Asset Protection

General Real Estate Investing
18yFollow

Asset Protection

Michael Shadow
Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes

Just looking for other peoples thoughts on what is the best way to protect your assets. I've heard so many different strategies it's hard to try and figure out which way to protect yourself. How do you have set yours up?

Putting all the properties in individual LLC's sounds like a pita, not to mention that it sounds like it would start to get quite expensive come tax time, why having your accountant prepare 40 different returns for your 40 different LLC's just doesn't sound practical to me. Then you have to pay corporate stock tax on top of all that (a PA law, maybe others).

I've also heard own the properties in your own name and set up a C Corp to lease the properties to and have it manage them for you.

Just get an Umbrella policy.

Trust Deed them to someone you really trust (who's not family) and set it up so they can do nothing with the property with out your permission.

Ugh... the list goes on and on

What have you done to protect your assets?

2Reply
81 views

Most Popular Reply

Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y

UrbanInvestors,

I buy all my properties in LLC's. I do not buy them personally and then quitclaim them to a LLC. I sign a personal guarantee for all the properties even though they are in the LLCs. Almost all of my loans are commercial loans through small local banks. Single member LLCs are dangerous from an asset protection perspective. According to Pat Tarr, one of the leading asset protection lawyers in the US, recent court cases have pierced the LLC on the basis that they are just an alter-ego of the individual. She strongly recommends that all LLCs should be at least two members (like you and your wife).

I get the insurance in the name of the LLC with my wife and I listed as additional insured.

Mike

2Reply
See this reply in the discussion

35 Replies

Jump to latestLatest
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    LLCs are generally the best entity for rental properties. I put several rentals into each LLC. You might start by putting 5 rentals in each of 5 LLCs to start until you have about 25 rentals and then increase to 10 in each LLC.

    Obviously, you also need insurance.

    Additionally, don't tell the tenants that you own the property. You are the property manager. Also, don't drive a nice car to your rentals, drive your pickup truck or an non-flashy car. Don't attract attention.

    C-corps and trusts do not provide asset protection.

    Good Luck,

    Mike

    0Reply
  • Peter Vekselman
    Real Estate Coach · Atlanta, GA · Member since 2008 · 80 posts · 5 votes
    18y

    I agree with the concept that rentals should be set up in an LLC. You will get the most favorable tax consequences that way. And also, for tax purposes you should set up the properties you are going to buy and sell within one year in an S corp.

    Make sure you have a general liability policy for your corporations. The great thing about many of these policies is that you can just keep on adding entities into them as you form them.
    _________________

    0Reply
  • Ryan Urban
    Real Estate Investor · Colorado Springs, CO · Member since 2008 · 96 posts · 4 votes
    18y

    Can we get a little more specific about this process?

    Here's my situation - I'm closing on two properties at the end of the month. For both, I've put 10% down and used my personal credit.

    I'd love to form an LLC and slide those properties immediately into the LLC. But:

    1. Doesn't that require a Quit Claim?
    2. Wouldn't that trigger the Due on Sale clause?
    3. Would it be difficult to get insurance?

    Thanks for your input.

    0Reply
  • Michael Shadow
    OP
    Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
    18y

    I've never had a problem with insurance. My dilemma is buying them in the LLC name requires you to get a commercial loan which has a higher interest rate and possibly a pre-payment penalty depending on who you borrow from. I asked a couple of the brokers I visited about buying in my name then sliding into the LLC and they said I wasn't allowed to do that, I just took them for their word because I didn't want to start pushing the envelope and start flirting with mortgage fraud or risk the loan getting called. I want to get the better residential interest rate and still protect my assets.

    I don't have any experience with the other questions you asked.

    0Reply
  • Peter Vekselman
    Real Estate Coach · Atlanta, GA · Member since 2008 · 80 posts · 5 votes
    18y

    1 If you are using a personal guarantee to get the properties then chances are very good that the mortgage company will require you to take the title in your personal name. After the closing i would then deed the properties into the LLC's.

    2 There is a chance of triggering the Due on Sale Clause. But after being envolved in hundreds of deals and over 12 years in this business I have never heard that clause being enforced for that particular reason.

    3 I would get the insurance under your name, and then add your LLC as an additional insured.

    Hope that helps....

    1Reply
  • N/A N/A
    Member since 2008 · 8 posts · 0 votes
    18y

    If your LLC's are single member, you won't need separate tax returns for each LLC, they just drop into your personal return.

    The best line of defense against law suits is to treat people fairly, but using LLC's is simple and inexpensive and can provide some peace of mind.

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    UrbanInvestors,

    I buy all my properties in LLC's. I do not buy them personally and then quitclaim them to a LLC. I sign a personal guarantee for all the properties even though they are in the LLCs. Almost all of my loans are commercial loans through small local banks. Single member LLCs are dangerous from an asset protection perspective. According to Pat Tarr, one of the leading asset protection lawyers in the US, recent court cases have pierced the LLC on the basis that they are just an alter-ego of the individual. She strongly recommends that all LLCs should be at least two members (like you and your wife).

    I get the insurance in the name of the LLC with my wife and I listed as additional insured.

    Mike

    2Reply
  • Ryan Urban
    Real Estate Investor · Colorado Springs, CO · Member since 2008 · 96 posts · 4 votes
    18y

    Great stuff, guys, thanks. I didn't know it was possible to personally guarantee a loan for an LLC. I'll look into this.

    I had just begun shopping for a liability policy for these first two properties. Do you feel that, if the properties are owned by an LLC, that the liability insurance would not be necessary?

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    Ryan,

    You should be able to get landlord liability with your rental policy. They are both on the same policy with all my rentals. I use Foremost Insurance.

    Mike

    0Reply
  • N/A N/A
    Member since 2008 · 8 posts · 0 votes
    18y

    Thanks Mike. That's the first I've heard that about single member LLC's. Fortunately it's a simple thing to convert to a multi-member.

    Dave

    0Reply
  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    18y

    Ryan,

    I am a little late to the discussion.

    1. Get Wealth Protection by William Bronchick. Low cost book from a RE investor and lawyer who explains things in English.

    2. Protection comes in layers. You use multiple things to get the job done. Liability insurance and other things like an LLC.

    3. Transferring from your name to your own LLC rarely ever triggers DOS. Most lenders will see the LLC as the same as you. More so if it is a sole member LLC. If they do complain you can transfer it back until you can get it refinanced with a lender who is not as strict. I would be surprised if they even notice.

    4. You need to operate correctly. If you follow the laws, screen your tenants well, hire licensed contractors and other steps you reduce your liability. You also build a track record showing that you operate correctly. That can matter in court if a mistake happens.

    You also need to run the LLC and other entities correctly if you want to believe that it will not be set aside in court.

    Hire a good RE lawyer to advise you rather than just fill out forms on the web. That way they can be checking your back.

    RE investing is a business. All businesses have liability of some nature. Some more than most. Family estate planning is another way to put a break between 1 pile of assets and another pile. You have other business so you do not want issues in one area to bleed over.

    John Corey

    2Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    Ray-REI,

    The problem with using a Delaware LLC is that many states require you to file as a foreign entity in your own state. So, you will get to pay to operate in Delaware and to operate in your own state. That can be expensive and cumbersome. Ask me how I know.

    Mike

    1Reply
  • Michael Shadow
    OP
    Investor · Bellefonte, PA · Member since 2008 · 1k+ posts · 88 votes
    18y
    Originally posted by "MikeOH":
    Ray-REI,

    That can be expensive and cumbersome. Ask me how I know.

    Mike

    How do you know?

    0Reply
  • N/A N/A
    Member since 2008 · 59 posts · 1 vote
    18y

    Mike, do you know Marco K.?

    California requires you to declare and pay a filing fee to operate a "foreign" entity in California.

    1Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    Marco K? No, I don't think I know him, at least personally. I know about the requirement to file a foreign corporation because I have a Delaware LLC and had to file as a foreign entity in the wonderful state of Ohio (proud to be #46 on the list of states that are most friendly to business - UGH!)

    Mike

    0Reply
  • N/A N/A
    Member since 2008 · 59 posts · 1 vote
    18y

    OK, it was the "Ask me how I know" line. That's one of Marco's favorite lines.

    Yeah, I've been avoiding doing real estate in California for similar reasons. However, the forclosure market here is just too good right now.

    0Reply
  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    18y
    Originally posted by "MikeOH":

    C-corps and trusts do not provide asset protection.

    Good Luck,

    Mike

    To correct a mistake the above is only half true.

    C corporations very much provide asset protection. Most all the major corporations are C corporations with liability protection being one of many reasons. Note that C corporations are not so good when holding appreciating assets. They can be fine for employee benefits and other tax advantaged programs to benefit the owners/employees. S corporations are similar to C corporations but have pass through tax treatment. C corporations pay taxes at the corporate level.

    Some folks use C corporations for all business activity that generates short term income (property management, flipping, etc). The owners can hten set up pension plans and other employee benefits that are paid with pre-tax dollars. The appreciating assets are held in an LLC or in a S corp.

    Trusts provide no asset protection. They can reduce the visibility of the beneficial owners to the trust.

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    REI,

    I can see that I should have been more specific. C-corps provide absolutely NO ASSET PROTECTION for the officers or directors (other than insurance the company has), but they do provide protection for the shareholders. As it pertains to this situation, if you start a C-corp to hold your rental property and you are an officer or director, you have personal liability and can be sued for the actions of the company. Not only are your assets in the C-corp at risk, but so are your personal assets.

    Mike

    \

    0Reply
  • N/A N/A
    Member since 2008 · 12 posts · 0 votes
    18y

    Hey.

    Wanted to weigh in here and let you all know that Wachovia can afford you a certain amount of asset protection through our World Savings affiliate, which allows for title vesting in a qualified LLC or Trust.

    One primary requirement is that your LLC or Trust not be layered through another Corp or entity, but that you are named personally as the manager or trustee.

    Edward Rodriguez

    0Reply
  • Frederic Petit
    Real Estate Investor · Gaithersburg, MD · Member since 2008 · 6 posts · 3 votes
    18y

    I recently read on William Bronchick's web site that a trust with a LLC as the beneficiary is best for assets protection. First the trust hide who is the beneficiary and if someone can learn who is the beneficiary, the LLC provide limited liability.

    Has someone ever tested this setup here ?

    2Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    Fred,

    Yes, that is exactly the setup I use for my apartment buildings.

    Mike

    2Reply
  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    18y
    Originally posted by "Fred":

    I recently read on William Bronchick's web site that a trust with a LLC as the beneficiary is best for assets protection. First the trust hide who is the beneficiary and if someone can learn who is the beneficiary, the LLC provide limited liability.

    Has someone ever tested this setup here ?

    Tested? How would you know if it works? By lawsuits that have not been filed or by suits settled with less damage compared to owing things in your own name.

    I am not just making a joke. A strategy that revolves around keeping a low profile really does mean that you will not know how many times a lawyer has declined to take on a suit because they could not tell if you had any assets. Great strategy but hard to measure that which has not happened. You would need to know the averages for people who do something different and then compare that to your situation.

    Good property management including good screening of the tenants helps a lot. Liability insurance is tool in the toolbox.

    I am a fan of Bronchick's materials. Just no way to tell how much better you are doing because you follow the advice.

    John Corey

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    John,

    You are correct, it is difficult to quantify the success of a particular structure. However, I believe that I have avoided 2 lawsuits because of our entity structuring. In both cases, the trustee received letters from low-life contingency lawyers (I despise them). My trustee is instructed NEVER to tell anyone who the true owner (beneficial interest) is. When these low-life contingency lawyers understand that they are in for a fight just to determine the owner, they simply move on to easier pickins. Could I ever prove that the entity structuring saved the day? No. However, I believe it did.

    Mike

    1Reply
  • Frederic Petit
    Real Estate Investor · Gaithersburg, MD · Member since 2008 · 6 posts · 3 votes
    18y

    Thanks Mike, This is what we can call a good test.

    This solution really make sens. The more I think about it, the more it makes sens to me anyway.

    It seems that you are not just limited in having one trust only. You can separate your properties in different trusts so there is no way for anybody to know that it belongs to you since trusts do not need to be recorded anywhere. In case of big problems, you just change the beneficiary of all your trusts to a new entity. It's gonna be hard for anybody to know about it and it seems to be something easy to do.

    Mike do you hold your properties in different trusts ?

    1Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    James,

    I agree with everything you said. My intent in using a trust with an LLC as beneficial interest is to make it difficult for the scumbag contingency lawyer from square 1. I want it to be difficult to find out who owns the property. I want it to be difficult to collect if they get a judgement. Let's say that they actually win and get a charging order. I can tell you for a fact, that LLC will never distribute another penny. They won't collect, but they'll get to pay the taxes. Good luck to them.

    Mike

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free