All Forum Posts by: Steve Hall

@Mike T. 

It seems that every new investor wants the low rates offered by conventional mortgages, but the protection offered by an LLC and can't believe it when they can't have both...

Do you think the loan officer lied to you because he doesn't want your money?

Your LLC cannot get a conventional residential loan, because the LLC is a business... Just like your LLC cannot open a personal "no fee" checking account. And no, your LLC cannot get a HELOC.

In many cases, a trust could get the loan as long as you are the trustee and beneficiary. (But a trust is not a business, and therefore is not the right vehicle for owning rental properties.)

Ketan, you are confused because you are listening to ALL the advice. Your job is to collect advice from BP members, and decide which advice is credible, and which advice makes sense for you. Let's talk about your 5 proposed options, one at a time:

1. Leave it as-is. (ie. rentals are in my name)

This is very unwise, since you have opened yourself up to personal liability for all 4 of your rentals! If one of the 4 rentals sues you, any judgement could attach to any (or all) of the other 3 rentals as well as your personal assets (your home, your vehicles, etc.) This is a business; you need to start treating it like one.

2. Add an umbrella insurance policy for my 4 rental properties

Every property should be insured, and you should have an umbrella policy to cover as much as possible, including acts of fraud, negligence, and illegal actions. (if you can find such a policy) Insurance is a safety net, but it won't stop you from falling! (don't rely solely on insurance.)

3. Deed my 4 properties to 4 land trusts (one for each property). Create 4 LLC's (one for each property) and add each LLC as a beneficiary to the corresponding land trust. Finally, create a lien(HELOC) through another LLC to strip the equity I have accumulated so far.

Why would you want 4 land trusts? Land trusts are for estate planning (and anonymity) and offer zero liability protection. (There's also the DOS clause to consider when doing this.) HELOC is not available once you put these in an LLC.

4. Same as #3. However, create only 1 LLC for all 4 land trusts. And add this LLC as a beneficiary to each land trusts.

As I explained above, land trusts do nothing for you, and can cost $500+ each to create. Having one LLC for all 4 properties will separate you personally from the 4 properties, but it will not protect all 4 properties from each other, since they all have same owner.

5. Is there another way to achieve liability protection/estate plan and minimize tax liability?

Yes: One LLC for each property with a Pour Over Trust owning the four LLCs. Ideally, I would complicate this by advising you to have the four LLCs (called operating companies) held/owned by a holding company (also an LLC) and the holding company would then be owned by the trust. Regarding tax liability: with this plan, you have already minimized your tax liability by creating a separate entity (the LLC) for your passive income, and by using the buy & hold strategy vs fix & flip (which is earned income, with FICA tax.)

Also worth noting: based on your goals, you will need at least 2 attorneys (a real estate attorney and an estate planning attorney) as well as an accountant.

I hope this is helpful, but we are way off topic now. This thread was supposed to be about "How to identify a good attorney to work with", which no one has yet to offer up an solution. I am very interested in the answer to that question.

@Greg Pugh

I asked you for your LinkedIn more than a month ago:

https://www.biggerpockets.com/forums/517/topics/692138-updating-investor-partner-list

I was interested, but I never received anything from you. Bad sign...

I am not interested.

@Russell Holmes

I assumed you were looking for anonymity and I assumed your FL LLC was going to be a Single Member LLC (SMLLC). If you are not familiar with Olmstead v FTC, you should read this. (Every business owner considering opening, or having a FL SMLLC should know that FL SMLLCs are unlikely to protect you from creditors.) 

• Having the parent holding company in a state like Wyoming ensures charging order protection for SMLLCs and allows for anonymity.
• Florida law allows an out-of-state holding company to own an LLC in Florida without being registered as a foreign entity.
• Although currently untested, those employing the structure I have described are counting on the fact that the Wyoming Courts will not allow Florida to put a charging order on a Wyoming LLC, thus protecting it's owner. (Some LLC owners ensure they have an address and a phone number in Wyoming, bank accounts in Wyoming, and some even have their LLC certificate kept in a Wyoming Safe Deposit Box.)
• Anonymity does not exist in Florida. All Florida LLCs have their members listed on sunbiz.org.
• As I mentioned previously, a Florida Land Trust will not protect you from creditors. Sunbiz.org will show everyone the name of your trust.

Regarding the "conflict of interest" that you don't understand: I would never give you an equity cut based on my purchase capital - only my rehab capital (since that is what you are in charge of - the rehab). If your investor is sophisticated, he will structure your equity share the same way I would. Using your exact example, let me explain:

• Let's say we put $160,000 into a property we only planned to spend $150k on. 
• $130,000 purchase price and $30k on rehab (even though you both planned to spend $130,000, but only $20k on rehab)
• It appraises at $200k even though we thought it would be $210k. Probably not worst case scenario, but still missing the mark on both by $10k.
• 75% LTV with $200k appraisal gives us $150k back and he's left $10,000 of his capital in the property. 

Here's the part you're missing: The $130,000 goes back to him FIRST. He spent $30k on rehab, but only got $20k back. That means he only got back 67%. (now you split the 33%, so you get 16.5% equity stake.)

The conflict: You had check writing capability, and you authorized $10k too much in rehab costs. Had you spent $10k LESS on rehab, you would be a 50% equity shareholder.

Now do you see why I said you were not ready for this?

@Russell Holmes

1. You are not ready for this yet. You are wise to consult with an attorney. I would love to hear the legal advice you receive.
2. You are confusing a partnership with a joint venture (JV). Even some experienced investors don't know the difference. Never partner... always JV.
3. Very few BRRRRs ever recover 100% of the capital investment. The more you both spend on the property and the more you spend on the rehab, the lower equity position you will end up with. (See the conflict here? The bigger the checks you write, the more you're cutting yourself out of the deal!)
4. Land Trusts in Florida do not offer any "protection". They are for estate planning and anonymity. 

You should form a holding company (LLC) in DE, NV, or WY, and the holding company should own a FL holding company (LLC). The FL holding company will be a member of a new FL operating company (LLC) which has 2 members, your FL holding company and his FL holding company (or him personally is he so chooses.)

@Alan D.

What you did was protect yourself personally from the liability of the mobile home park, and if set up correctly, protected the mobile home park from your own personal liability.

You have NOT taken any steps to "distance yourself from the tenants". To do that, you will need to hire a property manager, or a property management company. Then you can send the tenants a letter stating that the new POC for issues, rent payment, notice, etc. is the property manager.

@Horacio Gutierrez

Learn to use Search Engines.

http://bfy.tw/NWbG

@Carson Plant You needed an attorney 4 weeks ago...

@Lexi Teifke

I am not in your niche, however I do own a non-real estate related business too. Like you, I need clients. Calling everyone in the world to see if they could use my products or services would be a HUGE waste of time, and would honestly get quite depressing.

Ideally, you want to find a way to funnel the entire world down to just those people who would even be interested in your service. This is your target market. Example: calling households to sell diapers would be wasted effort on everyone with no kids, as well as everyone with school age kids.

Some ideas: you can use search engine PPC traffic, direct mail campaigns, voice mail drops, or just network with other professionals who know what you do. This can help to weed out 80% to 90% of the people that would never be interested in your services. Then calling the remaining leads would be more fruitful. Make sure you log every call in a CRM, and assign it a priority and an action.

@David Deng

This is why many landlords don't allow pets, like @Thomas S.

The expense and down time for this repair is your cost for this hard-learned lesson. If you said NO PETS, then that would be different. Then you could evict them once you discover that they had pets, instead of have to thy the "termination agreement" method.

So now you are stuck trying to get them out.  I would NEVER draft any document releasing myself from the ability to make a claim. Instead my document would say that the tenant is released from any early termination fee (sort of like cash for keys), however tenant shall remain liable for any and all damages.

Be sure to send any required security deposit notice if your state requires it, and then keep the money. Keep any pet deposit as well. If the amount of damage beyond that is less than $3,000, you could try a small claims suit, but I can tell you that your odds of winning are low. (They will most likely try to get you to settle for something in mediation) and even IF you prevail, your collection on your judgment is unlikely to be successful. Hiring a collection agency, just gives away 50% of the judgment.

Another option, mentioned in this thread, is to charge the tenant a fee while continuing to allow them to rent there. Such an added fee would be due and payable as rent. If it were not paid, then you could evict.