What is the right structure for someone starting to make deals?
Rental Property Investor · Boone, NC · Member since 2015 · 291 posts · 88 votes
Hello,
I am a beginner investor, recently closed on my first wholesale deal. Now that I am starting to generate income from real estate, I want to know what would be the best way to structure my business. I am located in Houston, Texas and my goal is primarily to acquire rentals while wholesaling some deals along the way.
I do not have any LLC or anything set up yet. What basic investment structure would you recommend from your personal experience?
I was thinking about two LLC's, one for acquisition (the rentals would be under that LLC name, and I would also use that LLC to do my wholesale deals) and a second LLC that would act as the property management company for the rentals (hold the rent money, pay expenses..etc).
Please let me know what are you thoughts.
Thanks
Ask your CPA about this structure...
Set up a trust with you as the beneficiary.
Set up an S-Corp to be your operating company. Most of the cash will flow through the S-Corp. The trust owns the S-Corp.
Set up an LLC to hold your first couple or few properties. The S-Corp and the trust own the LLC.
This way, you "control everything, own nothing".
If (s)he chokes on it, I can refer you to someone who can handle it (JD/CPA Tax Attorney / Accountant).
1. Agreed about not making this into a Renatus thread.
2. This is irrelevant, but I have done several CLE classes for other lawyers. Most lawyers --- including me --- will receive a few calls each month from Continuing Education Companies to do these classes. Some people find it enjoyable, other's don't. Again, that neither credits nor discredits Mark's advice. But it's also irrelevant when discussing whether Tristan should use the structure that you suggest.
Perhaps you can find one of Mark's articles advocating such structure. If so, we can discuss the pros and cons of such structure.
3. I suppose the main reason I am hammering this point is because of the following post:
When I first read it, it made me pause since it's an awfully complicated set-up for someone who just completed his first deal. Then your later posts clarified that you learned this from Mark at a Renatus seminar. Since I wasn't there, I can't comment on Mark's reasoning for such a structure. As I suggested above, if you can find an article where he recommends this structure, I'll be happy to discuss this.
Again, I'm not suggesting that the above structure is inappropriate in all circumstances. But the benefits you listed in the later posts is incomplete at best:
Not sure exactly what you mean by "multi-member" but I assume you mean a structure where the Trust owns the S-Corp, and the S-Corp owns the LLC. First issue, I take is the statement that Single-Member LLC offers almost no protection. That's true if you fail to run it properly. But having an S-Corp (whether you create a single shareholder corporation or a single member LLC elected to be treated as a S-Corp) doesn't solve the problem. In fact, it could arguably make it worst because the mistakes that many shareholders and members make gets compounded by having to deal with two separate entities (e.g. under-capitalization, failure to adhere to corporate formalities, intermingling funds, etc.).
Along similar lines, if @Tristan S. commits the actual wrongdoing, the above structure may not help him at all depending on how Texas feels about participation liability.
I have few issues with this.
First, it is true that creating a trust could theoretically make Tristan less visible. But that's frankly a moot point if Tristan intends to actively participate in wholesaling or property management. If he wants to engage in those activities and use his skills to make money, he will be visible to the public.
Second, the liability issue depends on the circumstances. If Tristan commits the wrong doing, then Texas may allow the plaintiff to hold him liable regardless of how many fictional entities he creates between him and the plaintiff. If Tristan didn't personally commit the wrong doing, hopefully he has appropriate amount of insurance coverage (for each of his entities) to deal with the appropriate liabilities.
Third, the realistic question to ask is the time and money required to set up such structure. I'm not sure what the going rate is in Tristan's town, but I assume he would be able to spend between $1,000 to $2,000 to form his LLCs and get the needed advice from his lawyer and CPA about what he needs to do when running a LLC.
How much would it cost for a lawyer and a CPA to set up your structure and go over all the formality issues with Tristan?
Also you noted that you said nothing about Tristan becoming the trustee. So who will become the trustee? His attorney at an hourly rate? Or another company that offer professional trustee services? How much will that cost?
At this point, I'm think I'm just going to refer you to Mark Kohler's office. You're making a LOT of lay-person / newbie mistakes in your assumptions - FAR too many for me to address. You need to speak professional-to-professional - perhaps even take some of HIS CE classes, especially on entities and entity structures.
Everything I've laid out here for Tristan is in Mark's two-day Tax and Legal class in the Renatus Essentials. The material may or may not be available for public consumption. Mark publishes a lot of stuff on YouTube.
You're also, apparently, making the typical consumer paradigm mistakes about costs vs. benefits: "How much will it cost?". Remember: before you can be in the REI business, you first must build an REI business. Otherwise, you're a hobbyist. So, you need to take some classes on entrepreneurism to adjust and expand your paradigm into "How much income will it produce / loss will it prevent?".
Everything I've laid out here for you is in Mark's two-day Tax and Legal class in the Renatus Essentials. The material may or may not be available for public consumption. Mark publishes a lot of stuff on YouTube.
You can get hold of Mark or one his partners or staff through kkoslawyers.com. That's the actual website - it is NOT an affiliate link.
Tristan
nice place, we just bought our daughter a place in Galveston she is at ut medical
seems that a lot of people forget about my favorite person in law-THE PARALEGAL-
how do you think those attorneys get there information
find you a good one, start asking questions and then make a plan, you can open up a nice trust for one, put one in your nieces name, keep one for your self, depends on what you want to do with your portfolio, keep it and use it as a tax shelter. do some research and see what is going to be the best to start out- maybe a rehab refi and sell scenario to move on to a bigger deal then a llc or sub s
good luck
keep up the great work
Let me get this straight @David Dachtera is calling @Chris K. (an actual lawyer) a lay-person/newbie ?!?
Thanks Chris for the points you made it is a shame there are FAR to many for David Dachtera to address.
Thanks for the kind words! :)
I think we are getting too personal here so let's agree to disagree. But just out of curiosity, are you sure Mark did not recommend the setup that he discusses in this video?
https://www.youtube.com/watch?v=HZln-xiJmRk
What he discusses is a very different setup than what you suggested. First, he doesn't suggest that S-Corp own the LLC that in turn will hold the rental properties. That's a bad idea for number of reasons.
Second, what he's essentially advocating is the use of revocable family trust. It's an excellent tool for estate and tax planning. Yet I'm sure he will agree with me that its use as an asset-protection tool is very limited at best. In fact, it's arguably non-existent. The benefits depend heavily on the family situation of @Tristan S. But even if it could provide some benefit to Tristan, one must ask whether he --- having done a single deal at this point --- should pay a few thousand dollars to set up a family trust at this point in his life.
An irrevocable trust would provide some level of asset protection. But if you want to own and operate a business through an irrevocable trust, you should have a very good reason to do so.
@Chris K. your driving down a dead end my friend.....some people never admit fault and always believe what they say is 100% truth. I started a conversation with a guy once wherein my premise was "How can anyone take what you are saying about your organization as objective if you're an affiliate?" It's simple, one cannot take what he says seriously because he has the objective of having new members join. To date still no suitable response just deflection and talking in circles...You cannot rationalize with an irrational person.
As I described, the strategy I suggest for Tristan comes directly from the on-line class. Don't know what to tell ya except to sign up for the classes and see for yourself. You seem to need a great dela of clarification on many points.
You did not identify yourself to me as an attorney, and the essay you typed suggested some seriously flawed knowledge - or too much cold medicine, not sure which.
As I mentioned, you can't run a business you haven't built, and NO ONE who is not independently wealthy should own properties in their own name.
@Shawn Ackerman seems to think that the only person who can speak authoritatively about something is someone who has never experienced it and knows nothing about it. Not sure what his problem is. He is the one talking circles. I did not "deflect" ANYthing - he failed to justify his point.
... and no, I am NOT going to re-open that argument! Period!
So, I'm just going to suggest getting some further training and education to make sure your understanding of it is correct. What you typed earlier was not only too long to read but seemed very confused and misinformed.
1. No need to engage in ad-hominem attacks. We can all be nice, civilized folks on BP. :)
2. Did you see Mark's video I posted? I'm fairly certain that what you meant to recommend is the structure that Mark discussed in that video. Note that there are some critical differences between what you suggested and what Mark suggests in that video.
Not trying to speak on behalf of Chris but he stated he was a lawyer in his opening argument :
Then he made a few well thought out points that to me made a lot of sense, And I am interested to hear counter points but calling someone a newbie, or a cold medicine drinker is not going to help anyone get a better grasp of the subject.
Not trying to speak on behalf of Chris but he stated he was a lawyer in his opening argument :
Then he made a few well thought out points that to me made a lot of sense, And I am interested to hear counter points but calling someone a newbie, or a cold medicine drinker is not going to help anyone get a better grasp of the subject.
You're right - I missed that. The whole post was too long to read in detail, and the details I picked up seemed confused.
1. No need to engage in ad-hominem attacks. We can all be nice, civilized folks on BP. :)
2. Did you see Mark's video I posted? I'm fairly certain that what you meant to recommend is the structure that Mark discussed in that video. Note that there are some critical differences between what you suggested and what Mark suggests in that video.
I'll look at that when I can. Where I am today (our RealeFlow workshop) has limited bandwidth and there are 100 or so people sharing the network.
The structure he uses in the class - and all subsequent discussions - is as I suggested: based on a trust, (at least one) S-Corp for operating company, LLCs for property holding companies. The trust and S-Corp are both members of each LLC so each LLC is multi-member.
Ok. Got to look at the video. Yes - that is EXACTLY what he talks about in his classes. What part of it are you maybe misinterpreting?
This video is focused on estate planning, not asset protection. It's only two minutes long. The two day class is 16 hours. Suffice it to say, this short two minute video will not include the same level of detail as a two day, 16 hour class.
The full diagram from the class would fill a legal size sheet of paper in landscape format, and then some. To be legible, you'd want to print it on tabloid size, landscape.
Hello,
I am a beginner investor, recently closed on my first wholesale deal. Now that I am starting to generate income from real estate, I want to know what would be the best way to structure my business. I am located in Houston, Texas and my goal is primarily to acquire rentals while wholesaling some deals along the way.
I do not have any LLC or anything set up yet. What basic investment structure would you recommend from your personal experience?
I was thinking about two LLC's, one for acquisition (the rentals would be under that LLC name, and I would also use that LLC to do my wholesale deals) and a second LLC that would act as the property management company for the rentals (hold the rent money, pay expenses..etc).
Please let me know what are you thoughts.
Thanks
I started reading feedback and had to reply right away. All you need is an LLC you can set up yourself to protect you from liability. You will start paying a lot of taxes when you start having corporations as a holding getting taxed then you getting taxed on money you take out.
LLC is only for liability, not tax purposes. If you have legal concerns, then get an LLC, if not, then you probably don't even need that. You could also just get business insurance I'm sure to protect you legally.
The two purposes you may want to consider for using legal entities (and different entities are better or worse for each) are:
If you do not yet have many assets to protect and you do not yet have high income to protect from taxes, then why would you need or want an entity? They are not cheap to set up or maintain. I recommend sole proprietorship (aka buy them in your name) with a reasonably size umbrella insurance policy ($1-2M coverage, which is not that expensive) to start.
This video is focused on estate planning, not asset protection. It's only two minutes long. The two day class is 16 hours. Suffice it to say, this short two minute video will not include the same level of detail as a two day, 16 hour class.
The full diagram from the class would fill a legal size sheet of paper in landscape format, and then some. To be legible, you'd want to print it on tabloid size, landscape.
link?
@Lance Robinson @David Faulkner @Susan O. I think you guys came to the right conclusion, for now, since I do not have assets or lot's of money, it will be fine to get the first properties to my name and re-evaluate the situation later on.
Thanks
This video is focused on estate planning, not asset protection. It's only two minutes long. The two day class is 16 hours. Suffice it to say, this short two minute video will not include the same level of detail as a two day, 16 hour class.
The full diagram from the class would fill a legal size sheet of paper in landscape format, and then some. To be legible, you'd want to print it on tabloid size, landscape.
link?
See Chris's earlier post. :-)
@Lance Robinson @David Faulkner @Susan O. I think you guys came to the right conclusion, for now, since I do not have assets or lot's of money, it will be fine to get the first properties to my name and re-evaluate the situation later on.
Thanks
... Until you get sued. Then, you'll be singing, "Coulda, Woulda, Shoulda ..."
Lawsuits are not a question of "if", they're a question of "when". Once it happens, it's too late to protect.
... unless it's your intention to donate all your assets and personal possessions to anyone who comes along and "asks" for them ...
@Tristan S. I think it would be wise if you got an umbrella policy to go along with those properties that are in your name.
@Lance Robinson @David Faulkner @Susan O. I think you guys came to the right conclusion, for now, since I do not have assets or lot's of money, it will be fine to get the first properties to my name and re-evaluate the situation later on.
Thanks
... Until you get sued. Then, you'll be singing, "Coulda, Woulda, Shoulda ..."
Lawsuits are not a question of "if", they're a question of "when". Once it happens, it's too late to protect.
... unless it's your intention to donate all your assets and personal possessions to anyone who comes along and "asks" for them ...
Or until you want to sell a property but your trust owns it and it's a paperwork nightmare every time he buys or sells anything. Better question - what are your merits to recommend someone spend so much money on time after a first deal? If deal 2 goes bad and he's out of the RE game it would be a huge waste. But please share your assets and liabilities and what made you get this structure.
Point 2 - LLC literally means limited liability. If in doubt than Tristan should just up his umbrella policy for litigation. You ONLY really need asset protection. Right now he may only have $100K in assets. A $1M umbrella costs a couple hundred a year at most, can be turned off any time, and 10X protection of his assets.
If he had $5M+ in assets then I would agree with you MAYBE. But he asked for entity protection, not estate planning - this is kind of the problem with bigger Pockets.
@Lance Robinson @David Faulkner @Susan O. I think you guys came to the right conclusion, for now, since I do not have assets or lot's of money, it will be fine to get the first properties to my name and re-evaluate the situation later on.
Thanks
Good call. Sorry about BP, people get really riled up and race to try and sound like the smartest in the room with all the answers. The more complicated, the smarter you sound. Most of them have analysis paralysis and have purchased a couple properties that have more debt than equity on them AKA not even prone to a lawsuit and think their millionaires as a result. Message me if you need more help. Good luck!