All Forum Posts by: Cody Backus

@Megan Arzt, I am attorney in @Jeff Breglio's office. There is a pretty slick way to hold title to properties in other states using the Series LLC formed in UT. You don't actually put the property into the Series but into a trust, whose beneficiary is the series LLC. I am working on a course that would instruct you and others on how to do this but in the meantime, would be happy to discuss over the phone if you'd like to call the office.

We can also help you with the statement and record deed. 

This is what Asset Protection lawyers do! You really should reach out to one in your area. They can advise you on how to structure these things to accomplish your goals. The cost is likely less than you would expect and is worth its weight in gold. There are layers and layers of analysis and critical decisions in the questions you have both posed and how it should all connect together and layers of complications that you are not even considering. Don't try and do this on your own.

First rule you already broke was thinking about putting a rental property into an S-Corp. Bad idea. Note from your IRA, be very careful about restricted transactions and see that you know exactly how this should be done. Loaning money to minors... laced with complications. Seek professional help.

You really should consult with a good CPA. Especially in your position and you should also have a great relationship with a good real estate & business planning attorney. You are getting to the point when these things matter enough to have a good team to advise you. Unless you get a CPA or local attorney from BP to answer your question, you won't get the answer you really need. You will get what you pay for and that is scary when you have the assets you do. I can promise the value you will get far outweighs the cost of professionals who can help you accomplish your goals. 

@Todd Summers and @Stacey Mollinet, have you connected with wholesalers? You will have better luck finding deals that can cashflow better from off-market properties that you can pick up from wholesalers. Do you know how to find wholesalers and how to get on their buyer's list? That will be a better deal source for you than picking things up retail on the MLS or KSL. Shoot me a PM if you'd like me to put you in touch with some wholesalers.

Oliver, I am a real estate investment and asset protection attorney in Utah & Arizona and while I am not licensed in your state, the tax conversation you mention is federal income tax so I can vouch for what the attorney you spoke with mentioned. You separate active income with passive income and a holding LLC for rentals and an S-elected LLC for your active income (commissions, flips, wholesales, etc). It has everything to do with the way the income is classified and how it can be taxed. You can get great tax advantages if you set things up correctly and a good accountant will be your best friend. I work closely with accountants to ensure that the input I give regarding taxes is always up to date. You should definitely seek out a good tax accountant that understand real estate transactions and investments.

The strategy for resigning a manager is a good one for anonymity/privacy. You are on the right track and the attorney you spoke with is as well. 

A 1031 will not materially change your position from an income or asset standpoint unless you just want to own a similar property in another neighborhood or state. You will still have the equity/rental situation.  Think of seller financing as you becoming a bank, loaning the proceeds to someone else to buy your house except the money you loan isn't coming out of your pocket, its coming out of your equity. You collect their mortgage payment at the interest rate you choose. You take a down payment up front (how much is a matter of negotiation). Cash in your pocket. No concerns about how they treat the house or whether it is leased or not. None of the concerns of a Landlord and you collect money on your money with interest.  You turn your equity in the home into a machine that generates income for you while reducing your risk/liability that comes from the property ownership. Banks don't get sued for negligence on the property. Home owners and insurance companies do. Its pretty slick way to make your investments make money for you. Highly recommend you look into. 

Here is another thought. You are going to pay a lot in income taxes when you sell those houses that are all owned free and clear, are you not? Capital gains will eat your lunch. I agree that having that much in equity out there can create a risk though. Two options. 

1. Strip the equity. Borrow against the equity with a HELOC (also called "equity stripping"). Your net income from rents will drop on each property because you will have to service the debt and then use the HELOC proceeds to either pick up more rentals (without the equity risk) or purchase your personal residence.
2. Seller Finance. Sell these homes Seller-finance with some cash down. You become the bank and get some cash in your pocket. No equity out there at risk of trip & fall, etc. Who doesn't want to be a bank. They are the ones making all the money. If you get into trouble personally, risk from the top down, these Notes could be at risk, but that is why they should be held by your legal entity. This gives you some money in your pocket (from the down payment) to make the next downpayment on your personal residence, but keeps you in a position to continue creating income. You also have the ability to foreclose if needed so your money is secured by the property but without the headaches of being a Landlord. There are plenty of people who would like to buy seller-finance properties.  

All depends on what you want long term. 

Welcome Todd to BP and the Utah Investor's Circle. You will learn tons here. Try to not become overwhelmed. Looking forward to hearing about your future transactions!

@Kris Spevak - @David Dachtera gave a lot of great advice. Really well said. Obviously coming from someone who has real experience and wisdom. Two things I would clarify from his post. 

One, one of the golden rules in real estate is to not ever take title or transfer title of a property into an S-Corp or S-elected LLC. It is fine going into that entity and while its there by not good when that property comes out of that corporation. This just follows the general rule of not owning properties in corporations and it has everything to do with the way it is taxed when it is transferred out of the entity. Do use that S-elected LLC or S-Corp for any active income such as flipping or wholesaling you may do and get the salary/dividend split David mentioned.

Your trust will have to have special language to be an owner in your S-corp because only natural persons or human beings can typically be owners in S-Corps. 

This leads to my second clarification. The LLC cannot be a part owner of the S-Corp because of what I just mentioned above. But, a trust or another LLC can be.

My suggestion to avoid this issue with the S-Corp is to actually have two LLCs. One should check the box for being taxed as an S-Corp, which then is taxed as an S-Corp but has the flexibility of ownership that the LLC has. I would do this only if you are making more than $40k per year as a flipper/wholesaler where you are earning active income and can get the benefits David mentioned. The second LLC should choose taxation as a partnership. It then becomes the LLC that holds your rentals for the passive side of the tax benefits and the asset protection for that property. I would use this same entity for the first couple of flips even just to keep it simple.

You will likely have to purchase these properties in your personal name and then if you decide to keep it you will transfer it into your LLC.

@Account Closed, setting up an entity can serve two purposes. One, protection of your personal assets and two, tax advantages. I would also argue that it creates some credibility with end-game buyers as well, but its not a deal breaker. If you don't have much in terms of personal wealth/assets and you are going to do your first couple of deals, I would say it isn't as critical. You could get by doing the first few deals without the entity. However, if you do have substantial personal assets and/or are doing more than $40k p/year (net) as a wholesaler, then you should get very serious about creating that LLC or S-Corp. My suggestion to most of my clients for this is an LLC that has elected to be taxed as an S-Corp with the IRS (aka S-elected LLC).

I say it never hurts to talk to a local business attorney to help you make this decision as well. Take my suggestions here with a grain of salt as I am not a licensed attorney in your state and your state laws may change my answer.  This is just general suggestion based on typical state laws and nothing here should lead you to believe that I am offering specific legal advice for your particular situation. I have to say this to cover my butt you know. That is what I do. Legal mumbo jumbo. 

If you are getting started in real estate investing or want to learn to wholesale properties and want to learn from one of the best in the State of Utah, come to the SLREIA meeting tonight.  You will find out what it takes from someone that's doing 10-15 deals per month.  Wholesaling is a great place to start, especially if you don't have a lot of cash and you can make a lot of $$$. Just ask tonight's presenter. See you there?

6:30p.m. @ Salt Lake Community College, Larry Miller Campus - Auditorium at the Miller Free Enterprise Center

9850 S. 300 W., Sandy UT.