All Forum Posts by: Scott Smith

@Eric M. For your first property I typically advise keeping your expenses low, you're likely pinching pennies to make the deal happen. Attorney fees are expensive to properly set up the structures, and a poor structure is barely better than no structure at all. Not all attorney's work like my firm with taking payments over time, so up front costs can be burdensome.

When you start looking into you second property and beyond I recommend the Series LLC with anonymity trusts. This hides your ownership of your company and the ownership of the assets. When people sue, assets are the first things the look for. The problem is that it is going to cost around $2,000 on the low end with some attorneys charging as much as $4500.

The due on sale clause generates a lot of debate on biggerpockets, but me and my colleagues have yet to see a performing note (a mortgage that is getting paid) get foreclosed on based upon that clause. Also, if you have an attorney that knows litigation they are better at advising you on what would really happen even if the bank made a move (which they likely wont) and how to protect yourself from any adverse affect. 

I can tell you more offline if you want to PM me.

Check the tax appraisal website, in Texas they give you detailed info about the current title status. I believe in most counties you actually have to go to the court house or use a title company to dig into whether title is insurable (good).

@Pat Bruton The maximum protections in Texas are Series LLC's with anonymity trusts. It is one thing to have your assets protected by a lawsuit, but with the anonymity it is likely the suit never gets filed. People don't sue when they don't think there are assets, and people won't be able to find your assets.

Feel free to PM me if you want more info -- Happy to help and talk offline.

California charges $800 per year per entity that does business in their state as a Franchise Tax. If you are doing business in California you should be using a properly structure DST to get the compartmentalized asset protection, tax savings, and anonymity.

@Johnny Park I believe you have four main concerns: (1) cumbersome management of the LLC; (2) corporate compliance (am I managing this LLC so that it is effective in litigation); (3) due on sale clause because of the transfer to the LLC; (4) commercial insurance being expensive.

Here are a couple of my thoughts on the issue which I would be happy to answer in more detail offline:

(1) You may not need bank accounts for each Series if you are diligent with tracking the money in a single account. Think about a property management company that has 10 clients, they only have one account but their accounting software tracks which money belongs to which company. Legal "co-mingling" is more than just having the money in the same location.

(2) You need a yearly (and perhaps on-going) review of your company to ensure that you (1) are keeping up with any changes in the law and (2) that you have been managing the money of your asset holding company correctly to keep away from any piercing the veil or other actions which would lump all your Series together into one pot of assets. 90% of my clients hire me for this service which I call the "Family Office Plan"

(3)/(4) My colleagues and I haven't seen banks foreclose on performing notes based upon the due on sale. However, your current system is incomplete. You can increase your protection with anonymity trusts (to hold the asset anonymously on title) which look like estate planning and makes the banks and the insurance company think it is you personally owning the asset. They won't hassle you and will give you the personal insurance rates. This takes some skill to execute effectively but I have done it for my clients repeatedly. 

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@Adam H. I'm not a tax expert, and I'm thinking that I'm missing something...Long term capital gains for IRS is over one year, so can you help me understand what you are referring to? https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States

@Account Closed banks will want to see that the LLC and you as the owner of the LLC have at least 2-3 years experience with active real estate assets in the LLC before they will loan to it. Commercial lenders and portfolio lenders will loan to the LLC, but they are going to want 70% LTV and rent payments that show that you can meet the P/I payments from the income of the properties.

@Javier Gil THIS IS NOT LEGAL ADVICE, but I'm going to tell you what's really up with the due on sale clause to save you from wasting tons of money.

I haven't seen banks foreclose based upon a due on sale clause on performing notes, nor have I or my colleagues ever seen a foreclosure prosecuted under those circumstances. 

This is not legal advice and you are not my client, but I believe the risk is very low if you deed the property into the LLC ($200 likely total cost) and ignore the bank; if they begin foreclosure, cure the breach of contract by deeding it back to you (which I would be shocked if it came to that) and then whole process should halt at that moment. The cost/benefit/risk seems more attractive than the costs of refinancing (higher rates, closing costs, etc.)

Now for some speculation...

We believe that it has to do with the fact that it is bad business for the banks, and we believe that the bank attorneys have to justify their budget so they add a huge line item around "notices" to make it look like they are doing a bunch of work even though it is basically worthless. 

The fact is that when a bank forecloses it is bad for business -- they will likely lose money on the foreclosure and REO sale and their rating goes down for issuing "bad" notes. A bank literally fails at their job if they issue a bad note because banks are in the business of loaning money and collecting P/I payments. If you work in corporate America and are the boss overseeing this, do you want to be the one that loses your company money and also hurts it reputation?

I talked about this in Podcast #109. You should seriously consider the protection and cost savings of the Series LLC because it is cheaper than filing single LLC's and paying your CPA to prepare all of the returns (Series LLC has only one return, maximum). If you want to know more you can PM me and I can fill you in.

@Derrick Cooper So it sounds like you are talking about two properties...For a solid LLC/ Series LLC with anonymity trusts you can get that from an attorney that specializes in that from anywhere from $1500-2500. Might be more than you need at the moment, but it is infinitely scaleable at no additional cost (except potentially franchise tax in CA, for example).

The question should revolve around how much income do you derive from the properties in conjunction with your other income (if over $60,000 per year it can make sense to have the LLC taxed as an S corp and take payments under a lower tax than standard income) as well as the amount of equity at risk.

An LLC and anonymity trusts are litigation insurance, and litigation is as unpredictable as a fire. Given the amount of equity of stake, is spending $1500 or so worth it to protect your assets from a lawsuit? The answer to this depends on your risk tolerance.