All Forum Posts by: Kyle K.

Once you have amassed a healthy amount of assets (home, investment real estate, 401k, etc.), the smart thing to do is put investment real estate into an LLC. How many properties you put into an LLC is up to debate and your risk tolerance, but it should be done. What Mitch described above perfectly illustrates the need to protect oneself. We're such a litigious nation, one would be a fool to risk his family's wealth to save a few hundred bucks not forming an LLC.

I disagree--sometimes. In certain instances, it may make sense to sell property without an exchange. High income earners (>$150K/year) cannot deduct depreciation against their ordinary income. However, this unused depreciation doesn't disappear, it accumulates. Later on, this unused depreciation can be used to offset any capital gains upon the disposition of an investment property.

I'm not a CPA, but that's how I understand it. Perhaps Charles Perkins can explain this concept better than me.

First of all, you need more cash reserves. If you go a sustained stretch without a tenant or a major expense, that could put your whole portfolio at risk. Then you have bigger problems than figuring out what to do with excess cash flow-- huge financial headaches, the threat of foreclosure, tainting your credit,etc. So, build up more cash reserves first. [Considering you have a property that is "just breaking even (hopefully)", you definitely need to prioritize building cash reserves.]

Now that you've got cash reserves, this is what I think you should do: Use any cash flow from your properties to pay its own mortgage down (this way the property pays for itself). But as for any extra money you earn from your day job, save it to accumulate more property. Either that or pay off your student loans. If you're paying >9% on your student loans, I would pay down the loans first.

I'm not sure what you mean when you say "having the LLC hold a loan that is in the personal name of an owner". If an LLC holds a loan, then it wouldn't be in the personal name of the owner.

Here is my understanding of how this works: you own property in your name initially and you took out a loan for said property. Later, you set up a land trust that names an LLC that you form as the beneficiary. This effectively transfers the rights of the property to the LLC, even though the mortgage is still in the owner's name.

Of course, the LLC must be operated as the business entity for the property. For example, the LLC should have its own checking account which accepts rental deposits, pays for expenses, and pays the mortgage. This affords you asset protection.

The main draw for LLCs should be asset protection. I'm not sure I see how having a separate property management LLC benefits you other than making accounting/paperwork easier. That being said, I'm not a lawyer. Perhaps having a separate PM LLC allows the legal separation necessary to afford you maximum asset protection. (I don't personally manage my properties so I don't have any experience with what you're proposing).

I will tell you one thing: before you pull the trigger, you should ensure that your insurance company will list you, the PM company and the holding-LLC as insured under your policy.

If I understand correctly, you are managing the property yourself then?

Interesting point; I am curious as to how often individual landlords have had judgements against them in the hundreds of thousands of dollars range. My gut tells me that it is extremely infrequent. That being said, I will do what I can to protect myself and place my property in an LLC. There is nothing that has shown me that isn't the best way to protect yourself as a landlord.

It depends on the market. First, if the home is not in an area that I would personally live in, then I don't want to consider it. I'm a buy and hold kind of guy so you have to think long term; I like to look at important economic factors surrounding the geographic region I'm investing in: unemployment, business environment, growth.

Of course, when you buy a property, you must cash flow. But that's Captain Obvious speaking.

As for when I would sell the property, that also depends on what the market tells me. If I built up substantial equity, but an opportunity comes along where I would be best served to exchange into newer, better property, I will make the jump. Otherwise, I will stay put. If exchanging into better property isn't a blatantly obvious decision, then I won't make it.

I think the thing most people fail to consider is that placing investment property in an LLC not only protects you from the property; it also protects the property from you (say, you get in a horrible car accident that is your fault). Another thing to consider: insurance companies will do everything in their power to not pay out. So, you're not guaranteed liability coverage for events stemming from your investment property.

I thought this was an excellent article that explains RE investing and LLCs. I think you guys will enjoy it as well.

[url]http://bawldguy.com/liability-protection-for-real-estate-investors/
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Will, thanks for the response. I've never heard about the use of an "Irrevocable Family Trust" in regards to asset protection. It seems like a solid estate planning tool (something I'm a little too young to get into myself). However, it is unclear to me exactly how it affords liability protection to an investor. Nonetheless, I'd love to learn more as I had previously thought my liability protection options were limited to insurance and entity formations.