All Forum Posts by: Kelly Byrd

Anyone have some insight on any of my questions?

"California will consider an LLC formed in another state whose only asset is property in that other state as doing business in California, just because the owners live in California?"

@Jonathan Twombly: Yes, I am sure, my own research dug this up, my RE-focused CPA confirmed this. A few years ago, The California Franchise Tax Board decided on an expanded definition of "doing business in California". If I talk to my property manager about my property, or a banker, or whatever, I am doing business in California.

I assume you picked  Wyoming and Nevada as those are generally considered friendly places for forming an company, right?

But, don't you end up having to pay filing fees in WY or NV, plus register a foreign corporation in the state the property is in, and then also register in California? That's three places to do annual filings. Also, in many states, you have to have a registered agent with a local address in that state too. 

I think I have a simple enough situation that I won't require advice from a asset protection lawyer, I'm hoping some of you are in a similar situation and can pass on what you have done.

My wife and I live in California. We are under contract for our first investment deal, a multifamily in South Dakota. We have assets outside of this property that we would like to protect, so my plan is to form an LLC for this property and then get umbrella insurance on top of that. The property is over four units, so we're looking at a commercial loan regardless. The lender has no issue with an LLC holding the property.

I know California is going to consider us "doing business in California" and therefore subject to the $800 minimum franchise tax in California. It seems my options are to either form a South Dakota LLC and register it as a foreign company or form a California LLC and register it as foreign company in South Dakota.

My questions:

• The LLC operating agreement can be simple, my wife and I will be the only members. Can someone share a sample simple operating agreement for this "married couple holding a single property" LLC?
• What are the pros and cons of forming the LLC in CA vs where the property is? The typical advice for RE investors is to form in the state where the property is because it avoids the overhead of having to register a foreign corporation where you are doing business. But since we are CA residents, we have that overhead regardless.
• California is a community property state, South Dakota is not. If we form a South Dakota LLC, can we still treat it as a disregarded entity because we live in California?

Thanks in advance!

Is this for earnest money? I like to get the money to directly to escrow/title company, marked for the specific file that company has opened. Either wire transfer or dropping off a check.  If you want to be a bit more paranoid (like me), then find a number for the title company on your own and call them to verify the account info on your own. 

@Basit Siddiqi: We're in California, the property is in South Dakota. 

Thanks for the quick reply @Andrew Severino! I do plan to run this all past my CPA, she's the one that suggested an LLC for properties initially, but warned me about the residential financing. But it's July 4th and I was hoping to get the basics answered here so I can ask her more focused questions. Once again BP members come to thru.

Yea! More LLC questions! Everyone loves LLC questions! Right? ;-)

In an effort to get specific answers, I'll try to be as specific as possible about my situation:

My wife and I are under contract for our first rental property, a 12-unit building. We're going to buy-and-hold this long term. Originally, we were looking at smaller properties, and I was not going to put the first one or two in an LLC just to make it easier to get conventional mortgages. However, this 12-unit came to us suddenly. We liked the numbers, so we jumped on it. With 12-units, I'm looking at a commercial loan. Since we're new investors, I expect to have personally guarantee the commercial loan.

So, I plan umbrella insurance regardless of the LLC or not. We do have personal assets I would like to protect from issues with the 12-unit. Right now, I am thinking that I should go ahead and form an LLC and place the property in that LLC. I know an LLC isn't a magic wand. We'll be having a property manager run the property well. We're not trying to use the LLC to avoid liability for mistakes we make personally or to avoid the bank coming after my other assets if I default on the commercial loan. I'm looking for a firewall for liability surround the property leaking out to our personally held assets. The LLC members would be my wife and I, and for now, let's assume the LLC holds only this property.

With all that said,  I have some questions around timing:

• Because we weren't prepared with the LLC already, we signed the purchase contract as individuals. Do you think changing this during escrow will be a problem?
• If I can't change the purchase agreement and I do find financing before closing (I'll come up with cash otherwise), how much trouble do you think I'll have with the commercial loan and transferring title to the LLC?

Finally, one question about an LLC that I have not seen answered: What are some guidelines for transferring money into and out of an LLC's operating account? We plan to build up and leave CapEx reserves in that account, but if we have an unexpected large expense sooner, we would have to transfer more personal capital in. Or, once our standards for reserves are met, we'll be pulling more money out of the account.

Thanks for the replies, let me clear up a couple of things:

- @Arlen Chou: Totally agree. We're not actually willing to go up in price. Our negotiation strategy so far has been: "we know what we're willing to pay, let's offer that." We're willing to negotiate on other terms to make the offer stronger or figure something out with the seller, but the offer price is the price we're willing to pay. We may not always do things this way in the future, but that's where we are now. We're perfectly willing to let deals go by rather than to talk ourselves beyond where our numbers say we should be.

- @Chris Haas: I agree, I can always transfer money out to get the balance where I want it, generate the letter for a specific offer, and transfer money back. That's just not very efficient if we're doing more than a few offers in a short period of time.


I had not thought of the idea that a proof of funds well above the offer help convince the seller I can close. I like that.

My wife and I are making offers in an effort to get our first deal. Where it makes sense, we are making cash offers and offering to close faster to get a better price. Unsurprisingly, our agent is asking us to provide a verification of funds. My bank will only provide a letter with an exact account balance. So if our offer is $53,000 an we have a $123,456 balance. The bank's letter will say: "this account balance is "$123,456 as of 6/27". I would prefer the bank's letter to be less specific, something like: "As of 6/27, this account has at least $53,000". 

I have two concerns about this:

1) With an exact balance, I am giving more information about my cash on hand to people I don't know, in general this sort of thing bothers me.

2) Does this reduce the chances of my offer getting accepted with the seller? Will they see my $53K offer, see my >$100K balance and think "These people have enough to pay my $60K asking price!"  

It's not hard (but is extra work as I end up producing a unique letter per offer) to temporarily transfer balances around to produce a proof of funds letter close to the asking price, but I'm looking to streamline where I can. Any advice is appreciated.