All Forum Posts by: Weston Couch

@Joe Splitrock Of course, and both are essential for good asset protection, but I think a lot of people don't realize insurance only protects your properties from claims stemming from the properties themselves. LLC's protect the properties from yourself(if you hit someone while driving your car), and from claims at other properties(tenant on Property A can't collect payment on Property B for example).

@Thuy Pham-Satrappe Hi Thuy, I work for an asset protection organization and we deal with these types of questions a lot. Insurance is great, but it's only one part of the picture. All the forms of insurance you mentioned are useful for rentals, but insurance can only protect you from events at or relating to the property. For example, you could still lose those properties if you got in an accident and didn't have enough cash to pay a settlement. Cheap LLC's(they vary widely in costs) cover those type of areas and provide a safety net for the extreme situations where insurance coverage doesn't work. Of course, there's a a lot more on how to protect your rentals than just Insurance and LLC's too. If you're interesting in knowing more, just DM me or connect.

@Grant Rothenburger All valid points, getting property is definitely the most fundamental part of investing in real estate, haha. I'll just say that you don't need to get a lot of experience(own multiple properties for example) before looking into LLC's, especially given they can cost next to nothing.

@Clash Lo Congratulations on getting into REI. Fair warning, I work with an organization that specializes in asset protection(protecting from lawsuits), so I have a lot I can share with you on this, though I'll try to keep it briefer on this thread. 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.

Yes, I realize Pillar number four doesn't exactly answer your question, but I think considering LLC's as a factor of thorough asset protection is helpful, plus they're actually extremely cheap these days if you shop around a bit.

Feel free to connect or DM me if you have more questions.

@Christopher Janney Great thinking, that's something we often have to explain to our clients. Do you also use a holding company/operating company structure?

@Todd Rasmussen Hi Todd, it's not so much an issue of "piercing the veil" as it is potentially violating a due on sale clause. Though it won't effect the ability of an LLC to shield from liability, a transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

While a transfer to an LLC will cause alarms at the bank and prompt them to send you a letter, a transfer to a trust will not. A transfer to a trust is exempt from due on sale violations since banks will view transfers to a trust as an estate planning tool. You should not even receive a letter from the bank.

This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the Trust has been established. It means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. All the while, you always have control and nobody else, not even your attorney, can manage or sell your property except for you.

If you need to prove ownership for financing or any other reason, you simple produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.

Please feel free to connect with me or DM if you’d like to know more.

@Tim Robinson Hi Tim. First, welcome to Bigger Pockets! I work with an asset protection organization and we do a lot of work in this area, along the lines of what Frank has said. I can't be your attorney here, but it sounds like you're questions and concerns are related to the third and fourth parts of what we call our "Pillars of Asset Protection. 

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.

Please feel free to connect if you would like to know more or need help with anything in this area.

@Mark Buchheim Are you protected against issues that insurance won't cover? For example, if you personally get in an accident and have to pay a settlement larger than your cash available?

@Ben Satterfield @Grant Rothenburger Full disclosure, I work with an asset protection organization, but I hear that "probably only worth it for big investors" rhetoric a lot, and I think LLC's are surprisingly affordable if you get the right services(comparable to insurance). I also think using LLC's are worth it even if you even if you're not a bigger investor for a couple other reasons. 

First, they do provide effective protection that insurance doesn't as long as you avoid mixing money, etc. They can prevent a court from stripping you of your investment properties if there's a large judgement from a car accident you were involved with for example. They also compartmentalize what's at risk in any given lawsuit meaning that if a lawsuit comes from an accident at a property, you can't lose more than that specific property.

Second, they're more about being proactive in protecting yourself. When used appropriately, they prevent you from ever being low hanging fruit for a lawsuit. If you only have insurance and own everything in your own name, when or if there's an accident on your property, you'll be a clear target for a lawyer looking to collect.

Feel free to connect with me if you would like more information. I can provide a lot of resources on the subject.

@Mike McCarthy Well, this is just my opinion as an investor, but I may be biased because I use the new one's(Series LLC) for our clients, granted we also use the traditional LLC's. Objectively speaking, you can enjoy the benefits(rates) of buying the property in your name and still put them "in" an LLC through a land trust, though eviction issues may be complicated some.

I think using LLC's are worth it even if you even if you're not a bigger investor for a couple reasons. First, they do provide effective protection that insurance doesn't as long as you avoid mixing money, etc. They can prevent a court from stripping you of your investment properties if there's a large judgement from a car accident you were involved with for example. They also compartmentalize what's at risk in any given lawsuit meaning that if a lawsuit comes from an accident at a property, you can't lose more than that specific property.

Second, they're more about being proactive in protecting yourself. When used appropriately, they prevent you from ever being low hanging fruit for a lawsuit. If you only have insurance and own everything in your own name, when or if there's an accident on your property, you'll be a clear target for a lawyer looking to collect.

Also, they're surprisingly affordable if you get the right services(comparable to insurance).

The only notable bad side I know of is related to what you mentioned. It can make some of the bureaucracy(like financing or evictions) more tedious, but there are easy fixes for that as well.