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For the past few months, most of the calls I receive are from real estate investors. I suppose this is just an enevitable situation, but I thought it would be good to mention some things on this forum. This is not really intended to go into depth or create a formal gameplan for RE asset protection, but many of you on here are RE investors and likely some of you are unfamiliar with many potential strategies.
I just got off the phone with a new client who owns several properties with a net asset value of about $8m. And he owns all the properties in his name!!! It is amazing to me that people do this, but it happens.
First of all, owning real estate in your personal name is just nuts. There are just too many risks out there you are exposing yourself too. Who knows when your next tenant is going to start a meth lab in the basement. For some, establishing an LLC as the owner, will suffice. Having the LLC owned by a trust, even better. It is also important to establish the LLC in the right state. There are only 13 states that offer charging order protection for LLC's. Generally for RE ownership, I recommend NV, WY, or DE. All three of these states offer the best protection, best privacy, and the lowest fees. The most important aspect of the LLC is the operating agreement. Essentially an operating agreement is the contract between you and your business. In absence of the operating agreement, you are at risk of the court determining your fate. With one, they must abide by the contract. A 10 page boilerplate operating agreement will not suffice for any significant asset.
A series LLC is an option for some of you that own multiple properties. It essentially segregates the risk between assets, but allows you to own only one LLC, thereby simplifying your life. Depending on your assets and your goals, a Limited Partnership may also be a good option. Just remember that the general partner bears 100% of the risk of the business. We always use an LLC, C-corp, or S-corp as the general partner to eliminate the risk to the owners.
Another tool we frequently use is liens. It gets a bit complicated, but essentially we form an LLC that the investor owns 100%, and that LLC holds liens against the investors other properties. This allows you to strip all equity from the property leaving it unattractive to creditors.
The most important things with structuring your assets, is to do it properly, and do it early. Once the sheriff serves you papers, it is too late. I get these calls from clients on a daily basis; "I own 6 properties, 2 of which have significant equity, 2 are zero equity, and 2 are severely upside down." If this person owned all properties in his name personally, then all of his properties are at risk if the last 2 go into foreclosure. I am not saying you need to bail out on your debts, but without a proper structure, you will be out of options. With a proper structure you get some leverage with your lenders to renegotiate terms or settlements. If you protect assets with significant equity, you can then use that equity to satisfy other notes, instead of having them taken in court.
Please note, this is in no way a sales pitch. I just keep getting calls daily about investors who have run out of options. I hope all of you RE investors out there put some thought into your plan. I would also like to hear from any of you RE investors about some strategies you have employed to protect your assets.
I just got off the phone with a new client who owns several properties with a net asset value of about $8m. And he owns all the properties in his name!!! It is amazing to me that people do this, but it happens.
First of all, owning real estate in your personal name is just nuts. There are just too many risks out there you are exposing yourself too. Who knows when your next tenant is going to start a meth lab in the basement. For some, establishing an LLC as the owner, will suffice. Having the LLC owned by a trust, even better. It is also important to establish the LLC in the right state. There are only 13 states that offer charging order protection for LLC's. Generally for RE ownership, I recommend NV, WY, or DE. All three of these states offer the best protection, best privacy, and the lowest fees. The most important aspect of the LLC is the operating agreement. Essentially an operating agreement is the contract between you and your business. In absence of the operating agreement, you are at risk of the court determining your fate. With one, they must abide by the contract. A 10 page boilerplate operating agreement will not suffice for any significant asset.
A series LLC is an option for some of you that own multiple properties. It essentially segregates the risk between assets, but allows you to own only one LLC, thereby simplifying your life. Depending on your assets and your goals, a Limited Partnership may also be a good option. Just remember that the general partner bears 100% of the risk of the business. We always use an LLC, C-corp, or S-corp as the general partner to eliminate the risk to the owners.
Another tool we frequently use is liens. It gets a bit complicated, but essentially we form an LLC that the investor owns 100%, and that LLC holds liens against the investors other properties. This allows you to strip all equity from the property leaving it unattractive to creditors.
The most important things with structuring your assets, is to do it properly, and do it early. Once the sheriff serves you papers, it is too late. I get these calls from clients on a daily basis; "I own 6 properties, 2 of which have significant equity, 2 are zero equity, and 2 are severely upside down." If this person owned all properties in his name personally, then all of his properties are at risk if the last 2 go into foreclosure. I am not saying you need to bail out on your debts, but without a proper structure, you will be out of options. With a proper structure you get some leverage with your lenders to renegotiate terms or settlements. If you protect assets with significant equity, you can then use that equity to satisfy other notes, instead of having them taken in court.
Please note, this is in no way a sales pitch. I just keep getting calls daily about investors who have run out of options. I hope all of you RE investors out there put some thought into your plan. I would also like to hear from any of you RE investors about some strategies you have employed to protect your assets.
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