All Forum Posts by: Brian Schmelzlen

Hi @Lee Liberman,

I am unclear; does the LLC hold title to the properties? If it doesn't, then I don't see it offering much if any liability protection.

I agree with Aaron that a financial adviser might not be the best person to help with the situation you described.  However, if you are still looking for a financial adviser to help your parents with their investments, I can recommend the person I use.  He works largely in the Orange County and San Diego area.  PM me for his contact information if interested.

Hi @David Morehead,

I recommend "Crushing It in Apartments and Commercial Real Estate: How a Small Investor Can Make It Big" by Brian Murray.  I would also listen to his podcast interview on the BiggerPockets podcast.  I think that this is a great book for getting the basics of commercial and apartment investment.

Hi @Patrick Gault,

A lot of this depends on both on your time frame (for your first withdrawal) and how you define "low risk".

If you are looking at needing the money in less than a year, the only "low risk" option that I am aware of is keeping it in cash.  By that, I mean a savings account.  A number of the online banks are offering interest at around 1.65% to 1.7% which is pretty good, and federally insured.

If you are willing to hold onto something for a few years, I would consider Treasury bonds.  They will not make you a lot of money, but they are a very safe asset and currently pay a better interest rate.  I believe its currently around 3%; of course the tax benefits of this investment is nice as well.  However, most likely interest rates will be going up significantly, so if you sell the bond you may be forced to sell at a discount.

If you are willing to hold onto an investment for at least 5 years (longer is ideal) and are comfortable with volatility, index funds might be a good choice for you.  This is a riskier investment than the other two I mentioned, but with a fund that covers a broad swath of the market the risk is reduced through diversification.  There will be volatility, so if you are looking for only a short-term placed to park you money this is not a good choice for you.  If you are looking for a long-term option, it would probably do the best for you in terms of total returns.

What your broker is suggesting does not work for splitting the profits between you and your partner. Your goal is to split everything from all of the entities 50/50. Ultimately, that means regardless of whether you have 1 LLC or several, each LLC would have to be owned 50/50.

But I will walk through my interpretation of your broker's suggestion. There are 3 LLCs. There is a "master LLC" that you both own 50/50, and an LLC you own 100% (lets call it A LLC) and an LLC that your partner owns 100% (lets call it B LLC). The last 2 LLCs own all of the real estate. Based on that, all of the income from A LLC flows to you, and all of the income from B LLC flows to your partner (who in this scenario is not your partner). The Master LLC would not get any of the income, so it has nothing to split.

If you want to get the income from A and B LLC to the Master LLC without the Master LLC owning A or B LLC, Master LLC would have to perform services for A and B LLC. But what services could it perform that would provide a business justification for paying all of the profits from A and B to Master LLC? Plus the IRS would look at this and likely say that Master LLC actually is the owner of A and B (given that all of the profits go to it) which would defeat the whole point of this setup.

As you can see, your broker's suggestion is needlessly complicated and ultimately does not work (unless I am missing something).

If you want to operate 50/50 with a partner, you both need to own the LLC (or LLCs) 50/50.

Hi @Christen G.,

With limited liability protection (what LLCs offer), successful plaintiffs are only able to seize the assets that are in the LLC unless they are able to "pierce the veil" and sue you individually as well. So your broker is correct that because all of the properties are in the same LLC, a successful plaintiff would be able to go after all of the properties.

In regards to your reason for not wanting a separate LLC for each property, I don't understand why you would have 3 bank accounts for each property. It should be just 1 bank account for each property. However, I agree that there are good economic reasons to not have too many LLCs. I think it is a balance between the benefits of reducing your liability by separating your assets into different LLCs and the operational costs of doing so.

Your broker's suggestion is a bit complicated, and if you look at it based on title doesn't make sense. Why would an LLC owned entirely by you pay 50% of the profit to another entity?

Hi @Andrew Merritt,

You have a few options.

First, you can try to bring in your brother-in-law's parents as private money lenders.  The upside to them is that they would get regular, predictable payments at a decent interest rate.  The downside to them is that they would not get to participate in the overall profit of the project if it all goes well, but of course they also have less risk than everyone else.

If they want in as equity investors, you should consider an LLC or a Limited Partnership (with the LLC as the general partner). There are a few variables that go into which structure you go with, so you would want to talk to local attorney and CPA that knows South Carolina's state tax laws. The upside to both of these structures is that they would get to participate in the overall profit of the project. The downside for them is that they won't start getting any payments until you do, and there is more risk involved for them since equity holders get paid after debt holders in a liquidation.

I don't think our opinion of whether it is too ugly or whether it should look like the buildings by it matters.  I think you should try to conduct some informal market research to determine if your potential tenants think that it is too ugly.

First, I would look at the buildings next door and what type of businesses occupy it.  If those are the type of businesses you want as tenants, and the other buildings are full then that is pretty good evidence that your potential tenants are fine with how the building looks.

Next, I would ask people in the industries that you want as tenants what they think about the building.  To be clear, I am not suggesting that you ask them to rent from you (although that could be a bonus), I am asking if they would be comfortable running their business there.  You would want to ask people who would be honest and not just try to give you the answer they think you want to hear.

If you find out that your potential tenants are fine with how the building looks, why should you care if its too ugly?

Talk to the person you are working with for the FHA loan because I am not an expert in that, but my understanding is that you only have to live there for a year.

Great, that helps.  If you don't want them to know that you are the owner, the easiest approach would be to hire a property manager.  While that is obviously an additional expense (and you would have to be prepared to manage the manager), it would stop you from having to deal with your tenants directly and might actually save you a lot of money in the long-run.  Having a professional manager might stop you from making a lot of mistakes.

If you choose to self-manage, you can simply refer to yourself as the property manager and not disclose that you are the owner.

I do think that using multi-families to house hack are a great way to quickly build up wealth, as long as you plan in advance to make sure that it doesn't negatively affect your preferred lifestyle.