Seeking Advice on Asset Protection for Out-of-State Real Estate Investments

[Anthony Dupre]

Hi,

My wife and I are starting our journey into real estate investment. While we currently reside in California, our focus is on acquiring properties outside the state, particularly in Arizona, Nevada, Texas, and Pennsylvania. Our goal is to purchase two multifamily properties per year, and we want to ensure that we establish the most effective structure for asset protection from the outset.

We’re exploring options such as Subsidiary LLCs, Parent LLCs, and Irrevocable Trusts to maintain both asset protection and anonymity. I’d greatly appreciate your thoughts or suggestions on alternative approaches we might consider. the pro and Cons of this approach recommended by a lawyer, when it comes to tax, refinance, etc..

Additionally, if you know of any CPAs or lawyers in your network who specialize in real estate investments and asset protection, I’d be grateful for a recommendation (DM me)

Looking forward to your insights, and thank you in advance for your help! Wishing you a Happy Thanksgiving!

Best regards,
Anthony

[Henry Clark]

BP it’s time for an AI generator.  

[Anthony Dupre]

Agree! Meanwhile do you have thought on the above ? Thanks!

[JD Martin]

My first question would be protection from what, and what kind of assets? If you are taking about dropping a million cash into properties each year, then yes you are going to want to have some type of reasonable corporate structure, but if you're talking about 25% down 100 grand properties with bank notes, all you really need is some decent insurance. New investors get way too stuck on LLC setups and the like when they really don't have anything worth taking, and those with loans have partners that provide some buffer anyway - the bank, who's going to end up with the property if anyone sues you successfully enough to get a judgement, which means it will be the rare attorney who even takes the case.

[Henry Clark]

OP. Attend an REI group meeting. Ask a couple of them to stay after and discuss this topic.

Forget the negative tone of any of the following:

This is a huge discussion with many questions and answers.  To what degree have you invested your time on this subject?

1.  Rental and eviction procedures?

2.  Maintenance procedures?  

The above two are your major liability determinants.  On the property side you need to find a nationwide program, plus the maintenance program.

If you didn’t salt the sidewalk or didn’t let me rent because I’m Serbo Croatian.  If your policies and procedures aren’t in place.  Your liable.  Even your insurance may not cover.  

3. Legal structure. In your LLC did you add a Line you can vote to suspend distributions?

4.  Do all contractors or PMs give you an Additional Insured insurance letter? 

5.  Are you worth $xxmm?

6.  It’s Saturday 7:42 pm where I’m at. Can you call your PM, electrician, plumber, etc at this moment?  How I’ll you do that over 4 states? 

Point.

You have to start.   Address the issues as they come.  Do your first rental unit.  Go over insurance.  Policies and procedures.  Talk with your tax personal.  Normal financial advisors won’t be helpful.  Find an Estate attorney, not your normal attorney.  Use the lookup function on my name. Read the post”What happens if you die?”.   Just start chipping away.  

[Henry Clark]

Don't do your LLC in California.

[Anthony Dupre]

Thanks !

I know most of your comment aim at people who probably start with 20K and bring small properties. we are planing on investing 250k to 500k as a 25% down payment a year, hence the question. Would that change the above strategy/comment/ approach?
Thanks

Anthony

[Henry Clark]

Quote from @Anthony Dupre:

Thanks !

I know most of your comment aim at people who probably start with 20K and bring small properties. we are planing on investing 250k to 500k as a 25% down payment a year, hence the question. Would that change the above strategy/comment/ approach?
Thanks

Anthony

 Approach doesn’t change much.

1.  Find a large Commercial Broker in your area.  That deals more with apartments than comml industrial.  Have a conversation with them.  Your going to end up being a commercial investor.

2.  Ask the person above to recommend a trust
 Attorney.

3.Ask them for a finance company or bank that covers those states. Otherwise your financing will be difficult.  You don’t want to use your money.  Worst case deposit money at each bank and earn.  Have them use as collateral and get a point off the interest rate.  
4. Ask the CRE realtor to recommend insurer.

5.  You’re going to have to make mistakes with PMs like everyone else.

Do you read the post what happens if you die?  

You have to dig in.  No one person can handle this. 

[Chris K.]

@Anthony Dupre

Here are a few thoughts:

1. The terms Subsidiary LLC and Parent LLC don't mean much on their own—they just describe one LLC owning others. There are valid reasons for having complex corporate structures, but unfortunately, some lawyers and professionals push unnecessarily complex setups on clients. Pennsylvania even had cases where lawyers were disbarred for selling overly complicated trust structures to older clients who didn't need them.

2. Irrevocable trusts can be useful, but they’re a serious commitment. They shouldn’t be created without thorough estate and tax planning.

3. My main advice for avoiding liability is: (1) work with a great insurance broker to get comprehensive coverage; (2) avoid signing full recourse personal guarantees whenever possible; (3) max out your 401(k) or defined benefit plan with ERISA protection; and (4) strive to reach a point where you’re not personally involved in the business’s day-to-day operations.

Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

[Ko Kashiwagi]

Hi Anthony,

Definitely CPA/lawyer would be great place to start. As a lender/broker I can offer a perspective on the financing side as it would be important especially if you are going to use financing. Most lenders are not able to do irrevocable trusts and some can't do complicated structures like Series LLC, LPs, etc. If you are going in cash it's not a concern but limiting your option for the purchase financing or refinance option down the line will cause headaches.

[Bill Hampton]

@Anthony Dupre

Bigger Pockets is a great place to find a real estate accountant. 

I recommend finding a tax accountant who specializes in real estate taxation, financial planning and tax planning.

You may want to consider working with your accountant remotely to expand your options.

I would also recommend looking for a accountant willing to work with you throughout the year. You want an accountant who can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

Good luck.

[Corby Goade]

Personally, I think most newer investors WAY overthink this piece. For one, if you have any properties with conventional loans on them, this makes things much more complicated and severely limits your ability to limit your liabilities. People always go for the cheapest financing, quit claim in to an LLC and go about their lives, when they've essentially done nothing to protect their personal assets.

You'll get all kinds of advice from novices here- good and bad. Find an attorney who you trust and can help you strategize. There's no right or wrong way to do this, just varying levels of risk and the only proper route is the one you understand. 

Finally- you can eliminate 95% of the troubles and risk by simply having professional and legal screening and management processes, so don't sleep on that piece. 

Best of luck!

[Sean O'Keefe]

Following- I’m based in California 

[Ashish Acharya]

@Anthony Dupre For out-of-state real estate investments, consider creating subsidiary LLCs in each property’s state for liability isolation, owned by a parent LLC in a state like Wyoming or Delaware for anonymity and strong asset protection. Optionally, use an irrevocable trust for added estate planning benefits, though it limits control. This structure offers liability protection, scalability, and tax benefits but involves administrative complexity, potential California franchise tax if managed there, and refinancing challenges due to personal guarantees. Discuss with your CPA how to handle the 800 CA fee for each LLC you create.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Allan C.]

@Anthony Dupre sounds like you’re buying higher priced assets, so LLCs likely make sense if you’re pursuing commercial MF (5+). Like others say get your own attorney and CPA, but I’ll share nuggets I’ve come across over time.

Set up LLCs in states where properties are. Purchase the property vested under the LLC (ie commercial loans/DSCR). Obtain insurance under the LLC. Establish an operating agreement for each LLC. Have separate bank accounts for each LLC and never commingle personal funds or funds between LLCs.

If you plan on self-managing the properties, then you'll likely need to register each LLC as foreign entity in state of CA and pay franchise tax for each one. Alternatively have parent LLC that is registered in CA, but now you expose each LLC to the other.

Do research on what inside vs outside protection means, and charging orders. Also define how much equity exposure you want within each LLC. Let's use example of $1M equity, which is $4M property value at 75% LTV. As you pay off the debt are you comfortable with $4M equity exposure within a single LLC? Perhaps you can equity strip and refi to keep equity exposure to $1M, but these are considerations worth having now if you have the purchasing power you're suggesting.

Btw, my understanding is that LLCs with only spouses as members don’t give you protection, so maybe you just avoid LLCs altogether, hold title under trusts for anonymity and just bulk up your personal umbrella.

[Jonathan Bock]

Quote from @Chris K.:

@Anthony Dupre

Here are a few thoughts:

1. The terms Subsidiary LLC and Parent LLC don't mean much on their own—they just describe one LLC owning others. There are valid reasons for having complex corporate structures, but unfortunately, some lawyers and professionals push unnecessarily complex setups on clients. Pennsylvania even had cases where lawyers were disbarred for selling overly complicated trust structures to older clients who didn't need them.

2. Irrevocable trusts can be useful, but they’re a serious commitment. They shouldn’t be created without thorough estate and tax planning.

3. My main advice for avoiding liability is: (1) work with a great insurance broker to get comprehensive coverage; (2) avoid signing full recourse personal guarantees whenever possible; (3) max out your 401(k) or defined benefit plan with ERISA protection; and (4) strive to reach a point where you’re not personally involved in the business’s day-to-day operations.

Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

 Thank you Chris!  Absolutely love your #1 

My assumption is the OP will stay pay for an overly complex structure that adds limited value except to the pockets of the service provider

[Max Emory]

Hey @Anthony Dupre, whatever you decide for your entity structure, ensure it's simple enough for you to easily abide by the structure in your day-to-day operations.

We've had bookkeeping clients with complicated structures that apparently protected them to the maximum degree but they didn't abide by the structure when conducting transactions in their business daily (lots of unintentional commingling). When this happens the fancy/complicated entity structure is useless protection-wise.

Lots of attorneys out there who will sell you a $10k+ entity structure that doesn't mesh with your operations as you scale your portfolio and team. Most of what they recommend only makes sense from an operational standpoint if you are a larger investor and have a team to help you manage everything.

Also, ensure your REI-savvy tax pro and your REI-savvy attorney link up during the entity structure creation process so things are optimal on all sides.

Just something to keep in mind as you're beginning this journey.

[Katie Balatbat]

@Anthony Dupre

California is generally more cumbersome than other states when it comes to taxes and filings. Even if you create a non-CA LLC, if you are managing the business from California, you will likely be deemed to be "doing business" in California and therefore likely subject to CA taxes. California charges a minimum tax of $800 a year per LLC, and more if you have gross receipts in excess of $250k. So, if you create an LLC in another state, you will likely need to register it as a foreign LLC in California. Though, this process will be the same for the other state (if you created a CA LLC you may need to register it as a foreign LLC in the state in which you are doing business/holding property). This means that you will probably need to pay registration and filing fees in at least 2 states if you don't buy CA property as a CA resident.

Be sure to tell your accountant that you may now need to file non-resident income tax returns in each state where you own property as well. CA taxes residents on worldwide income but may provide a credit for taxes paid to other states.

Most likely the state where the property is located is where lawsuits would be brought if they are something for personal injury like a trip and fall or something of that nature because the “cause of action” arose in that state. So even if you pick a state with stronger protections like WY or NV, the cause of action arose in the state where the tenant fell, so likely that the court where the accident happened would have jurisdiction. Of course, with all things, the answers to all these matters will depend on the circumstances.

California tends to have more laws on the books and requirements and restrictions that it can be a good idea to form a CA LLC for out of state property so that you as a CA resident are covered, and to try to have your contracts fall under the purview of CA courts. It also is helpful to have a California LLC in case you ever sell that property and move into another state so that you do not need to form a new LLC altogether with new operating agreement, just re-register in the new state as a new foreign LLC. Also, the state of formation is likely where internal disputes would be brought among LLC members, so if you and a partner and/or spouse live in CA, you probably want to arbitrate in CA if the two of you had a disagreement. But, that is not always the right answer and you should speak with someone familiar with your personal situation to get advice specific to you.

*This post is informational only and is not to be relied upon. Readers are advised to seek professional advice. This post does not create an attorney-client or CPA-client relationship.