All Forum Posts by: Scott Smith

 The one entity that many investors in California use to avoid the foreign filing fees is the Delaware Statutory Trust, which can be implemented into your asset protection strategy but does not require the CA franchise taxes you expect from an LLC, or Series LLC. The initial cost of establishing the DST is generally a bit higher, but because you will be saving $800 per year (per LLC,) that is generally covered in just a few years. The additional benefit of the DST is that it can scale with your investments, so once your form it you can actually split the liability of different properties without having to form new entities each time.

The ideal for asset protection to to separate liability between each investment by placing them in their own LLC or liability limiting entity. The problem in CA is that will cost you $800 per entity. With the DST you can accomplish this protection at scale. The downside is that it takes more effort to establish and holds a higher demand on your attorney or establishing agency, so make sure you connect with a group who is comfortable with these entities.

Just one option. I have heard some different strategies over the years, but the DST is the only one I have ever been able to confidently get behind with all the legal implications. Feel free to reply if you have more questions, I have seen many of these and can explain it more if you are interested.

Haha, these entities - and asset protection as a whole - are an endless rabbit hole. In the end you just want to find a strategy that adequately protects you and allows you to invest forward with confidence. But finding the right strategy should make your growth easier. Some investors will run into issues and don't implement the right entities and end up getting really bogged down in the weeds of paperwork. 

That's the gist of it! It's essentially a parent-child relationship: you form the parent Series LLC, and from that you can privately file an unlimited number of child series under that SLLC (generally investors will just create a child series for each property, since it is so easy to do.) When investors get enough properties, or are investing in both buy-and-holds as well as fix-and-flips the recommendation may change and involve more than one SLLC to reduce risk and take into account tax implications.

Investors use the Series LLC across the entire US, they just form it in one of the states that offer the formation. The best strategy to work around any foreign filing fees that would hurt your bottom line is setting up Land Trusts which would operate the properties and assign the child series as the beneficiary (property purchased in your personal name > property transferred to Land Trust > Land Trust assigned to child series for liability protection.) This strategy allows you the best financing options available in your personal name, avoids the foreign filing fees, protects you from the Due on Sale Clause and can also provide privacy through removing your name from public record when created correctly.

The SLLC was essentially made for investors who were scaling up and needed a better entity to scale with their portfolios. The Land Trust is a powerful tool that offers the investor flexibility and enables a smooth transition into their future estate plan. 

Once again, just touching on a lot of point without going into any of them. You can also check out this article on the SLLC through this link.

 Hey Ashley, good questions!

1. I obviously am biased in this category, but I do recommend people have their attorney/CPA write up the LLC. There are some investors who invest a lot of time and energy into learning the nitty-gritty in establishing a proper LLC and operating it correctly, but there are others who do it wrong and create a document that doesn't protect them at all. I usually encourage people to at least have an attorney draw up their first LLC so they understand the language and can be taught how to keep it compliant.

2. It depends on the investment. You can establish the LLC and elect to have it taxed as an S-Corp, which is the way most people do it. Would recommend running this by a CPA. This article discusses these entities a bit more.

3. The best strategy that I see work across the US is purchasing a property in your personal name, transferring it into a Land Trust (a protected transfer from the Due on Sale Clause,) and finally assigning the LLC as beneficiary and yourself as the Trustee.

These are all pretty general responses. The general response I have for people is this: you are paying for the expertise. If you are willing to put in the work of learning and understanding the structures that you are attempting to DIY to save money, just make sure you do your due diligence. One strategy I have seen some DIY'ers take is to draft it all up and have an attorney/CPA review the document - still saves money but also ensures the documents will protect you.

The last bit of advice I would suggest is to ensure you are working with professionals who are personally invested in real estate investing - bankers, property managers, attorneys, contractors and CPAs. Obviously you can't get it all right away, but these are the professionals who can provide you the best you can find!

If you have other questions feel free to reply. 

 Hey James,

You always want to define roles and get an agreement of this sort in writing, and the LLC provides that through the Operating Agreement. On top of that it also creates liability protection for all parties involved, so if there is any legal issues involved with any partners or the investment it can't "splash" into the other partners or the investment.

The most common entity for this type of transaction is the Joint Venture LLC. On your first run I would highly recommend having an experienced attorney draft it for you, as they can guide the process and help you outline what actions should take place in different circumstances you may run into. (Examples may be when one partner decides they want to sell and the other partner(s) don't, etc.)

If you don't have it in writing these issues can be a huge problem, but if you bite the bullet early you save yourself a tremendous amount of work down the road. Plus you are protecting yourself, which is always smart.

 Hey Andrew,

I work with these entities daily, both in my business and my personal real estate investment portfolio. What kind of questions do you have about the SLLC?

Hey @Sunil Sharma,

It's a great question to ask. The most general answer to your question is to find the strongest asset protection structure that costs the least amount of money. That can get tricky when comparing different entities and accounting for foreign filing fees.

Nevada is a very business friendly state, and the biggest advantage to Wyoming is that the anonymity is integrated into their entities and add an additional layer of privacy to you. With that being said, Nevada is not the only business friendly state and there are strategies that can introduce anonymity to your ownership without the use of the Wyoming LLC. An addition option for you is through introducing Land Trusts, allowing you to operate investments from states separate from your LLC without being required to pay foreign filing, so it really opens up a lot of possibilities at a low cost to you.

I am personally partial to operating out of Texas because the low annual cost of LLCs and minimal requirements as well as it's favorable disposition to business owners. Texas also offers the Series LLC, which allows you access to a liability protection entity that scales. But that is what fits my portfolio and my needs best, and could be different than your needs.

If you want more specific recommendations to your current situation feel free to mention where your current investments are and your future goals with REI and the type of protection you want. If you can clarify what you want I could give you a better idea of what entities might fit your situation best.

Hey Eric,

The main issue with refinancing through an LLC is the rates are low, when they are even offered, by a bank direct to the LLC. Otherwise some people transfer the property to their own name to refinance with the intention of transferring the property back into the LLC, but this runs the risk of getting hit by the Due on Sale Clause.

The smoothest strategy I have seen for refinancing while maintaining protection is when investors introduce a Land Trust as a "middle-man." To refinance you transfer the property back into your personal name for the best rates, then you transfer it into the Land Trust. The Land Trust is a protected transfer thanks to the St Germain Act, since the Land Trust is an Inter Vivos Trust (an estate planning tool.) From there you assign the LLC as the beneficiary and yourself as the Trustee. If you want some privacy you can even have your attorney sign as the Nominee (short-term) Trustee upon the formation of the document, so the attorneys name is on public record instead of your own and you have a layer of protection thanks to the attorney-client privilege.

You can also read more on the LLC lending strategy and about introducing anonymity through those links.

I am very comfortable with these entities, so if you have more questions feel free to reply and let me know!

In regards to Series LLCs and states that recognize them or not, the issue comes down to each specific state recognizing the "internal liability shield." Not if they have a Series LLC to create in that state or not--an investor in any state can form a Series LLC in a different state if he or she wants one. Every state has an internal liability shield for LLCs and that is what is analyzed in every state: the LLC Internal liability shield of the state you're being sued in.

There is a misconception that the Series LLC is a new entity. It is not. It was first created in 1996 in Delaware, over two decades ago. While the Traditional LLC is more established, it is not much "older." The Traditional LLC first became available in Wyoming in 1977, but most other states did not follow suit until the 1990s. The next state was Delaware, which enacted LLC legislation in 1995, followed by California in 1994/5. It was not until 1996 that all states had an LLC option. The same year, the Series LLC was statutorily created. So it's interesting how people quickly fall in love with the Traditional LLC thinking it's been around forever. But the reality is that after the creation of the LLC in most states, the Series LLC immediately came into the game. Just one year after California codified the traditional LLC.

Hope this helps a bit. If you have more specific questions feel free to reply and let me know! I know this was a bit general, but I don't want to ramble on forever as I can have a tendency to do on the forums.

Hey Joe,

Some banks will work with the LLC with higher rates, it just takes some shopping around. Another strategy I have seen many investors use is implementing a Land Trust as the "middle-man" between the property and the LLC. In this case you would refinance the property in your personal name, then transfer the property into the Land Trust, assigning yourself as the trustee and the LLC as the beneficiary. This type of transfer is protected by the St. Germain Act from the Due on Sale Clause, as the Land Trust is considered an estate planning tool. This article covers the strategy in a bit more detail.

The Land Trust is also useful for any future estate planning and can also provide more privacy through removing your name from public record if created correctly. 

Let me know if you have more questions, I've seen it done in every state and can provide more info if you would like.

 Hey Joseph,

I would agree with the advice  above - you really want to ensure your numbers are solid for the first few projects. I often get multiple quotes and show other people the plans to see if they can find any flaws in it.

When you start tackling issues with using an LLC you will find some banks wont want to lend to a new LLC, and of those banks who do you will often have a higher rate to pay. I really do encourage the use of an LLC, and this article covers asset protection from more of a high-level perspective. When it comes to financing you can still work around the issues with the LLC by using a Land Trust, a strategy discussed in this article. 

In the end you should only accept money from a person/institution that you are comfortable being tied to. While you can still protect yourself through the LLC, ideally you want to develop a good relationship with your lender that allows for future deals. But early on I still recommend people use LLCs because that is when you make the most mistakes, and many of those mistakes can be pretty easy for insurance to deny based on their degrees of fraud written in their exclusions in your agreements. For people who already have a profession and are getting into real estate it can be really important to create that liability separation to ensure mistakes don't spill over into your personal life or other businesses/investments.

Just some thoughts. If you have more questions on this stuff just let me know by replying or just TAG me.