All Forum Posts by: Edward Stephens

Forget Both LLC's, and get decent insurance. With an LLC you'll lose your section 121 Exemption form cap gains on your owner occupied side, plus it just adds a bunch of other issues/problems.....due on sale clause issues, non homestead taxation, tougher insurance issues, etc.

Thank you very much for the insight! I haven't researched all of the issues you brought up, but I will. I have researched the "due-on-sale clause" issue. I want to use the Living Trust tactic I learned from the book How to Use Limited Liability Companies and Limited Partnerships, Second Edition by Garrett Sutton. I'd like to know everyone's thoughts.

"Many mortgages are written so that any transfer will technically trigger a due-on-sale clause requiring the borrower to pay off the full amount of the loan. By law, however, mortgage companies have to allow a transfer from a borrower to a Living Trust so that the borrower can achieve his or her estate planning goals. I have had clients explain in advance to the mortgage company that they are first going to transfer the property into a Living Trust and from there transfer it into an LLC/LP so that they can further accomplish their estate planning and gifting goals. When the mortgage company agrees they then explain that because there are often transfer taxes and other costs associated with it all they are just going to do one transfer, from their individual name to the LLC/LP. In most cases, this works. I have had other clients consciously risk that the mortgage company's computer will never notice a transfer as long as the mortgage is paid and transfer away without notice to anyone. A key factor in the due-on-sale question is whether interest rates are in balance or not. If older rates are at seven percent and newer rates are at 12 percent you can be sure that mortgage companies will be out looking for ways to trigger due-on-sale clauses so they can lend money at higher rates." Thanks. -Edward

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Originally posted by @Joe Bertolino:

Sounds very complicated for a duplex. Why not just buy an umbrella policy and save the elaborate risk management structure for when you need it?

I don't really have the time to delve into why sole proprietorships are poor legal entities, but this audiobook explains it. Listen to the first few minutes and see if it helps.

https://www.youtube.com/watch?v=6AxPVCiMxvA

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Thank you. I have come to a decision now. I appreciate the quick replies from all those who were considerate enough to read the entire discussion before posting. I look forward to asking and answering more questions on this forum in the future. -Edward

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Dear BP Community,

I am buying both units of a duplex, leasing one unit to someone else and living in the other. I’m taking a hardship withdrawal from my 401(k) to fund the purchase. Any comments regarding my decision to use my 401(k) to finance the purchase should be directed here. The details of the deal can be found here. If the deal goes through, I will inherit a tenant from the previous owner.

I am in the process of forming an LLC (we'll call it LLC #1) to hold the property's title. I will also be forming another LLC (we'll call it LLC #2) to act as the property manager.

Question 1: Is it possible to transfer title from me to LLC #1 a few days after closing, or am I disqualified from doing that because of my situation (see above links)?

Questions 2: What important aspects am I not considering? (I don't know what I don't know.)

Question 3: What are the advantages and disadvantages of forming two LLCs to accomplish the objectives I’ve stated above?

Let me know if this post is unclear or if you need more information. I will read every reply and will try my best to respond to them all. Thanks in advance.

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Originally posted by @Arthur D.:

Hi everyone,

Couple questions. 1. Should I start a LLC when I purchase my first rental property.

2. If I purchase a property in Pennssylvania and my residence is in NY where shouls the LLC be.. Can it be in NY?

Thanks

Let me start by saying I am not a legal professional. I am not giving legal advice. Consult your attorney if you want legal advise. All I can give you is my experience and what I've read from credible sources.

1. Great question, Arthur. I am reading How to Use Limited Liability Companies and Limited Partnerships, Second Edition by Garrett Sutton, Esq.. I believe this book, as well as his book Own your Own Corporation, make a clear and convincing case for forming legal entities when conducting business. And that's exactly what you are doing - conducting business. When you conduct business as a sole proprietor (meaning by yourself, no partner, no corporation or company formed), you are essentially telling the courts you agree to be held personally liable for your business dealings. If anyone has a real or imagined grievance, they can sue you. The prosecuting attorney will assess how far into your personal finances they can reach in order to satisfy their client. Think of everything you own that is in your name - your car, your savings accounts, your jewelry, your vacation home. They can seize it. Not so with a properly formed LLC. Real estate may also involve personal liability for leases, contracts and mortgages as well as for expensive environmental remediation and clean up. Think of whether you want to be liable for all these things too. Again, thanks to Garrett Sutton for writing the books I've mentioned.

2. Your choice of where to form your LLC is not limited to Pennsylvania or New York. In fact, I recommend you form your LLC in a business-friendly state like Nevada (read more here.). Once you've done this, your LLC can apply to do business in Pennsylvania as a foreign LLC. Wherever you choose to form your LLC, you'll ultimately need the approval of the Pennsylvania Department of State. When the time comes, you can file the necessary paperwork on the Pennsylvania Department of State's website by clicking here.

Read the books and articles I've recommended, then speak with a real estate attorney. Hope this helps.

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Originally posted by @Dennis Weber:

@Edward Stephens

I've also read those same books. I hate Tony Robbins but I like this book. One thing mentioned in Kiyosaki's book it seems you are forgetting is that Rich Dad became wealthy because he didn't pay as much in taxes as Poor Dad. So paying 40% in taxes would seem to go against the advice.

Why not get a HML? You'll have more money next year.

Paying taxes on my 401k withdrawal is unavoidable. I either withdraw today and pay today's tax rate or withdraw later and pay the tax rate of the future. A HML requires I pay back the entire borrowed amount plus interest and fees. I would be paying it back with after-tax dollars too. It's a worse deal than paying a thousand bucks to get my 401k money, in my estimate.

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Originally posted by @Brandon Hall:

@Edward Stephens

Great responses - I'm thoroughly enjoying this conversation. See my replies below:

1. I have not read this book, but I have read a lot about this theory. There are plenty of interesting aspects about the theory. For instance, it's a commonly known fact that Baby Boomers do not hold the majority of equities (they actually hold a small proportion to the relative whole). Institutions hold the majority of equities, and their funds have a very long time horizon. Additionally, these boomers have kids who are will be working and investing as the boomers retire and pass away, filling in that demand gap. Will the market be altered? Who knows, nothing is a known fact.

But let's assume you are right and the market is due for a major correction. In this case, it makes less sense to stop contributing to your 401(k). Why? Because when you contribute, you are likely contributing on a bi-weekly basis. If the market crashes, you will be buying stock, on a bi-weekly basis, as the market goes down, bottoms, and recovers. You will average down your cost basis and be potentially sitting on massive gains.

2. First off, Tony Robbins is a motivational speaker and I wouldn't be taking financial advice from him. It is true that mutual funds charge unnecessary fees, but the industry is trending towards transparency and those managers are being quickly weeded out. Additionally, you get to choose which funds you want your 401(k) to invest in, meaning you can achieve similar returns to the market as a whole. You won't achieve the S&P because your mutual fund managers are mitigate risks and therefore returns suffer. But this shouldn't be a driving factor to take a distribution from your 401(k).

Additionally, you have to factor in a company match and the accumulation of compound earnings on a pre-tax investment (which increases your earnings power).

3. True, you aren't paying on the withdrawal now, but what happens when you sink these funds into a property and can no longer afford the tax liability created by the withdrawal?

Hope this helps.

I'm totally exhausted and appreciative of all the comments i've received. Maybe I'll answer more, but for now I'll make this short so I can grab some breakfast.

(1) Let's agree to disagree.

(2) This fact came from David Swensen, Chief Investment Officer of Yale University. It's in Chapter 6.2 of this book also, if you're looking it up. And please don't try to discredit this fact by insinuating Tony Robbins has no business publishing information on financial education. He is a very rich man, an owner of several companies, and has lived a life.

(3) The property is projected to be cashflow positive, so this isn't an issue. Can you (or anyone) find an example of a time when taxes skyrocketed for landlords and rents did not increase? If so, PM me, but let's not diverge from the original intent of the thread.

Thanks. -Edward

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Originally posted by @Oliver Trojahn:

Two things. The deal (to my surprise) doesn't look horrible. You should also be contributing to your 401k to get your company match. You are making a mistake if you give up free money. The stock market is not going to crash. If you think that then invest in something other than stocks in your 401k (bonds etc.). There is no way that book told you to give up free money. If it did, I would be surprised.

Anyone with discerning eyes who sees a giant neon sign flashing "FREE MONEY" should suspect something immediately. To say "The stock market is not going to crash" and provide no evidence of your position comes across as dismissive and in my opinion insulting. You sound like a future victim, and I'm not trying to be rude or humorous. Please read up on the topics I've mentioned, then come back and post. I'd like to hear your opinions then, even if they totally oppose everything I've said. -Edward

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Originally posted by @Jordan Thibodeau:

@Brandon Hall Jolly Good Form Sir. /Tips his monocle towards Brandon

@Edward Stephens sounds like you know what you want to do, you just want someone on the forums to agree with you.

Remember, Real Estate is an asset class. Every asset class has its ups and down, but if you put all your eggs in one basket and disregard the federal incentives to invest in your 401k......

Also, according to the IRS:

If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards.
(Reg. §1.401(k)-1(d)(3)(i))

My 401k specifically states that hardship is defined as medical expenses, loss in the family and etc. I would make sure that your company approves your use case, to me it sounds like it would be a liberal interpretation of hardship.

Also, what about cash reserves? Your plan is to buy two properties, how much cash does that leave you if something goes wrong?

Thanks for the post, and nice use of a South Park meme to express your opinion on something as complex as real estate investing using a 401(k).

I feared after I wrote the first post of this thread that it would sound like "I want someone to agree with me". That really, really isn't the case. I just want to make sure I have the facts, all the relevant facts, before making my decision. The opinion that you and 90% of the people on this forum share is the opinion of the traditional American worker/saver. Socking away money in the sky somewhere for retirement has become something of a sacred cow, and I'm only asking people not to prejudge my proposition and to actually contemplate it for a couple minutes.

My employer and investment management company have already verbally approved such a withdrawal for down payment and closing costs on a primary residence (and I told them it was both units of a duplex).

Your point about adequate cash reserves is well taken. Without diving into it too much and diverging from the exactness of this thread, suffice it to say I will keep plenty of reserves on hand for every property I buy. If you want more information or want to continue discussion about this point, PM me. Thanks again. -Edward

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All Forum Posts by: Edward Stephens

Edward Stephens has started 29 posts and replied 146 times.

Post: Forming LLCs for a Duplex House Hack

Post: Forming LLCs for a Duplex House Hack

Post: Forming LLCs for a Duplex House Hack

Post: Should I take a hardship withdrawal from my 401(k) for a down payment?

Post: Forming LLCs for a Duplex House Hack

Post: L.L.C

Post: Should I take a hardship withdrawal from my 401(k) for a down payment?

Post: Should I take a hardship withdrawal from my 401(k) for a down payment?

Post: Should I take a hardship withdrawal from my 401(k) for a down payment?

Post: Should I take a hardship withdrawal from my 401(k) for a down payment?