All Forum Posts by: James Kendrick

Peter I think it depends on your risk tolerance.  You can pickup new starter homes in mix white/blue collar emerging neighborhoods in southern states like Tennessee for under $200k that will attract high income tenants.  Safe rents but lower cap rates.

Contrast this with the Midwest or the Northeast where you can pickup rentals for well under $100k in bad/recovering/gentrifying/undiscovered neighborhoods that produce amazing cash flow but many more headaches. 

If I were in Spokane I would be looking in Utah and Idaho.  I know Boise and Salt Lake are taking advantage of the California migrations and should continue to do well for real estate. 

Texas = no state income tax = high property taxes

I've always thought of Texas as a great place to work and rent but a bad place to own property especially for outside investors. 

Are any of you digging out basements to get to the desired headroom?

@Daniel Mohnkern 

You are arguing that the court can only look at the LLC and not Daniel personally because Daniel is not even in the picture. What you need to research further is the ability of the court to look through the LLC to its shareholders. I would assume that you or your designee would be a shareholder in your LLCs correct? If you can legally hide any association between you and your LLCs then you are home free my friend.

In your example, when the tenant slips and falls they will sue LLC #1 and all of its shareholders. If a shareholder is itself an LLC or trust, they will sue all the way down to the biggest dollars. You as shareholder will say that you are not personally liable. Plantiff will argue that there is no legal separation between Daniel and LLC #1 because Daniel as shareholder does not fill out forms correctly or had malicious intent when he created LLC #1 or operates LLC #1 for his own personal benefit or LLC #1 wrecklessly borrows money or Daniel as officer of LLC #1 knew that the slip and fall could occur or Daniel did not adequately capitalize LLC #1 or any other lame excuse.

Would the tenant ultimately convince a jury that Daniel is personally liable? It doesn't matter because Daniel had to spend so much money on his legal defense convincing everyone that Daniel is a good guy and now Daniel is broke. If you are not yet broke they will rinse and repeat with all of your other entities. Daniel is officer of LLC #2 and LLC #2 has malicious intent so therefore the assets of LLC #2 are really Daniel's personal assets. And a good trial lawyer will do everything humanly possible to make sure you go broke if you don't settle. It is their fiduciary responsibility to their client. Why would you want to get involved in that?

You would be less concerned if LLC #1 was worth $10 MM and you had a $200k legal defense fund and a lawyer on retainer. You would probably eventually be home free but at a more than trivial cost. For big players it's the cost of doing business.

@Daniel Mohnkern 

Keep in mind that anyone can setup an LLC or bankruptcy remote vehicle. But it is very hard to follow the rules so that you are legally protected. You would need to hire an attorney at least annually to review articles of incorporation, operating agreements, meeting minutes, etc. A judge could dismiss the corporation simply because the debt is guaranteed by a third party. You could eventually win on appeal but how much would that cost you in legal fees?

Individuals who want legal protection from an LLC or an S corp generally are protecting tens of millions of dollars or more so worst case scenario they drop $300k to $400k in legal fees to defend the corporation.

When you start talking about McDonalds, Coach, and Wendys you are talking about C corps that have very large legal teams because they get sued everyday. C corps can weather the storm of a legal defense better than an LLC because they are accrual basis taxpayers. You can't really compare their situation to yours. Every hamburger you buy has a couple of pennies included to help defend against future lawsuits.

Daniel if you are really worried and don't trust insurance then create a C corp (which has its own advantages and disadvantages) or create an LLC with heavy legal oversight. And then have everything reviewed by a trial lawyer who would know how to stealthfully kill the LLC.

Also make sure you max out your tax deferred accounts as these have the ultimate legal protection.  You should never cash out ERISA assets like pensions and 401(k) plans.  These are bankruptcy remote and can never be taken from you (except by the IRS).  Most IRAs have similar legal protections that top out at $1 MM I think.  Also, 529 college savings plans, when properly created in certain states, have very large legal protections.  These are strong protections because there is really nothing for the plantiff's attorney to challenge in court.  You can't put property in these (generally) but you can put cash there. 

@Sal DeJulio my quick and dirty advice is leave the properties alone and dump the LLCs. Just get lots and lots of insurance. Why violate the terms of a loan agreement? What if your ex wife or girlfriend gets pissed at you. He/she could just write a letter to your servicer and cc the director of the FHA. You don't want that.

@Daniel Mohnkern  I used to struggle with the same thing. It was a barrier to entry for investing initially. I received some advice from someone whose only job in life is to take money from "greedy" landlords and give it to "deserving" and "abused" tenants.  And they are very good at their job.

What I am about to tell you is not legal advice and should not be relied upon.  Do your own due diligence and consult with the applicable attorney for your situation.

The first thing to remember is that you need to be ready to be sued.  Anyone can petition a court against you for anything whether you are the good guy or the bad guy.  You can be compelled to appear in court simply because you are who you are.  So small landlords should have $10k in reserve for this.  Larger landlords should have $30k in reserve.

Lawyers who win big judgments against landlords (the kind that put your net worth at risk) are going to go after the low hanging fruit. If you put your properties in an LLC and the lawyer thinks you are worth lots of money they are going to engage in many "gimmicks" to pierce the corporate veil to make sure that your LLCs become included assets in any judgment. I am told that it's really not hard to do. Stupid mistakes like failing to sign a form on a specific date are enough to demonstrate to a judge that the LLC is not a corporation. If you are water tight they will just keep filing legal motions that force you to run up huge legal bills that will eventually force you to settle just to keep your sanity. Let's say your tenant has a $1 MM judgment against LLC #1 and the LLC is worth $20K. They will file a new suit against LLC #2, LLC #3, etc. and any other entity you own just to have your lawyers tell you that your legal bills will be $100k next year. And then $100k the year after, and then $50k the year after that. Your lawyers will advise you to cut your losses and settle even though you have done everything right from a legal protection standpoint.

Take the same situation except now you have no LLCs but $2 MM in umbrella insurance, which will cost you about $500 or less per year.  Insurance companies are very good at holding on to their money and not paying lawyers.  Trial lawyers know this and know what they can get easily without going to court.  The insurance company pays quickly and resolves quickly.  Trial lawyers love this.  The tenant sues you personally, your insurance company steps in, and dances with the tenant's lawyer until they come to a mutual agreement.  No courts, no discovery, no depositions, just money flowing.  Everybody is happy, disaster is averted.

If the trial lawyer is an activist and wants to make a name for him or herself (generally young lawyers from very respected law schools) they will balk at your insurance company and proceed to discovery.  Your insurance company (who wants to hold on to their money) will bring their A game and will make life so difficult for the trial counsel that they will never try a similar case again.  They basically bury the newbie in paperwork for years and years.    

If you are carrying forward a capital loss there would be no need to file.  Your basis in the property would carry forward from your federal return.  If someone were to challenge how you arrived at your basis you would always look to your federal return for the details.  Generally when you complete your state return the starting point is always your federal taxable income.

As far as penalties, it would seem odd to pay a penalty to a state for failing to tell them that you don't have any taxable income in that state.

Doesn't this depend on whether the property produces taxable income?  I would think if the property produces a capital loss, the loss would carryover and there would be no income due to the state and no filing needed. 

You can make the transfer if the mortgage allows for it. However, most mortgages don't let you transfer the collateral. It all depends on the language in the note. For example, your standard Fannie Mae / Freddie Mac / FHA language says that the loan is due immediately upon transfer of the collateral to the LLC.

With that said, some people move their mortgaged properties into LLCs all the time in violation of their loan agreements.  If the bank ever found out you would have issues.

Leverage is your best friend and your worst enemy.  But in this business it is a tried and true way to success.  That's before considering today's low rates, tax advantages, and legal implications.