All Forum Posts by: Mike S.

Quote from @Kim Hopkins:

@Mike S.

Thanks for your thoughts on the limited risk of leaving the HELOC and LOC "in the bank". That's comforting.

With regards to the options for arbitrage, as you mentioned the CD is quite negative, so I think I would table that one. (The LOC and HELOC are sizeable so the interest is very significant).

With regards to the hard money lending and crypto, these are the exact areas of the market that I think could fail in the near future. If we invest in them with leveraged cash, and they go down, we go right down with them. Am I missing something? 

No, you are right, you need to assess your risk appetite.
I personally have hard money loans and crypto, but it is a small part of my asset and while losing them will set me back, it won't be a catastrophic change in my lifestyle.

Quote from @Account Closed:

Quote from @Greg Scott:

My 2 cents

Why would you NOT get a liability umbrella? They are super cheap. They protect you from problems that may occur at your properties. Most people don't even think about this, but an umbrella also protects your properties from YOU. If you look at your phone because you received a text message and run into someone, they could sue and take your properties. An LLC won't help against that. Take a good look at an umbrella policy.

Trusts are great for estate planning but have minimal legal protection.

Hi Greg, you mentioned that an LLC wouldn't help protect against an outside-in lawsuit.  Can you expand on that a little?  (I would love to learn more about this.)  We recently did move property into an LLC to (hopefully) protect against both outside-in and inside-out lawsuits.  Thanks for any info you can share for my learning.
-tom

An LLC in any state will protect you against inside liability. So if something happens within the property owned by the LLC, in a catastrophic law suit, the most they can get is the property (Unless you screw up your LLC by commingling money, failing to maintain the company veil, etc...).

Regarding outside liability protection (if something is happening in your life and you are sued for it), some states have better protection than others. If your LLC is in CA for instance, your creditor can foreclose on your LLC and force you to liquidate it to get their money. In WY, the best they can get is a charging order, so if you get money out of your LLC you have to give it away, but if you don't get money, you don't have to give anything (your operating agreement should be written accordingly to not have to make distribution).

So one of the best setup with LLC is to get a WY holding LLC that owns all your other state LLC where you have properties to get the WY charging order protection on all your assets.

An umbrella policy will not protect your asset. All your asset owned directly are at risk. Not only you may have a catastrophic lawsuit exceeding your policy limit, but worse, your umbrella may denied coverage (have you read all the fine print exclusions?).

A revocable trust will not provide any asset protection. An irrevocable trust will but then you lose ownership of your asset and the taxation may not be favorable.

Each one of us has to assess what their asset protection needs are. Some will sleep comfortably with only an umbrella policy. Some like me would not consider less than a single LLC per property and a WY holding LLC in addition to basic liability and umbrella insurance. Some more exposed persons may need to add on top of it an offshore component either from the start of with the intermediate option like the hybrid domestic/offshore asset protection trust.

I can not tell you what you need. You will have first to learn all the nuances of asset protection available and then discuss your specific situation with an asset protection attorney who can guide you to the best option for you. Each of these options has different cost and amount of work to maintain them.

So stating that an umbrella policy is enough, or saying that you don't need an LLC or multiple LLCs is not the correct answer. It may be for the poster, but no one can tell YOU what YOU need.

My HELOC had been closed a few weeks before I was closing on a new property and was trying to draw the money out of it. But that was a few years ago when many banks where starting to close their HELOC business.

Now with the raising interest rates, I see more banks reentering the HELOC business, so unless your personal situation changes drastically (loss of employement, loss of credit rating, ...) I would not be too worried about a line being closed.

Drawing the money out the HELOC to make sure it is there when you need it is a good option, but as you mentioned you want to park that money in something that will give you some money back to avoid paying interest on idling money.

There are multiple opportunities to make your money work short term, some are very secured, some are way more riskier (either regarding the principal value or regarding when the money will be available).

You can use bank Certificates of Deposit with duration from a month to a few years. Rates are in the 0.25 to 3%, so you will have a negative arbitrage with your HELOC.

You can find some hard money lending funds that will give you a 6% return but you will need to give them 2 to 3 months advanced notice to withdraw funds.

You can find some hard money loans giving you 10% return but your money will be locked for period as short as 9 month, some up to 2 years.

You can put your money into crypto stable coins with a 6 to 7% return, with a few days availability.

While you are still employed, many employers won't let you make an inservice rollover out of your 401k. If you leave the company, you can then either keep the 401k or rollover to another 401k or IRA. You can also borrow up to $50k out of your 401k at anytime but it has to be repaid over five years with interest, and you can not deduct the interest. And if you leave the company during these five years, you will have to repay it immediately.

Self directed IRA have more limitations than solo 401k. So if you have your own side business (even a very small one), it is often suggested to open a solo 401k for that business and use it to be the recipient of the rollover. That will give you much more flexibility.

Permanent life insurances have to be funded with after tax money. They are an excellent but complex vehicle, and IUL are often called the "rich man Roth IRA" as they have no upper limit on contribution. They are often misunderstood and need a proper execution to make them excellent. A poor implementation will give dismal result. Many financial advisors can't understand them and are preaching against them making grand statements proving they are confused.

You will have to shop with many banks to find one willing to open an account.

The first hurdle is to find bank willing to open account for trusts. Most will do revocable grantor trust (like a living trust) but won't touch any irrevocable trust. The 401k trust is neither revocable nor irrevocable, nor it is a grantor trust... So you may scare a lot of banks.

The second hurdle is that many local banks don't want to touch retirement plans as they are worried they may become liable to compliance issue with ERISA plans. I even had problem opening account for checkbook IRA LLC as there was the mention of IRA as the member...

Major banks should be more open to those, but you will need to find a business banker who is knowledgeable on trust accounts.

Again, shop around, a lot of banks will do it, even if your local banker doesn't know about it.

Solera and Titan Bank are two banks very well versed in solo 401k plans.

Last time I checked, by just passing the series 65 exam, you may meet the accredited investor qualification, but only for the 2 years your exam is valid. If you want to keep it for longer you need to get registered as an financial advisor with your exam and it has a lot of compliance costs and time that are wasted if you are not making it your profession.

There had been a lot of talks about offering other kind of exams to meet the accredited investor qualification. There are also rumors that the minimum amount of net worth criteria could increase from $1M up to $5M.

Why paying two states registration when you can pay only one?

To insulate liability between all my assets, I am not putting multiple properties in the same LLC, so I am creating a new LLC per per property.

Except maybe for CA where LLCs are expensive and the use of trust is probably a good option, I am creating the LLC in the state where the property is located. This LLC is a single member, member managed LLC.

All my single member LLCs are then owned by a holding WY LLC. This allow me to get only one taxable/reporting entity, I also have the anonymity provided by WY, and most important the excellent charging order protection from WY that you don't have in many state.

I don't see any good reason for foreign registering an LLC in another state. You pay two states registration and filing, in case of legal action a creditor will probably argue that he can choose the rules of the weakest state. There is more opportunities for you to screw up somewhere and weaken the company veil...

Chase business accounts have access to Zelle.

To my knowledge it is deductible as long as you can trace the use of the loan money. Where the confusion exists is that you can not deduct it as a a mortgage expense of your principal residence (personal itemized deduction). However, the interest will be entered as investment/business expense in the same location (schedule C/E..) where you entered your investment/business income. 

https://www.biggerpockets.com/...

 When I am "leveraging" my cash value (by borrowing from it) don't I also pay interest ("to myself") that subtracts from the yield that cash value is earning?  

I've been trying for a while to find any financial advisor who recommends these policies (particularly to middle class investors) who is not also an insurance agent who earns commissions selling these policies.  That's not to say they don't truly believe in them, but that naturally creates a bias.

Look at it the same way you can use a HELOC on your home. When you borrow some money with a HELOC, your home does not worth less, nor does it accrued capital gain slower than if you didn't have the HELOC. Of course if you sell your home, you will have to pay the HELOC back, so get less money at the sale of your home, but the home has still the same value.

Using a loan from a permanent life insurance is the same. An insurance, or a bank is lending you money using the cash value of your life insurance as collateral. The cash value of your life insurance continues to grow the same way, loan or not. Of course you have to pay interest for the loan, the same way than for a HELOC. So if you reinvest the loan money on something that produces more than the loan interest your money is growing faster as your are getting not only the gain of the life insurance, plus the arbitrage between your investment and the loan interest. On top of that, if you used a separate lender for the loan, you may probably deduct the interest of the loan as investment expense on your tax return.

The issue with an overfunded permanent life insurance, is that the cash value the first few years is lower than the premium that you put in, because of the different front loaded fee (including commission; cost of insurance; state taxes). So you have a few years of drag. A properly set up policy should give you 75 to 85% of cash value/premium the first year, going higher every year. Around year 4 to 6 you should have 100% of your premium available in cash value, and after it should be more than that, growing at an average of 3-8% a year, depending on the product (whole life, Index Universal Life). If you take into account that drag, and if you compare investing your money directly into an investment, or putting instead your money into a life insurance, and reinvesting the loan proceed to the same investment, the cross over is between year 7 and 10. After that, the compounding effect put the later way ahead of the former.

Permanent overfunded life insurance is a complex product, that need proper planing and a good execution. But it has excellent tax advantage, it is secured from creditors, it grows steadily and does not go down with the stock market, is a fantastic wealth multiplicator for your investments and on top of it provides a financial security to your family in case of your early demise.

If you are interested on how to use it properly, you need to find an insurance agent who is knowledgeable on it. You also need to find an agent who is willing to offer it, as to properly set it up, the agent has to lower his commission. Last I would also suggest to use an agent who is also an investor him/herself who uses it too.