All Forum Posts by: Cody Backus

Scott, you could start by chatting with an Arizona licensed attorney that works almost exclusively with real estate investors, including wholesalers, to determine when you should set up that LLC and discuss how it should be taxed, etc. I happen to be one if you'd like to chat.

@Valerie King, 

You've got some great advice here regarding leases and doing things right. You will sleep better knowing your ship is sealed tight. 

In response to your first question about the LLC, yes. Investors take title in their name and then transfer title to an LLC sometime thereafter. You will be especially clear from the Due-on-Sale clause if you are a single member LLC.

Regarding your second question, I feel there are many more benefits from having an LLC than just the asset protection. While this is the primary reason for having one, there are many other reasons for doing so.

One that you will appreciate as a landlord is the ability to separate yourself as the owner of the property and act as simply the manager. Tenants treat managers differently than they treat owners and when you represent yourself as the manager, the tenants know you are bound to act with certain limitations placed upon you as a manager. If they know you are the owner however, they think you have the ability to reduce or forgive late fees, excuse them for the pet they were not allowed to have per the lease, etc. Having the LLC act as owner and you as its manager helps to create that separation. Then, you are just the manager/messenger that can enforce the lease and collect payment.

@Rohan J., an S-corp does not protect you any more than an LLC, especially from getting sued.

Savvy investors will get loans in their personal names and then transfer title to properties into an LLC after the fact. Banks will not easily loan money to LLC's for real estate purchases without personal guarantee.

An insurance policy does not prevent you from being sued and losing your assets. Also, have you ever heard of a claim being denied? Uh, yeah. There are a lot more reasons for having an LLC than most people understand. Having an LLC reduces what can be sued for, which is often enough to prevent a litigious attorney from suing at all if there is nothing there. You should ideally have both and then observe the LLC formalities and respect it as an entity so that you get full protection.

As @Sean Morrison mentioned, Missouri is a state that allows the creation of a Series LLC, meaning you can form an "umbrella" or "parent" LLC with the state of MO, then place multiple properties into "baby" LLCs under that umbrella and isolate liability between them. These baby LLCs are typically not registered with the State, so as far as California is concerned, you will only have one more LLC. However, from an asset protection standpoint, you will have multiple "baby" LLCs for each property, each one protecting the assets within that LLC from liability from the other.

You could then use trusts to take title to the other properties outside of MO and use that same Series LLC to get the asset protection you would need. This is a very solid strategy for seasoned investors owning multiple properties but one you should start creating if you intend to keep building a portfolio of rentals outside of CA.

The strategy I mentioned is not as expensive as it may sound and is certainly less expensive than the CA franchise tax will be for each new LLC.

@Todd Willhoite, 

My response will combine the response of the other two responses you already have. As

@Steve Vaughan stated, the fees you would charge to manage your property would likely by categorized as "active" income whereas your rents collected through properties already held in the LLC would be considered "passive". Because of how these types of income are classified by the IRS, they are also taxed differently.

Typically the ideal situation for asset protection (observing corporate formalities and protecting the corporate veil) and tax advantages (using the right type of entity for the right tax advantages) is to hold rentals in the standard LLC while an S-elected LLC or S-Corp would be used to manage your properties. The standard LLC would contract with or hire the S-elected LLC or S-Corporation for management purposes. All of this is pass-through for tax purposes but it keeps the two entities doing what they should from a tax and asset protection standpoint.

Be sure to keep the income and bank accounts for each company separate as if they were two very separate and distinct companies. Don't sign lease agreements in the name of the S-elected and don't send invoices to tenants from the LLC. Operate two companies. Not as hard as it may sound.

Perhaps @Dave Holland can confirm from a tax standpoint but this is what I have seen many times from a legal standpoint. 

And, to cover my butt, make sure you chat with local legal counsel. Nothing here is meant to create an attorney-client relationship or act as legal advice for your particular situation. Just general info regarding typical structures I have seen that work well. 

Valerie, 

Great question. What I want to say (because I am an attorney) is that you should always involve an attorney... but... here's my two cents.  

First, you should NOT just grab a lease agreement from the interweb and hope it works for you. You should talk to other landlords, ideally someone that has been around for a while and see if they will pass their lease along.  Also, some nice property managers and associations such as the Department of Real Estate or Apartment Association may have a lease template or form that will be specific to your state laws and one they use for multiple tenants. These should come for free. If you have the advantage of reviewing several and choosing one that best suits you, great. If you can't get your hands on one, getting one from a real estate attorney for a few hundred dollars is well worth it, especially since you will be able to reuse it again and again. I even know of some RE attorneys that give out a lease form to new landlords. 

Once you decide to become a landlord, you should begin looking for and building a relationship with an attorney.  The reasons for this are many but an attorney can advise you about your risk of liability and what you can do to avoid being sued and what you can do to limit your exposure if you do.  I would say that once you become a landlord, it isn't a matter of "If" anymore but "when" you will be in a dispute with a vendor or tenant about the property and you'll be glad you have a good relationship with an attorney who knows your situation. 

He will likely recommend you transfer your rental properties into an LLC, and for good reason. Many people here on BP think that an insurance policy is all you need or that an LLC isn't necessary. This however is not true. There are many reasons you should use an LLC for rental properties, and have good insurance coverage.

While attorneys don't give tax advice, they should know enough about entities and your situation to help point you in the right direction regarding taxes and connect you with a good accountant who can make sure you take advantage of all legal tax strategies to reduce your tax obligation and pay only what is required.  This will save you thousands of dollars over the long term. 

It should not cost you to have a consult with an attorney to tell him about your situation and your goals and see what his recommendations are. Do not wait until you are already in a lawsuit to try and plan a way out. Take the proactive approach and do those things that will reduce your risk and probability of being sued to begin with. 

Robert, 

This new venture sounds very exciting. I meant to ask you a few questions about your career and trajectory, so this is a lead in. I would be interested in talking to you about this venture and if there is an opportunity for someone like myself to be involved. Perhaps there is a way we could collaborate on a few things and I could contribute from a distance. I have a B.S. degree in finance along with the JD (licensed atty in Arizona & Utah) and my extensive background in RE. I am looking to align myself with others, and particularly in situations where my education and experience can be of most value. I am interested in working on larger projects and with bigger dollars. Just a thought. Let me know what you are looking for as members on the team, even if it's not me, I am happy to see if I can help you connect.  

I will be looking for a response regarding a solution to your capital requirements we discussed previously.  

Kumar, the strategy you suggested is commonly used and typically a good idea.  It is the same structure that larger real estate investment and management firms work. It separates liability, isolates the right kind of income to the right type of entity, providing what is typically a great tax strategy for asset protection and tax purposes.  Usually it doesn't make as much sense with only a couple of properties but if you already have the entities in place then yes, it works great.  If it doesn't work it is usually just because of the administration headache that comes with multiple entities and paying each other which all ultimately pass through to you. You should confirm with an accountant and local attorney but you are definitely headed in the right direction. 

I would say it totally depends on your strategy and what you want to accomplish long term. What is your risk tolerance and how much is at stake? Your question is quite loaded in that it could take hours to explain all the issues at play. Are your homes in the same state in the mid-west? 

I would highly recommend you reach out to other investors in the state where your properties are located and get referrals for highly competent real estate investment/small business attorneys, and CPAs that know real estate, and determine what is best for your situation. Often these professionals will give you a free consultation to get you pointed in the right direction. Your question here involves tons of tax considerations, asset protection factors, administrative costs, and more. The cost of good professional guidance is well worth it and is much cheaper than if you do it wrong.  

Hi @Taylor Thayne, welcome to BP and the Utah Investor's Community.  You will find a lot of great support and information through this forum. The Meetup.com is hosted by Jeff Rappaport and Brian Pitcher in Draper twice a month. There are also several other resources that will discuss wholesaling properties.  I agree with partnering or working with other wholesalers. When you work together with someone you can build your buyer's list faster and when you do need to spend some dollars in marketing, you can spread the costs.  I am a Utah attorney and I work with a lot of wholesalers, their buyers and lenders.  If you ever have legal questions about the wholesaling business or process, please don't hesitate to ask. You should attend Meetups and SLREIA.com or utahreia.org to network with buyers and other wholesalers. 

@David Bullock, the short answer to your question yes, a trust can be used to take title to property and you can connect that to an LLC by naming the LLC as the Beneficiary in the trust. You will transfer title from your name into the trust. This is a very plausible way to do accomplish your objectives. However, you need to make sure the trust language is specific to this purpose and that it is the appropriate type of trust to do this. You should also understand that by doing this, you are connecting liability from your Utah property to your Montana assets. If you choose to go this route, you'll just want to ensure you have adequate insurance coverages. You will also want to confirm how your MT LLC is being taxed. You do not want to put your rental income assets into an S-elected entity (from what I have been told by accountants). A good CPA would have likely recommended you make the S-election because of the type of income you will make as a home inspector (active). Not sure what you mean by investment, whether that is rental investment or flips/wholesales but that may be a factor. As you can see there are many factors to consider and @Jeremy Pakalka's advice is certainly never a bad idea. In fact, its a great idea. Happy to help you create the trust and transfer the property into that trust once the other elements of this discussion are fleshed out and you confirm this is the best strategy for your particular situation.