All Forum Posts by: Weston Couch

Do you find LLC's to be useful or not with your real estate investments?

@Bennett Pinkley You could hire an attorney and work out a payment plan with them that best suits your needs. If the  purchase amounts are that small though, it may not be worthwhile. Are you trying to avoid using a realtor to save costs?

Have you considered transferring it into a land trust owned by an LLC? This is what we do for our clients as it avoids any due on sale concerns(technically the property remains in your control) and it can make you anonymous as the owner(helps protect you and your LLC from lawsuits stemming from the property).

Hello Greg, insurance is great, but I don't think it can supplant using entities to insult yourself, especially given it's relatively cheap to use them and they provide substantially more protection. To answer you question of why protecting yourself from liability in another state vs your backyard may be more concerning is just that you would have to familiarize yourself with the laws of the other state and potentially pay significantly more to form protective entities(Texas LLC's are free once created for example whereas CA one's are $800 annually to maintain). Also, for those that like to closely supervise, it may seem daunting ensuring legal claims don't develop against you when you can't physically check on the property yourself. The right legal strategy can simplify and deal with those concerns though, no matter how many properties or jurisdictions you invest in.

When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures are, and (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often 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 - 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 they can't touch you or the other properties. There are several ways to achieve this though, and you can check out this article to learn more.

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 what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using 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 still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

Now of course, when you're just starting out, it may not be ideal to abide by all these pillars of asset protection because they do cost some money to put in place, but as your real estate portfolio grows, the value of these principles goes through the roof. You could spend 10+ years building a 30 property portfolio for example and lose half of the properties in one lawsuit if they're not structures appropriately. It's also important to keep in mind that every additional rental property you own is another potential source for legal trouble, so if you grow to a certain size, it's almost inevitable that some tenant will get a valid reason(such as falling through a porch you didn't know was recently termite infested) to sue you over a 10 year period.

@Ryan Mullin @Erik W. @Nathan Gesner @Jay Hinrichs@Steve Vaughan Looks like there's a lot of reasonable and good thinking here, but I think it's easy to oversimplify protecting yourself legally, especially if you start small and grow. The best model for an investor with just one or two properties probably isn't the best for someone with 10-20, or more. In general, the more properties, the more risk. While big dollar lawsuits that insurance won't cover may be rare, I've seen through my own experience working with HUD just how devastating they can be, even for larger investors.

When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures are, and (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often 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 - 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 they can't touch you or the other properties. There are several ways to achieve this though, and you can check out this article to learn more.

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 what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using 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 still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

Now of course, when you're just starting out, it may not be ideal to abide by all these pillars of asset protection because they do cost some money to put in place, but as your real estate portfolio grows, the value of these principles goes through the roof. You could spend 10+ years building a 30 property portfolio for example and lose half of the properties in one lawsuit if they're not structured appropriately and you run into that 300k settlement.

There are multiple sources of legal risk when it comes to investing in real estate. What are some of your legal concerns as a real estate investor?

@Terrell Hill

@Mirzet Mehovic
I think Terrell makes a great point about it just being something you have to grow with as you gain experience. That said, I would go beyond just the insurance, especially with your multi-unit situation, though insurance would certainly be good to have.

When I sit down with clients I will always discuss (1) their personal assets, (2) what their current investments portfolio and other business ventures are, and (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. I often 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 - 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 they can't touch you or the other properties. There are several ways to achieve this though, and you can  check out this article to learn more.

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 what you own, then they are less likely to sue. People don't sue people that qualify for food stamps. This anonymity can be accomplished for free by using 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 still, it doesn't matter because you are not the owner. The trust and the LLC are the owner of the asset/real estate, so even in the scenario that they guess, they guess wrong.

Now of course, when you're just starting out, it may not be ideal to abide by all these pillars of asset protection because they do cost some money to put in place, but as your real estate portfolio grows, the value of these principles goes through the roof. You could spend 10+ years building a 30 property portfolio for example and lose half of the properties in one lawsuit if they're not structures appropriately. It's also important to keep in mind that every additional rental property you own is another potential source for legal trouble, so if you grow to a certain size(and Terrell might be approaching that size), it's almost inevitable that some tenant will get a valid reason(such as falling through a porch you didn't know was rotten) to sue you over a 10 year period.

Statistically speaking, you have a high chance of facing a lawsuit with that number of units of the next 10 years. Putting it in an LLC is certainly one way to deal with that risk. Do you hope to acquire additional rental properties in the future?

Do you know how much you could lose in a lawsuit from a tenant? Are you personally protected if a tenant has "a good case" against you?

Hi Mirzet, do you plan on holding this five unit in your name personally?