All Forum Posts by: Frank Chin

@Steve Smith

I bought a business from someone who had it in an "S Corp" and I put the business in an LLC. Found out the prior owner had a lawsuit against him for $3 million. He only had $1 million insurance coverage. I had a front row seat in this case since I took over his employees and I paid them for attending depositions in the litigation. The prior owner was on the hook personally for $2 million.

I was worried enough to speak to a lawyer involved in these litigations since his S Corp and he and his wife was sued personally as the owners. I learned that the prior owner tried to get the lawsuit against him personally dismissed arguing that he had an S Corp. The request was denied. 

The lawyer advised that he sues small family owners personally as a matter of course and request to deny liability of owners are also normally denied as a matter of course, It was explained that as a property owner, failure to shovel snow for instance, both I and the LLC will be sued. I'll be sued for negligence since the LLC doesn't shovel snow, I do. If I use a licensed PM, the onus would be on the PM who would carry his own E&O insurance.

Interestingly enough my employees were asked what the owner did all day. The owner bought the business as an investment and was never around to supervise it. It was also during the deposition that the litigants learned the owner moved to Florida after the sale of the business and bought a mansion. When the litigant attorney heard this, shouted "oh no, we're screwed" and pounded on the table. Florida had the best homestead laws.

When I purchased my liability insurance, it was not that much more to buy the additional millions. I only got $3 million when my insurance agent said that was more than enough. The litigants finally settled for $1 million which is still a pretty good payday.

There's a ton of posts on this site mentioning the use of LLC's. Then there are plenty of replies that you don't need it, as all you need a good insurance.

I have a business in a LLC, not for anonymity or risk aversion. On one occasion I overheard two customers chatting in the waiting room and they had no idea I was the owner. One guy mentioned he did OK over the years suing owners for small amounts, five to ten thousand. Due to the hassle, people settle. I said nothing and walked away.
 
Sure enough, a few weeks later, I got a letter from an attorney, photos of his client injured from a slip and fall, and a demand letter for $10,000. As I got liability insurance, an umbrella over for $3 million to cover myself overall, I called my insurance agent. She said just to send all the paperwork and calls to the insurance company and let them handle it.

I contacted the lawyer, advised him to send all correspondence and make phone calls to the insurance company. What happened? The customer came back nine months later, told me his attorney is not returning his calls and asked me to find out what's going on. I was shocked, I'm supposed to follow up? Called the insurance company, they looked up their claims file and found three calls and three letter from the lawyer. When asked what they did, they advised they filed it away. The reason is for that amount, that's all the attorneys would do on a contingency basis, and they only charged a fee if they collect on a lawsuit, 

The customer then asked if I would pay him a few dollars instead. Told him he needed a new lawyer. Funny he still patronizes my business and never mentioned the case again. Ignored my advice to get a new lawyer.

Conclusion. The insurance company acted as my legal department and did a wonderful job by just filing letters away. My LLC did not come into play at all.

@Mary Umoh

For more information: Info on Philly zoning

I had zoning reviews done in New York. If you never done one before, it's best to use professionals called "Expeditors" usually architects, to do a walkthrough and see how to do it. Some years ago, a paid $150 to do a walkthrough. You can contact the law firm who published the info also.

Each jurisdiction has it own procedures. Here in NY, I here to go through the community board first, then obtain a variance through the zoning board. 

The long and short of it, you'll more than likely need an architect to draw plans to do the conversion.

@Amit M.

My relative did most of his investments in San Francisco, whereas I did most of mine in NY City. I can say that while prices went up tremendously over the years in both areas, in NYC, there were dips, as much as 30% at times. If you time it right, buy at the dips, you'll do fine. I also invest in the stock market and did very well with high tech stocks.

In NYC, where I started investing in 1980, the first downturn took place in 1986. Triplexes that I got rose from $150K to $350K between 1983 and 1986. In 1986, the owner of the triplex next to mine divorced, sold it for $350K. A flipper bought it, placed it on the market for $399K, gave up 3 years later and sold it at $300K, and negatively cash flowed more than $10K/year losing a total of $100K. Another investor who bought it for $300K sold it two years later for $250K, losing more money as his son lived rent free as PM. On the other hand, I bought mine in 1983 for $150K and sold it in 2003 for $450K after determining the property needed $100K in rehab. In addition, I cash flowed $10K/year while I had it. 

In 1993, there were pages and pages of auctions advertised in the papers each week. One I bought at auction for $208K, market price $325K, which I still have had an appraisal of $1,450,000 in June when I got a HELOC.

The markets here took another dive between 2006-2008 where I attended a few foreclosure auctions a month between NYC and in MA and picked up a few. I agree at current levels, prices would not rise as it once did. 

@@Don Konipol

Your post is right on. My wife started her career by 1st getting a realtor's license, then got a job with a real estate agent who's a former classmate. She described the type of customers you described.

Then her mom had some money to invest, and we decided to join her to purchase rentals, mainly duplexes and triplexes. She had this theory that if you look over 80 to 100 properties, you'll find a fluke. So how do you go about it without driving real estate agents crazy. The typical agent would not waste time showing you more than a few properties. Any more than that, it's "what's wrong with you?"

What did we do? We started going to several open houses a week, got to meet a few real estate agents during the showings, and agree to see one or two properties with each of them, and no more. 

What finally happened? For the first property, we did take 10 months, looked at 60 to 70 properties, and got a triplex that should go for $210K for $150K. Long story, it was through a real estate agent, but the owner determined his price assessment of $150K is correct, and the agent wrong. Since the owner was the type of guy who believes he's always right, the agent figured why not sell it at $150K if she's going to collect a commission anyway. Turned out the ad appeared in the papers that weekend, we went over to see it right away. When we got to the house; the agent saw the owner talking to someone she bought over a day before. She found out they were trying to cut her out of the deal, the owner will delay things till the agency agreement expires. The agent, a fiery German lady going after the owner, berated the owner, threatened to sue him if he doesn't accept us as buyers, and the deal was signed off that night.

An explanation. Housing prices went up so fast in the early 80's that a property will go for $150K one year and $210K the next. The owner has a price in his head that's a year old. I met the bank appraiser during his visit, and he shook his head at my purchase price in amazement.

A year later, a duplex, now valued at $240K was advertised in the papers for $180K, also by an agent. Explanation was the agent promise the owner he'll get $180K as long as he doesn't care how much it's advertised for. Great idea. The problem was the girl who placed the ad for the agent heard it wrong, thought the property was to be sold for $180K. What happened? I spent the next 3 months following up the property, with me offering $180K. Funny thing is, the owners were 2 young guys, only allowed showings when they're there, and was away every weekend. The agent couldn't show the place, and finally, 2 weeks before her contract with the owner was to expire, offered to sell it to me for $185K so she she'll at least get a $5K commission. I had an inspection done and the house needs a new roof. So I counteroffered $182K. Her comment? I'll take it as getting $2K commission is better than nothing. I found this deal also viewing over 60 properties the second year.

This was back in the 1980's, mortgage rates were 13%, at its height 18%. We were able to plunk down $50K for the first property and over $60K for the second. We wouldn't be able to land deals at such prices, able to cash flow, without going through the number of properties we did. 

I am a NY investor who invested some years back in Springfield MA during the real estate crash in 1992 where condos selling for $110K were sold at auction for $40K. It those prices, I got 2 of them was able to cash flow very well. I was told to look west of Worcester to get better cash flow. Further east, nearer Boston, not so much.

A relative of ours, and his wife had successful careers, invested over the years in real estate, accumulated plenty of properties which became mortgage free. I was in the same boat for a while. I was shocked when they told me they took out mortgages on the paid off properties, to invest in more properties. 

Turned out their earnings are so large that they hit limits on what they can deduct on their tax returns. I don't know all the particulars, someone more well versed can comment on it, when your income exceeds a certain level, there are limits on your deductions you can take. He tells me his cash flow is more than what he needs. So, he instead is reducing his cash flow, mortgaging his paid off properties, acquiring more properties, and get more appreciation instead. He invested in high appreciation areas in New York and San Francisco and the additional properties which he got ten years ago so far more than doubled in value, where capital gains are not taxed, I agree that in his situation "cash in not king".

I always thought acquiring properties, over time being mortgage free, cash flowing is the end game. After hearing what my relative did, there's another chapter to the story, trading cash flow for appreciation, acquire more properties, due to limitations of the recent tax laws.

@Quan Dao

I owned a number of MF rentals some years ago. I also have an S Corp., C Corp, and an LLC for an active business I bought.

The LLC was not used as a shield. It's used to form a barrier from one business to another. In the active business, I have employees. I'm required to provide workman's comp, unemployment insurance among other things. The state does on-site inspections of business. If I don't separate this active business from the rentals, they can go into who I hire for my rental business, what are the locations etc. Before Obamacare, it cost me $2,000/month for private health insurance. But if I bouget it under the LLC, by law I have to buy it also for my employees. Thus, I formed the C Corp management company to pay for my health insurance as I cannot charge it off as a rental expense schedule E. The management company paid my insurance and charged me a management fee which can go onto the schedule E as a rental expense.

Get the picture?

@Quan Dao

Here is an article on taxation of an LLC in your case. From the discussion, you'll be taxed most likely taxed as an individual. So you'll add a level of complexity and expense for no reason at all.

LLC Taxation

No. An LLC will do nothing for you such as providing asset protection and shielding you from lawsuits. If you have a mortgage in your name, you cannot change it to the LLC. If the bank finds out, they can terminate the mortgage. Just leave things alone.

If you don't deed it to the LLC, then it's a useless LLC costing you fees for no reason.