All Forum Posts by: Drew Shirley

 Well, a general partnership offers no liability protection whatsoever, so I would not recommend that.

An LLC with both you and your partner as managing members would be the simplest way to protect yourself individually. And I would make the effort to get financing for the LLC, not you personally, and a non-recourse loan if at all possible. (I know it is not always possible when you are starting out, but don't just go with the first bank you apply to!)

Also, the concern that is generated over the due-on-sale clause by real estate investors is about 100 times greater than the actual risk of a note being accelerated. It almost never happens. Making business decisions based on the possibility of a due-on-sale violation is simply not worthwhile.

I would avoid recourse financing if at all possible - if the project is large enough and cash flows well, you should have lenders will to lend directly to your partnership or entity.

Speaking of which, what entity are you going to use?

You can form an LLC, or a series LLC, without an attorney. There are certain requirements for the formation documents and the ongoing operations of the entity.

Read more here --> http://www.sos.state.tx.us/corp/formationfaqs.shtml#LLC

Keeping a separate bank account for each series is not a legal requirement but may be advisable for accounting and tax purposes, and to avoid any "commingling" of funds.

I charge $990 to set up a series LLC (or $99 per month for 12 months), plus filing fees ($300).

Hi Eric, welcome.

The "no money down" mantra is a bit of a misnomer because it's very difficult to invest in real estate without any money whatsoever. At the very least, you are going to need some sort of marketing budget to generate leads for buyers and sellers.

If you're going to wholesale and do double closings or assignable contracts, you at least need a good assignable contract and a list of investors to assign your deals to. That requires an attorney and marketing, or maybe a membership in the local real estate investors club. 

You can cold call FSBOs and FRBOs on Craigslist and in the magazines... that's free but time-consuming. If you're actually going to take title to your properties, you'll need to buy a sign to put in the yard, a lockbox, more contracts... etc.

I do know that the only way you'll ever make any money is make offers, the more the better. So you've got to get in touch with motivated sellers somehow and make offers. Everything else is window dressing.

Good luck.

@Account Closed do you mean you recommend a separate bank account for each series?

*** This is not legal advice and I am not your lawyer. ***

No offense, but this is terrible advice.

Banks want the property in the individual's name so they can go after the individual's assets if the deal goes south, which is exactly what the LLC is intended to prevent.

And if you deed the property into your name, even for one day, you are now personally in privity with the deal and you will get sued personally if someone sues over the deal. 

Finally, quit claim deeds are practically worthless and most title companies will not insure them. 

Stay away from the big monolithic banks and find smaller lenders who will lend the money directly to your LLC and not require you to personally guarantee the note. It's not easy to find a good lender who will do this, but it is worth the effort.

@Tristan S. *** This is not legal advice and I am not your lawyer. ***

I'm also not a tax lawyer, so I'll recommend you read this for a lot of the basics. And by the way, the IRS says you're supposed to pay estimated taxes every quarter, not every year. 

In terms of forming an LLC right away, it really depends on if you have any personal assets. Many of my clients are just-starting-out real estate investors, and I will sometimes tell them that if they don't have any money and they're not agreeing to personal liability in their first few deals, there's not really much to worry about. If you don't have any money at all and all your properties are fully leveraged up, you're what we might call "judgment proof." Why would anyone sue you if you have no money?

Certainly the safest, most conservative route is to form the LLC first, then start doing deals. But I personally think it's okay to wait until you have assets that need protecting before you start worrying too much about asset protection.

If you do form an LLC, you would be able to open a bank account in the LLC's name and you would be the signatory for that account. The LLC can act just like a legal person - it can generate income, pay bills, and move money in and out of bank accounts. So yes, the rent would be paid directly to the LLC's account, and then you could either re-invest the money back in something else, or distribute it to the LLC's member -- you. (But beware -- you will have to pay taxes on your profits even if you don't distribute the $$$.)

@Debra Richard *** This is not legal advice and I am not your lawyer. ***

I think the reluctance regarding series LLCs is based on the fact that they are new and in some ways an unknown quantity. I think they are really the best vehicle for real estate investors who own lots of properties.

That being said, I would not recommend converting an existing LLC into a series. That could be problematic. I would start one from scratch and then convey the properties one at a time into the new series LLC.

In terms of the potential pitfalls...

Some lawyers are concerned that courts will simply disregard the series structure and open the entire entity to exposure -- even though the statute specifically says that the assets and liabilities are segregated. 

I really cannot imagine a Texas court "piercing the series" and simply disregarding the statute like that, but I suppose you never know.

There is some concern that states that do not permit series LLCs may not recognize them in those state courts--but again, how likely is that, that a foreign court would simply ignore a business organization?

And there is uncertainty about exactly how each series will be treated for federal income tax (and Texas franchise tax) purposes. Let me be the first to say I am not a tax lawyer, so there may be something definitive out there, but I do not think the IRS has affirmatively said how they intend to characterize series LLCs. I think there is an informal advisory note that says each series can check the box for itself, which seems to be the most logical choice. 

I think the massive cost savings and organizational efficiency of the series LLC make it well worth the slight risk that any of these bad things will happen. Compare it to forming a separate LLC for each house, which has always been a nightmare.

Hi Tristan, welcome.

*** This is not legal advice and I am not your attorney. ***

1. Rent is taxable income and you would pay taxes on the rent; however, you can deduct the cost of paying the mortgage, maintenance. utilities, etc., so you only pay taxes on your profits.

2. I recommend a "series LLC" for my clients who will be acquiring multiple properties. It is basically like having many companies under one roof, but each "series" has its own assets and liabilities and is insulated from the other properties. You would want to acquire the property in the LLC's name, though some lenders do not allow this. Avoid putting properties in your name or being personally liable for the debts of your investments.

3. You can elect "pass through" tax treatment when you form your LLC, so the entity itself is not taxed. You are taxed on the LLC's income, but you pay no corporate tax. You may have Texas franchise taxes to pay, but not right away.

4. To become a licensed real estate agent, you must take a bunch of real estate continuing education courses, pay a fee, and pass the real estate exam. THEN you must find a broker to sponsor you AND you will have to pay an annual fee to your local realtor's association to have access to the MLS. It is a fairly expensive and time-consuming process, so you might be better off finding a flexible, aggressive agent who will help you with listings, comps, etc.

Good luck.