in the case of the St. Germain Act. That is what it boils down to. People are free to try and fight it, but it costs a lot of money to litigate and the laws are clear on this type of transfer. 

The grantor is the person selling the property. So if the investor signs as the grantor, it shows that the investor no longer owns the property. So it would make it seem even more unlikely that you actually own the property, rather than attaching you to it.

Your LLC isn't providing any liability protection unless your property is held in the LLC. The LLC works like a liability box and only protects things that are inside of it. You would just be adding complexity by accepting rent checks through the LLC at this point, so it would just be easier to collect them in your own name until the LLC is set up properly.

The best strategy to utilize an LLC I have seen for investors in your situation is through a land trust. If you attempt a direct property transfer from your name into an LLC for the liability protection it will potentially trigger the due-on-sale clause. However, if you transfer the property into a land trust it does not trigger the same red flags because the land trust is considered an estate planning tool. After that you can assign the beneficiary of the land trust as the LLC, granting the property to liability protection of the LLC and avoiding issues with your lender.

As far as methods of collecting payment - I always work to collect payments online. It has proven the safest and most consistent form of payment to date in my own investments.

Hope this helps. Let me know if you have further questions.