All Forum Posts by: Victor Lau

Hey @Victor Lau,

I will talk more on the point about the LLC, since I have much more experience with with those entities. When you establish the LLC can vary on several different factors, so I would encourage you to look at asset protection as a whole. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.

The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.

The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.

The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.

The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.

The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.

Having spent my early career cutting my teeth litigating major insurance companies for refusing claims, I personally have always placed properties into LLCs. You will need to do it eventually if you continue to grow, so the real question is when you start.

This is not legal advice, just my opinion as a real estate investor. Feel free to tag me or connect if you have more questions.

@Victor Lau

I BRRRR'd my first property. Had around $55K into it, apprasied for $100K, pulled out $65K in a refi and immediately purchased a duplex about a month later. So to answer your question, I moved on the second property as soon as the refi was completed and I had my initial investment back in my account.

Thats where the power of the BRRRR comes into play. You COULD save up for 6-7 years and buy another, but any time you can find a way to build instant equity and pull capital out - it allows you to scale horizontally quicker.

Another idea to consider is going in with some partners - they help provide most of the capital and you do the leg work to find and manage the deal. 

Hi Victor, I'm in a similar situation, but am trying to lead-turn the problem by building a base of investors who would want to structure a partnership with me through debt or equity. As much as we want to do it alone, I think using other people's money has to be in our future to grow. I don't know if you've been able to force appreciation on your initial property, but my first one was a 6-plex and I was able to increase the equity by increasing NOI and that gave me $50K in equity to tap into.

Best of luck!

Cheers,

Brian

@Victor Lau

I set up my LLC on my first property because I wanted to grow...and doing that mentally helped me remember that one property wouldn't be enough for me.

As far as banks go, I started with portfolio loans, so the process was the same for the 2nd, 3rd, 4th, etc properties.