Help with structuring my business

[Matt Herbert]

Hello all,

I'm relatively new to BP, but I've been dabbling in Real Estate for 5 years now. I've decided this is my year to become more intentional. I own 4 properties, and am under contract for a 5th. Currently I do all my business as a sole proprietorship. No LLC's at all. I also work in a stable full time high income job (that I'd eventually like to escape).

I know that for liability reasons, I should probably get the properties into LLC's. However, I have this nagging feeling that how the LLC's are structured could affect my tax strategy. I've had a couple of CPA's in the last few years, and none have been able to help me figure this out (they were more number cruncher's, and not strategists). I'm looking for any advice around how to structure a small but growing real estate rental business. Or, suggestions on how to find an amazing CPA that can really help me maximize my situation.

Thanks

-Matt

[Scott Smith]

@Matt Herbert congratulations on getting yourself into a good position! There are a few thoughts I would have on your situation. When meeting with clients the first order is to discuss (A) their personal assets, (B) break down their current investments portfolio and other business ventures before discussing any (C) future goals. Each of these variables will dramatically change the advice for the individual asking this question. I often break it down into the "five pillars" of protecting your assets.

1st pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments - these simple steps will help you prevent lawsuits before they even occur.

2nd pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

3rd pillar applies after you have good insurance You need to protect yourself from what insurance doesn’t cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property they can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE- check out this article to learn more.

4th pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

5th pillar is owning everything anonymously. If people don't know what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using Trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

I have some great connections with CPAs and will DM you my recommendation for that! 

Ultimately you will want to find an experienced attorney who can set up a good infrastructure for you that can scale without causing you a headache and costing you an arm and a leg. When people kick their real estate investing into high gear I always recommend finding professionals (CPAs, attorneys, contractors, etc) who are also personally invested in real estate - those are the professionals who will save you money and get you the niche advice that can position you well for the future.

This is not legal advice, just my opinion as a real estate investor.