All Forum Posts by: Steve Buckman

@Horton M. - Thank you for your question and I agree that the use of an LLC doesn't typically allow for the best lending options.

If a client was asking me the question (and they do), then I would schedule an appointment to discuss in detail their objectives, risk tolerances, and making sure they understand the potential consequences.

Like you, I also see pitfalls to having the insurance in one name and the property in a different name. Even assuming the insurable interest issue is resolved in favor of there being coverage, the scenario sets the stage for litigation that will add to the expense.

My initial comments above suggest that every investor identify for themselves their priorities. For some, the attractiveness of the lending rate will be enough to forego the protection an LLC affords. While I have my own view that liability protection is a higher priority than the interest rate on the loan, I respect that others disagree.

Experienced investors have typically been down this decision tree before. They understand the trade-offs of both approaches. Some of the newbies in RE don't appear to grasp that "investing" in RE is really operating a business with all types of liabilities. So the lure of a few percentage points appears like a deal too good to pass up. But, they sometimes overlook that making money doesn't accomplish much if you can't keep it.

Thanks again!

Hi Marco,

Your question about using an LLC (or going as a sole proprietor) seems to come up frequently in the BP posts. I'm not exactly sure why? Maybe because there are opposing views on the subject and it keeps the conversation alive.

I recognize your post had to do with lending to an LLC and HMLs. Here's the thing, are you asking the right questions. If not, then you're probably not going to get the answer that's right for you.

As a real estate investor (and a licensed attorney in Tulsa, Oklahoma), it's pretty rare for me to think that having rentals in a sole proprietorship is a good idea. Based on my background, I tend to see risks and liability as a higher priority than nearly anything else. So for me personally the answer to your question about an LLC is simple and uncomplicated.

It's not that I don't like to keep life simple. I do. But, the benefits of an LLC far outweigh the cost and the increased complexity of doing business in an LLC rather than my personal name.

So the question for you to give a little thought is "why are you starting in real estate"? Is this a hobby? Is this just for fun and adventure? Are you wanting another line item for a resume? If your reason is any purpose other than accumulating wealth, then an LLC may not be as important to you as an LLC is to me.

In 35 years of practicing in the litigation field including construction defects, insurance coverage, and civil litigation, I've seen some pretty surprising scenarios. Situations that experienced people in their own line of work never dreamed would occur.

Just ask anyone who was injured in a car accident if they expected to end up in the hospital before the day was over. The answer is always, "No, I would've stayed home!" The unexpected is what hurts. You can plan for what you know is coming at you.

Once you establish your objective with real estate, the answers to all of the questions start to come into focus.

This isn't legal advice. I don't represent you and I am not forming an attorney/client relationship with you. I am probably not even licensed in your state. My suggestion is that you find a competent and experienced attorney in your local area to consult about the use of an LLC.

A lot of the advice in BP comes from varying professions with different perspectives. If the advice doesn't match up with your own personal objectives, then it's probably not what you need to hear.

Examine your own goals and you'll begin to ask different questions. 

My opinion may not be yours. All the best in your REI!

P.S. - we place some general information (that is not legal advice) on our law firm website. 

Hi Lyn,

In looking to find an attorney, you look for the same qualities that you would want in any other professional. You are looking for someone who is the right fit for you.

Attorneys have different personalities and varying risk tolerances just like other people. Sometimes you just have to try a couple to see what they are like.

Word of mouth is probably the best, assuming the referral comes from someone you already know and trust. A referral from someone you don't know can still be valuable, but you have to keep in mind their expectations may not be the same as yours.

Sorry, I don't have someone in your area that I can suggest. But, an internet search will undoubtedly give you plenty of options. Ask if the attorney is willing to do a 15-minute "meet and greet" without charge. You can often get a pretty good idea in a short meeting if you think the attorney is going to be someone that you want to work with.

In my opinion, you should use an attorney for the creation of a lease. However, there are a lot of online sources for leases. You may save yourself some money by developing a draft lease to have a lawyer review.

A lease is a contract. As such, it will contain the agreements reached between the landlord and the tenant. An attorney can suggest clauses, but you are the person who is going to know more about what you want in your contract than anyone else.

To be crystal clear, I am not suggesting using a form without consulting a local lawyer for legal advice. Forms are a good starting point, but the laws in your state need to be considered. You want the advice of a licensed attorney familiar with residential leases.

This is not legal advice, nor am I licensed in your state. I can not form an attorney/client relationship with you. As a real estate investor, if I were planning to lease property to a tenant in your state, then I would consult an attorney who practices there.

I hope my general comments may help just a little. Again sorry that I don't have someone to offer as a prospect for you.

Hi Clay, 

As you already realize, there is a number of ways to structure a real estate deal. You are also correct in that you need to retain a local attorney with RE experience.

First, the type of structure may depend somewhat on how well you know the other party. While you will want to "paper up" the arrangements, the level of trust and knowledge about the other person makes a big difference in any deals that I do.

Generally, I like to see an LLC with each person owning some percentage. The LLC then owns the real estate. The LLC acts as a third person to the extent of all the incoming and outgoing monies. The LLC is typically set up as a pass-through entity. The company either makes a profit or a loss with the members (the owners of the LLC) accepting the outcome.

You did not mention contacting a C.P.A. or a tax advisor. While you need the attorney for the LLC or structure, you also should consider the tax implications. In any real estate transaction, you should have both legal and tax advice.

For example, I am an attorney practicing in Tulsa, Oklahoma. However, I always suggest that my clients get separate tax advice. I don't practice tax law and recognize the tax issues can be significant.

Some banks will loan money to an LLC. The bank may require a personal guarantee. If you can't find a bank, there are HMLs who will loan to LLCs.

Please bear firmly in mind, I am not giving you legal advice. Although I am an attorney, I am not licensed in your state. I also cannot form an attorney/client relationship in an online setting. So my comments are from the view of a real estate investor. Go find a local attorney and C.P.A. to help you! Best of luck with your REIs!!!

Steve Buckman
Tulsa, Oklahoma

Hi Justine, 

I met another attorney online a few days ago on Bigger Pockets in the Dallas area by the name of Ronald Rohde. I tried to include his contact details, but BP doesn't let me do that. You can find him by a quick search.

While I haven't actually worked with him yet, there's a potential contact for you.

I need to make clear that I am not providing legal advice, nor establishing an attorney/client relationship with you.

Steve

First, I am not licensed to practice law in your state and this is not legal advice.

In our real estate investing, we use an LLC for everything. If something goes awry, then we want separation from our personal assets. While liability insurance is used, the LLC acts as the last line of defense. For example, if there's a fire resulting in death or severe injury, insurance is where you look first. But, did you buy enough coverage? Is there an exclusion that ends up with no coverage for the claim?

You should consult with an attorney in your jurisdiction to find out the benefits and the costs for an LLC before you take the next step. Ask about any mortgage and due on sale clause that might trigger the mortgage coming due.

Investors that ignore the legal issues and forego getting solid advice from an experienced attorney tend to find their way into all kinds of scenarios. Most of these little adventures are expensive.

Also, don't forget to check with a competent C.P.A. or tax advisor and consider any tax implications. There may not be any, but you want professional guidance.

Your strategy is taking you from being a homeowner to a business owner. 

From the view of an REI - find yourself a RE attorney and get some legal advice. Good luck!

This is not legal advice and I am not forming an attorney-client relationship.

I want to start by pointing out that I'm not licensed in California to practice law. However, I don't like the use of insurance as the sole protection of your personal assets. I like to use an LLC combined with insurance.

My legal background has been heavily based on insurance coverage and bad faith lawsuits. Therefore, a considerable amount of my legal experience has been litigating whether or not there's really coverage.

In December, I gave a talk to a local REIA group in Tulsa where I practice. One of my points for setting up an LLC involved a legal case decided in Oklahoma.

The facts are pretty simple. A motel had an indoor swimming pool. The heater malfunctioned causing carbon monoxide exposure to guests enjoying the pool. Claims were submitted to the insurer who denied them due to a policy exclusion. The issue was litigated to our Supreme Court who agreed with the insurance company. The court said the insurer had the legal right to include specific exclusions.

Without meaning to sound unkind, most REIs that I see don't read their insurance policies. They don't know what is covered and what is excluded. Not to mention the coverages can change from one year to the next. This doesn't take into account that different insurers write varying types of coverage. When all is said and done, you don't know if there will be covered for whatever arises in the future.

An LLC is your exit strategy when insurance and everything else fails. It's the last means to get out of a "deal gone bad" with your personal assets safely in your possession.

My suggestion is to seek advice from a local attorney about the cost of an LLC. This isn't legal advice and I'm not creating an attorney/client relationship with you. But, sound investing advice (in my humble opinion) means limiting all of the financial risks as best as you are able. And you aren't going to be able to see all of those risks!!!! No one can.

Best of luck with your investing!

I would echo Scott Mac about being careful. It's easy to verbally say that you understand the risk. The "no risk, no reward" is true, but it is also tossed around by some of us (including me) in a way that sounds "bold and brave". The reality is that losing the money you inherited probably can't be replaced.

If you chose to go forward with guests or tenants, then I suggest you speak to a Tennessee attorney to set up an LLC. I don't practice there so I'm not familiar with the laws there. But, LLCs, generally speaking, provide some degree of protection. You will also want liability insurance.

Seriously, give some thought to your own abilities and experience. Real estate investing sounds like buying stocks or shares in a company. In actuality, you are starting a business. It can be more complicated (once you have jumped into the industry) than it appears watching podcasts and reading forums.

I don't mean to sound negative or like I'm throwing cold water on your dreams. However, I have observed several clients over the years blow through 401Ks and inherited funds late in life. It's sad.

My thought is to find some local attorneys and C.P.A.s to help you take a hard look at what you will be getting into. It's a lot less expensive to spend a little on professional fees to find solid answers. Good luck to you!

FYI - I have to make clear that I am not giving legal advice to you. My comments are investor based.

The issue of financing is one of the impediments that creates some of the differences of opinion among investors about the use of LLCs.

There are private lenders and hard money lenders that will loan money to an LLC. You should expect the terms will include a personal guarantee for the debt.

In your initial post you said that you have a "pretty good sum to put down". Depending upon what that means (and I don't need to know), you have (1) something to lose and (2) you have money to give a lender some assurance that money loaned will be returned to them.

Check around a little and see if you can find a lender willing to loan money to an LLC if you put down enough. Again, talk to a licensed attorney in your state about how LLCs work and the issues.

I have a different take on using an LLC. As an investor and an Oklahoma attorney, I like to look ahead just a little.

There are a lot of folks who disagree with me about using an LLC for your first property. But, I suggest looking down the road a little way. Do you intend to grow your REI business? Do you plan to develop assets as you go forward? Will you create significant wealth? Maybe, it's the hope for a lot of REIs.

Over the years, I have watched a number of people whose early mistakes caught up to them. A mistake years earlier can result in a lawsuit. Without an LLC, they were personally liable for the situation.

This is not to say that an LLC is complete protection against liability. It's not! In most states, it's only limited protection.

Having seen people in litigation over an event that happened 7 - 8 years earlier, you never know what your circumstances will be in the future.

I also see REIs who start off with "bad habits" in my opinion. Once you create habits, they tend to stick with you. So why not learn how to do it with the most protection that you can give yourself. In other words, limit some of the risks that come with owning real estate and operating your own business.

In our law firm website, there are several blog posts on LLCs that give our Oklahoma residents educational information. It's not legal advice, but the idea is to give them information to think about.

Sorry, I don't mean to sound like I have all the answers, I don't. Keep doing your research and listen to everyone's point of view. But, remember some of the advice in these forums is from people who haven't really done all that many deals.

Experience teaches you lessons that you don't forget. No one can predict the future so you have to prepare for the unexpected.

This is not legal advice. I am not licensed in your state. Invest a few dollars in an hour consultation with a competent attorney in your town and get some sound legal advice. All the best!