All Forum Posts by: Luis Alvarez

Hi @Jonathan Thomas

It sounds like you are looking for more of the software/technical aspects of setting up a management co., yes? As for the registration, if you're referring to the business being registered/formed correctly, you first would want to determine the appropriate business entity, location of registration (state, county/city, if applicable). 

Hi @Davin Manfredi I'm a bit late to this thread, but wanted to provide my point of view from a legal (estate planning/asset protection) background.  Here's what I have in place, and why:

Once I have a property under contract, I go to setup the LLC. This must include the State registration, pulling an EIN (optional, but to create a truly separate entity, should be done), put together an Operating Agreement (even if you are the sole member, because again, this is part of business formalities necessary to show in a court that you're intention was to make the LLC separate from you personally); and yes, you should open a separate business bank account for the LLC (because comingling funds in an account under your personal name is the easiest way for a suing attorney to collapse the LLC). And yes, having the ability to create my LLC and draft my own documents in a snap is really helpful and I understand that sometimes is difficult for other investors. I transfer the properties into the LLC once closed, and before everyone throws hands up regarding the "due on sale clause", yes, this is often found in every modern day mortgage, but also, there are ways around this, especially when the purpose of the transfer is to entities for the sake of estate planning/asset protection.

To @Matthew Kwan's point, there is also an added layer of the "holdings" entity, which I personally have implemented, but this may or may not be appropriate for you...it just depends on other circumstances.

As for insurance, you also will want landlord insurance, as well as an umbrella insurance in place.  But remember, insurance does not protect you from liability...it pays the damages once you've already been found liable. An LLC also does not make the property immune from liability...it limits it to the assets within that same LLC. This is something I think is misunderstood throughout the real estate investor world. Generally, an umbrella policy covers any excess damages that haven't already been paid by your underlying policies, but those policies need to pay in the first place, and then the umbrella kicks in.  I have insurances (landlord and umbrella) in place for my properties, but I know how insurance companies stay profitable (by only paying claims that they absolutely must pay).  Keep in mind that these policies are drafted by sophisticated attorneys and drafters and typically have precise language and exclusions. 

Short answer to your question: set up the LLC once you have the property under contract and don't expect anything to cause it to fall out. I hope this helps. Feel free to message me if you have any further questions.

@Alex L. I hope this helps (from my estate planning/asset protection POV):

It sounds like both you and the properties are in OH, thus, I would establish a holding LLC (in OH is fine) that would in turn own the rental property LLC (IE "123 Main Street LLC" is owned by "Alex Holding LLC"). Now to transfer, I would execute a Grant Deed, not a Quitclaim Deed, b/c a Grant Deed conveys all the title covenants stating that title is free/clear and is the Grantor's ("Seller") full interest to convey to the Grantee ("Buyer"). A Grant Deed contains the language "for valuable consideration paid", and won't need to necessarily disclose what the consideration (price of the transfer) is on there. When the Property LLC is looked up, the Holding LLC is shown, because it was made the manager-member of the Property LLC, and a Registered Agent office can be the only actual physical address/contact that would be found on the Secretary of State site.

Now regarding the assessment/transfer taxes, I'm not experienced with OH assessors, but when these transfers are made for estate planning/asset protection purposes you can typically relay to the assessor's office that ownership did not fundamentally change (when you provide them with an explanation of your structure) and that typically straightens out any re-assessments they may make due to change in ownership.  

Regarding you "selling" the properties to yourself, I don't have a tax background, but depending on how your LLC is taxed (I presume it's currently a pass-through) you would be essentially borrowing from Peter to pay Paul...it all goes back to your 1040 anyways. If you had partners or other members involved and it was treated as a partnership or s-corp (for tax purposes) that would likely be a different conversation.

I know there's a LOT of information out there regarding LLCs, anonymity, etc. Some correct, some misleading, some conclusive, but most of it doesn't apply to every person's situation...because as lawyers say: "It depends".  

I personally have a similar structure and when having some reverse checks on myself, all you could really find online is that at some point I personally owned certain properties. :)

Hi @Adam Burrows, wanted to give my 2 cents from an estate planning/asset protection background. If I'm following this correctly, the 1st issue I see is that you have an "active" business (consulting) versus a "passive" business (the rental property, assuming you don't do hands on management, etc.)...this would be a separating line for many people I've talked to about this.  From an exposure to liability, in the sense of how much a party can be responsible for action/inaction can come down to the participation for that business.  

The 2nd issue is that your consulting business income is going into your personal checking account, and not the bank account tied to the LLC which (presumably) owns your consulting business. Whichever LLC you have the consulting business in, is not doing anything much for you because of the comingling of funds into your personal account. Now mind you, depending on what type of consulting you are in, your exposure to liability from that business activity may be very limited, thus, a sole proprietor may be fine.

3rd issue, where would the rents to your property be deposited to? You mentioned you wouldn't have it go in the LLC which you would form for that rental property. (Again, you could be comingling, depending on what your plan was for this).

4th issue, in trying to keep the existing parent LLC functional for potentially both, it makes it unclear the purpose of the LLC in the first place (this is something typically indicated clearly in your Operating Agreement, assuming you have one).

LLCs can provide great asset protection (contrary to what many may say or believe), BUT...big BUT here, it must be set up correctly and maintained correctly.  I'll say that again, it must be maintained correctly. This means you have an LLC for a single business activity, which is filed correctly, has an Operating Agreement with clear and precise terms, you set up a separate bank account for that LLC and its related business activity, you do not use that bank account in any way for personal activity, and while it varies per state as being a requirement, you always want to make sure you have periodic filings and to take it even further, hold a "meeting" once a year...even if you're the sole member and there's not much changes that took place for the year. This is all to show to a Court and a savvy plaintiff attorney (when you get sued) that your business activities follow corporate formalities and they are separate from you as an individual.

I see why many of us on BP want to keep admin work to a minimum and reduce the necessity of extra entities and extra bank accounts, but these are things that the big players do.  And while I'm certainly not there yet in terms of real estate, I know that any hiccups in my acquisitions and scaling up won't come from a lapse in my asset protection structure.

I hope this helps! Feel free to ask away..

@Samir Khosla Did you end up getting some more clarity on the issue?  Feel free to DM me and I can relay the path/process I've taken for my structure...after law school I went into estate planning/asset protection for HNW clients.

Hi @Joe Fermin, to chime in a bit:

If title to the rental properties are currently in your (and/or your wife's) personal names, then it sounds like you would need to transfer title to LLCs so that they can give you an added layer of liability protection.  Without wanting to summon all the BP naysayers against LLCs, let me proceed to touch on some major points:

To @Joe Norman 's point, many (attorneys included) will say you don't have to do an LLC for a rental property because: the corporate veil (what separates you from the business entity) can be easily pierced if you don't treat it legitimately separate, or it's too expensive, or people don't want to hassle with another bank account. Following law school, I went into estate planning and asset protection, so I may be biased when I say this, but not all attorneys and CPAs are created equal. That's not to put anyone down, but remember that everyone has their niche, and even those that work with RE investors sometimes don't know all the nuances that can be state-specific and current law specific.

I believe that (generally) every rental property should be held in it's own LLC because, when set up and maintained properly, the LLC protects from inside and outside liabilities.  I say generally, because every investor and every rental property is unique, and as we say in the legal world:  "It Depends".  And to add on to Joe's point, an umbrella policy is ALSO necessary. It's not a question of this or that...it should be both. Umbrella Policies, and rental insurances are great as your first line of defense, but we all know how insurance companies stay profitable...by trying to deny claims.  So should something happen at one of your rentals, the 1st thing they'll do is look for a way out.  If they do pay out, great, your golden.  If they don't, your defense will be up to containing the damage to that one rental property where the claim arose from.

As for the mechanics of transferring title, it's a fairly simple process, and yes, you will find many things out there about triggering a "due on sale clause" that's found in many modern day mortgages.  But there are ways this risk can be mitigated, through the perspective of estate and trust planning.

This is in no way constitute specific legal advice to you, but just my opinion on the topic.  Feel free to DM if you have any questions!

@Sol Romand Sure! I sent you a colleague request since we can't send attachments in messages unless we're "connected" 

@Courtney Nguyen DM sent, thanks!

Hey @Corey Duran, 

Sorry for the delay, it was a crazy week/weekend.  And no worries about me chiming in on here...there was a lot that I saw with estate planning and asset protection that isn't taught/known to seasoned investors and attorneys and CPAs.  Unfortunately, and fortunately at the same time, we now live in a world where anyone with an internet connection has a voice...so we just have to navigate through that. 

I think the idea of having 1 management company handle all the management aspects of the real estate investments and even collect their rents via management agreements offloads a lot of the "active" part of the business, which is where liability arises, or another words, can be shifted to.  (IE if you have a partnership ownership of a rental property and one is active and the other is more a silent partner, when sh** hits the fan, the silent one can say "hey, I'm not involved in day to day stuff, I just collect profits or post losses)  But the issue I see there is that once the rent is collected, those profits or losses have to go somewhere...they can't stay in the management company's bank account because it doesn't own the rental properties. Thus, you create a co-mingling of funds in one bank account, one pot, and if any liability arises in any of them, a savyy plaintiff attorney would uncover (during the discovery process of a civil suit) that these are not treated as separate businesses and instead of looking at just 1 asset being on the hook, they're now all on the hook.

I get why there's so much push back against setting up multiple entities, multiple bank accounts on BP, and on the internet in general.  Many of us try to keep costs reasonable, after all, we're in this for business.  And not seeing an instant return on money spent is the first place we look to cut expenditures. But IMO this is the mistake of practicing "resulting", where we take a certain course of action (or inaction), no dire consequences happen, thus, we believe that our decisions were correct because nothing bad happened.  

Don't mean to drag on more in here. But I can share my structure with you if you'd like.  Feel free to DM me.

Hi @Jason Wilson, that's awesome to have bought a house for $1! Not knowing all of the circumstances like the location of property (though I presume somewhere in PA?) or if there are any county or municipal restrictions due to the purchase price of $1 (was their some sort of commitment as part of a rehabilitation project?) we would typically approach this with a Purchase and Sale Agreement and the proper deeds (and applicable county assessor forms) to transfer title from the Seller (your dad) to the Buyer (you).

Again, not knowing the full details, it sounds like your dad's cost basis is $1 and if he sells to you at a low price (presumably not also $1) the gain would be nominal. However, this is where a tax mind (familiar with the region) would be vital to determine reasonable FMV of the property in the eyes of the IRS and local values so as to not make it look like a transaction between family members is being put together for the purpose of avoiding fair market tax assessments.

Not giving you specific legal or tax advice, just some personal thoughts :)