What's the best way to structure asset protection in California?

Question

For someone that only has 6 rentals spread between California, and TX. What will be the best way to structure the ownership for these properties that can provide good asset and liability protection?

My insurance agent is suggesting a commercial umbrella. but I'm thinking about separate entities or trust. However it's expensive to do LLCs in California with $800/year tax per LLC. I've heard about series LLC, would that work in California?

What would be your recommendation for property owners at this scale?

Thanks

Alex

Juan Carlos Quiroz Zolezzi · Answer

Alex,

I find most RE investors that have entities hold property in LLCs as this provides the most flexibility at the lowest cost.

Corporations and LLCs have almost the same "formality" requirements, so don't think that because you have an LLC you don't have to follow the formalities. The flexibility refers to the structure of the LLC not to getting away with things. The lowest cost of the LLC refers to tax matters and double taxation.

If you work in 2 states you will either have entities in each state or will need to be registered in the 2 states, which is almost the same amount and it is the cost of doing business.

Many RE investors, hold their properties in trust and they argue that this protects their assets. A trust does not limit liability but it does provide anonymity, which may be just as important. There are costs for maintaining the trusts and there are formalities to be followed.

Having General Liability insurance also protects your assets as in the case of a lawsuit you may be defended at the cost of the insurance company and they may also pay all or a big portion if you lose. However, not all policies are created equal, just because you have insurance does not mean you have General Liability insurance. You may only have insurance against a fire loss without GL coverage. You may also have GL without dog coverage and then you get sued because of a dog bite.

HOWEVER, as @Jay Hinrichs mentioned, you may spend all this money and nothing ever happen... which is the norm. Don't let any of these stop you from investing and growing.

On our side we use LLC and GL to protect our properties.

Account Closed · Answer

Hiding your name in a land trust will not cover your asset protection needs. If a tenant wants to sue you, a lawyer and/or judge will find out what properties you own.

I own 5 multifamilies in CA. LLCs are useless here. I have a $2M Umbrella, only cost $400/year from GEICO and I even received a 10% discount on my auto, so it really only ended up costing $250/year

Not a bad price to pay for $2M of coverage

Joe Homs · Answer

Did not really need to provide my two cents here, but my name was mentioned.

I totally agree with @Juan Carlos Quiroz Zolezzi and @Parker Cox in their assessment of the question.

I personally use a land trust to hold title which provides me with the privacy protection I need.  The beneficiary of the land trust is my Corporation which provides me with the liability protection I need.  I also carry a 1 million dollar umbrella policy on top of the normal "Fire Insurance" policy for each property.

Even though I've been doing this over forty years, I encourage everyone to take a course from the expert in this field.  Here is his website  Mr. Land Trust.

Finally, always treat everyone as you would like to be treated and you should not have any problems.  But, always protect yourself just in case.

Great investing to you all.

David Faulkner · Answer

I've asked myself this same question and have come to a similar conclusion as most posters. My portfolio is too small and the cost in CA too high to justify a LLC, even assuming that it will function to protect me if/when needed. So, umbrella insurance policy, which I've never needed (knock on wood).

I'm no expert, but I have also heard and read about putting property into a trust in such a way as to protect your identity as the owner; you can't sue who you can't find ... this is intriguing to me if anybody knows more about how to pull this off. @Joe Homs?

Parker Cox · Answer

@Alex Chen as an insurance agent in Ca.  I think your agent is walking you down the right path.

I insure more than 500 units with REIs and in almost every case I have seen a single LLC with GL and a Commercial Umbrella will be enough basic structure/protection to build on as your portfolio grows and changes.

But, it comes down to your risk aversion: many people in your position (1-8 rentals) have their rentals attached to their Homeowners insurance and then have a personal umbrella for extra protection.  But, if you dont have a homogenous portfolio, ie a 1 million dollar commercial building vs 3-50k SFRs, you may want to have stronger protection or separate LLCs because of the unique exposure differences as well as asset loss potentials.

Ultimately, if this is going to be a business more than a hobby, I suggest setting up at least 1 LLC (though in my experience I have seen attorneys suggest that the LLCs are for more similar properties: like 1 for your california properties and 1 for texas....etc)

Then get a GL policy at least and likely a $1-3 million umbrella.  The umbrella is gonna be in the ball park of $500/year and a small price for the protection.

Long and short: there is no right answer here.  You need to determine where you see asset exposure and to what lengths you would like to go to protect yourself.  If you do pursue more insurance I suggest you read the fine print--don't buy just because it is the cheapest and make sure your agent has experience with investors who are not only your size currently, but also familiarity with investors who have scaled to higher heights because if you plan to grow, you need a proper foundation now or else growth will be costly and time-consuming later. as @Juan Carlos Quiroz Zolezzi says "all insurance policies are created equal" and neither are insurance agents...

Feel free to reach out with any other questions.

David Tipton · Answer

I tend to have a jaded view of these kinds of things, since I only see things when they go wrong.  When it comes to insurance, better to have it and not need it than need it and not have it.  I still haven't pulled the trigger on my first rental property, but definitely going to make sure I'm properly insured.  Here's to hoping I have your luck!

Jay Hinrichs · Answer

@David Tipton  you are absolutely correct on the single member LLC. vis a vi the corp veil.. one reason to have proper G L insurance.. on my 27 homes subdivision I am building in Portland right now.... it cost me 40k for  1 million in coverage for the 10 year warrenty period. and we bought that basically only for cost of defense.

I am just about out of the land lording game.. and can only go on my 30 plus years of owning the dog gone things.. and I have never been sued by a tenant.  guess I am lucky in that regard.. but I do have an umbrella and have had it all these years  5 million.. but never once used it.

Manolo D. · Answer

I don't disagree with @David Tipton, but I think mixing corp funds and personal funds is always a bad practice, both court and irs, I am sure you are aware of that. I also do get to hire a paralegal to file paperworks for me, just to make sure that there is a supposed annual meeting and corporate requirements. I am not sure if the court will call them BS as long as the corporation hold its meeting and file corp requirements, while the judge can call it, you can also fight for it, a discussion that is reserved for another day. I am still learning about trusts, but from what i have read, you can use a trust name to be anonymous. If this is true, I would make some common name to be my trust name and not something like Alex Chen Holdings trust, something like Irvine Texas Holdings Trust or something. LLC offers a little less corporate viel than Corporations. Also, if it is not too expensive, one entity can be exposed to lawsuit but another entity to hold the asset.

David Tipton · Answer

There is a general misconception about LLCs.  They do not automatically and completely shield an individual from liability. If the corporation is simply an "alter ego" for the person, a court may "pierce the corporate veil" and find individual liability.

For a simplistic example, let's say you start @Alex Chen, LLC. You are the only shareholder. You put your properties in, but extract cash regularly for your personal expenses. You hold no board meetings because it's not really a corporation, so why spend the time and energy, right? Wrong. A court may call "BS" on you and treat the corporation as an attempt to avoid liability, which it is. There are certain requirements that corporations must meet so definitely talk to a corporate attorney about your particular situation.

Is there anything that would stop you from doing both? @Jay Hinrichs has a good point that being a good, responsive landlord will go a long way. But California is one of the most litigious jurisdictions in what is unquestionably the most litigious country in the world. If a tenant is motivated they will find a way to sue. There is even a state law that prevents a landlord from preventing "tenants rights advocates" from meeting with tenants on your property. In Los Angeles, there are law firms that pay people to go door to door and try to get tenants to file big lawsuits against their landlords. Guess who is statutorily required to pay the attorney's fees for the tenant's attorneys? You guessed it! The landlord, or his or her insurance. Something to consider.

Alex Chen · Answer

From tenants, and also from other liabilities - bad business venture that resulting lawsuits, someone got injury by us(knock on wood) etc.

Of course, I will ask an attorney about this, but want to know enough basis before talking to an attorney.

Thanks

Alex

What's the best way to structure asset protection in California?

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