All Forum Posts by: Scott Smith

 Exciting times when you are growing and scaling up rapidly! I would encourage you to checkout the Five Pillars of Asset Protection to start with - this is how I explain asset protection that applies to most investors who are scaling up. As @Account Closed had mentioned above, ideally you will want to place each property in it's own liability limiting entity so that if there is a lawsuit regarding a property it does not impact your other investment. This can get expensive and complicated, as you had stated, which is where entities like the Series LLC can come in and simplify the process, allowing you to still operate assets within the same class in a single entity and housing them in separate child series for protection.

In your situation I would have many clarifications I would want to make, but I will just spitball what it could look like. I personally like Texas LLCs because there is no annual fee and minimal requirements paired with it being a business friendly state. Theoretically, I would look at setting up an asset holding Series LLC for the properties, splitting each asset into it's own "child" series, and operate them all through the bank account and EIN of the Series LLC (unless some of the properties could be taxed as an S Corp.) Then I would set up a traditional LLC to function as my operations company, allowing me to separate the highest liability activity from my assets (signing leases, collecting rent, paying contractors, etc.)

The Series LLC could scale to hold as many properties as I would want it to, so it is ideal for a growing investment portfolio. It is as simple as I can make it, since all of the properties can be operated under the Series bank account and EIN (unless I choose otherwise.) And this way I just have to work on ensuring the bookkeeping is solid - the "burden of proof" is on the investor to prove the "child" series operate independently, so I make sure to keep the financing in line.

This is just a general approach - in your situation there could be several factors that play into the strategy you choose. The article I linked above also discusses anonymity, which becomes more and more important as you grow so people don't chase you with frivolous lawsuits because you look rich.

If you have questiosn regarding any of this just ask. I try hop on BP as often as my schedule permits!

When lenders try pushing the ticket regarding what you can and cannot place into an LLC I have seen many investors use a Land Trust to work around the issue. The main issue with banks is that they will threaten the Due on Sale Clause - calling the note if you transfer it out of your name. One of the transfers that is excluded from the Due on Sale Clause is through a Land Trust. Essentially you purchase it all into your personal name, then transfer everything into the Land Trust which is protected by the St. Germain Act as an estate planning tool (inter vivos trust.) After the transfer is complete you can assign the LLC as the beneficiary of the Land Trust to implement to liability protection. If the bank still complains you have the paperwork that shows that ownership has not "changed name," but that you are only rolling it into your estate planning structure.

There are some additional benefits to using a Land Trust, but this is the one most applicable to the situation you are facing. The main issue with what the lender is proposing is that you are essentially piercing the corporate veil by using your personal name to secure the loan for the business. In court it is your responsibility to prove that the LLC is functioning independently, so if an attorney can show that you are personally tied to the loan then they can implicate your personal assets in the lawsuit and work around the LLC. While what the lender is requesting may be good for their security, it is placing you at risk.

I would lean toward using a warranty deed, as opposed to a quit claim deed, in order for the investor to maintain title insurance. Most title insurance companies will cease to offer insurance if a quit claim deed is used for the transfer as the quit claim deed offers no warranties as to clean title.

Every county requires a warranty deed to be signed by the Grantor (the Investor) and either witnessed, notarized, or both. Therefore, the investor will need the warranty deed in order to execute and record.

The fees to record a Warranty Deed will vary from county to county. To check recording fees, simply visit the website maintained by the County Clerk (Registry of Deeds, Recorder of Deeds, Clerk of Court, etc) and locate the Recording Fees information.

Most counties require additional ancillary documents/forms to be sent in with the Warranty Deed in order for a successful recordation. The documents/forms will vary county by county. The required documents/forms can be found on the website maintained by the County Clerk (Registry of Deeds, Recorder of Deeds, Clerk of Court, etc). Examples include: Transfer affidavits, Preliminary Change of Ownership Reports, Transfer Tax affidavits, etc.

Many people hire an attorney to do this for them. I have found the process of executing property transfers to be one of the more time consuming projects regarding my time spent working with real estate investors, mainly because of these additional county specific requirements. I would encourage you to have a professional do it the first time for you to be sure it is done right. After seeing the process some investors will want to do it themselves to save some money, while others will gladly pay an attorney so they don't have to hassle with it all.

Another method that investors use is implementing Anonymous Land Trusts. You would purchase the property into your own name and then transfer it into the trust. The trust would be formed by your attorney, who would sign as the nominee trustee, before passing to you as the trustee following it's formation. This way it is the attorney's name on the trust, not yours. You can accomplish the same function at the level of the LLC with an Agent Trust.

When people search for the owner of 123 Main Street (the property,) they will see 123 Main Street Trust as the owner of the property with your attorney as the trustee. Your name is not on public record for the property.

This means that you can add anonymity to the entity structure in the state of your choice. The added benefits of the Land Trust are that (1) you can access the better financing options in your personal name [since the Land Trust is excluded entirely from the Due on Sale Clause,]  (2) you aren't paying the annual fees for foreign filing, and (3) your assets can easily roll into any future estate planning you intend to do.

 Better follow that  agreement. It sounds like you are in foreign territory, so I would encourage a lot of caution with any plan you move forward with. You could look into a warranty deed, as opposed to a quit claim. But I would still say it's best to have a professional look into your situation and help you navigate to an outcome you want. If you start trying to implement different ideas without having the full picture you can run into an issue down the road. Be sure not to break the contract, otherwise they can just call your note back.

An example: if you didn't have the document stating you would not quit claim the property, I imagine you would have done that without asking advice. Most Title Insurance companies will cease to offer insurance if a Quit Claim Deed is used for the transfer as the Quit Claim Deed offers no warranties as to clean title. Each decision in the process impacts your business down the road, so it is really encouraged that you have someone assist you with this process. 

This is not legal advice. I am just giving my opinion as a real estate investor.

If you transfer the title into the Land Trust and assign the LLC as beneficiary, then you are still able to provide the paperwork to prove the chain of ownership to the property. The St. Germain Act excludes the transfer into the Land Trust from the Due on Sale Clause, and since you own the LLC you can provide the documentation to prove that it isn't "changing name," you are just restructuring the entities into estate planning tools for yourself.

If this is your first time attempting this strategy I would recommend having an experienced attorney walk you through the process. It is possible to DIY, but investors can sometimes scare off lenders by trying to explain strategies or do the transfers in the wrong order. Having an attorney walk your through the process the first time can cost you some money, but you will be assured it is done correct the first time.

Even though everyone wants there to be an easy answer to this question, the real answer is, "it depends." Some investors have a very low risk tolerance, or they have a lot of personal assets they want separate from their investments, and so they will invest in an LLC immediately. Others don't own anything beside their starting investment, or they are willing to accept the chance of a lawsuit and will operate with no liability protection to try and leverage the money to grow faster.

Realistically the general approach to asset protection is described pretty clearly in this article. You will need to decide how much protection you are comfortable with in order to be able to move forward with your investments confidently. I personally hold everything I own in their own liability protective entities (LLC, Series LLC or other entity,) but I have the benefit of creating these entities myself...

For your situation it sounds like your exposure is quite low. I would probably set up an LLC anyway, since they are quite cheap to form and you will be setting one up in the future anyway. This will give you a low-stakes opportunity to learn how to operate it correctly. In the end you just need to decide what you want to use that money/time for! Best of luck to you moving forward!

Hey @Al Bryant,

Most lenders lean toward working with investors personally, as there is more to leverage in case the payments for the note ever stop coming in. There are lenders who work with LLCs, but they will generally not be the major banks. Many of these lenders will still have you sign a personal guarantee.

The best strategy I have seen for both remaining protected from liability while maintaining the best financing options is to purchase in your personal name and then transfer into the LLC after it is over. In the past people would need to use a strategy involving a Land Trust to be able to do these types of transfers because of the Due on Sale Clause, but because of recent law changes newer LLCs wont have to even deal with that step.

What are your goals with the LLC and your investing? How many investments are you planning on acquiring over the next 5 years? Some questions that may help you refine the strategy you will want to use.

I generally lean toward purchasing properties personally, then transfer the property into an LLC after the purchase. Doing it this way will offer you better financing, compared to the commercial loans you will get through the LLC (not to mention that some lenders wont even work with you.) In the past the only way to do this to avoid the Due on Sale Clause was through a land trust, but with more recent conventional loan changed you may not even have to take that step.

It can still depend on what you want and the terms that you are working with. Generally this helps protect investors by providing the liability protection and save them money in the process.

Some states are more business friendly than others regarding the LLC laws, but it just comes down the the costs involved and the assets you are protecting. If you have a single property that is modestly priced, the extra effort probably isn't necessary. Some people like to take the additional steps for their peace of mind, but from a business standpoint it wouldn't be necessary. The main time people will start establishing LLCs in states that are more business friendly is when they begin scaling or establishing entities of scale (Series LLC or Delaware Statutory Trusts.) The slight difference in laws will fortify their strategy and the additional costs/maintenance isn't really noticeable at that point.

The main thing I would encourage investors starting off to focus on is getting their entity formed properly and learning how to operate them very well. If you tackle those issues early on you will have much less need to test which state's internal liability shield will protect you better in the case of a lawsuit.