Archive for the 'Asset Protection' Category
Let’s start with: Why have an LLC?
There are mainly two reasons why you want any kind of business structure:
Pay less tax, and protect your assets.
Before you jump into creating your LLCs for your real estate holdings, there are a few things to consider. Do NOT make these three mistakes.
This article is Part 4 of a four-part series on Land Trusts. You can find Part 1 here: Understanding Land Trusts
In the previous installment of the Understanding Land Trusts series, we discussed the Due-on-Sale Clause and how the land trust benefits you. In this part we will discuss various strategies to keep your land trust involvement private.
Constructing a Land Trust for Privacy
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This article is Part 3 of a four-part series on Land Trusts. You can find Part 1 here: Understanding Land Trusts
Now you may be asking — how is the land trust going to help me with my lender?
The answer lies in why the land trust was created, and why it’s perfectly legal. It’s basically a compromise between two opposing forces. On one side is the bank which is interested in generating income from loans and at the same time protecting itself through a security interest in real property — on the other side is the borrower (real property owner) who desires to transfer title to his property without fear of foreclosure or forced refinancing. The bank acts as the protagonist by incorporating a “due-on-sale clause” into most, if not all, mortgages its writes.
This article is Part 2 of a four-part series on Land Trusts. You can find Part 1 here: Understanding Land Trusts
Investors, attorneys, or CPAs unfamiliar with the use of land trusts often ask me “why would someone consider using a land trust?” My general response is “why not.” When it comes to entity structuring many people prefer to being with the complex rather than the simple. The land trust, contrary to the multiple internet gurus or guest REIA speakers that sing the vestibule of virtues offered by this rudimentary of tools, is simply and nothing more than a title holding vehicle with some interesting attributes. From a legal standpoint, the land trust is a type of “grantor trust” (this is the phrase you should use in states that don’t formally recognize land trusts via statute).
The land trust is one of the most talked about, but least understood, entity utilized by real estate investors. The reason for this is simple, most attorneys or CPAs have never come across the entity in their professional practice. How can this be?
You might be asking yourself: if the land trust is a legitimate entity used by real estate investors all over the country shouldn’t my local attorney know something about it. Unfortunately the answer is no, they most likely wouldn’t have a clue and this is because only a handful of states actually recognize a land trust via statute.
Many new homeowners are looking for ways to save on their home insurance. Although some seem obvious because they are so highly advertised (bundling with auto, shopping online), there are others that are more subtle. You can get discounts on your home insurance just by making some minor changes to your home. Here are some of the things that you can do to help lower that insurance bill.
Are you a target for tenant lawsuits? Are your assets easy to locate? Do you own rental properties in your own name?
You wouldn’t walk around with a financial statement taped to your forehead would you? So why would you have your most valuable assets exposed to public scrutiny? Anyone can go down to the county courthouse or recorder’s office and look up the owner of any property. Real estate records are now computerized, so all of your real estate holdings can be located at the touch of a button! Lawyers, creditors, IRS agents, newspaper reporters, tenants and other “snoops” can find out what you own and whether you are worth going after.
Don’t give them the ammunition – make your real estate ownership hard to find!
Following up to our previous article titled, “3 Reasons a Series LLC Should be a Real Estate Investor’s Best Friend“, we now focus on benefits of a Delaware Series LLC.
The Delaware series LLC is a form of a limited liability company that provides liability protection across multiple “series”, each of which is theoretically protected from liabilities arising from the other series. It is similar to a parent/subsidiary structure, such as GM and it’s various brands. For example, you could have a master LLC that owns different subsidiaries which in turn own small groups of real estate. The subsidiaries would shield both the master and other subsidiaries from liability. Thus, a real estate investor can reduce the exposure to the assets that any one subsidiary owns.
The number one goal of your rental business should be to make money, not give it away. One way to protect you and your investment is to have proper insurances in place. Let me introduce you to four insurances that you should consider.
A Good Lease
The first insurance that I posses is the insurance of a good lease and a thorough move-in inspection. More than once I have referred to the pictures of a move-in inspection to counter a tenant’s claim about a pre-existing condition. I remember one time during a preliminary move-out inspection I noted a cracked ceramic floor tile. The tenant claimed that it was like that when they moved in. I turned on my laptop, pulled up the appropriate picture from the move-in inspection, and proved to the tenant that the crack was in fact not there when they moved in.
A growing number of real estate investors are using a self-directed IRA to finance their property purchases nowadays. That’s because a self-directed IRA can provide them with the opportunity to buy real estate and earn rental income without paying early distribution fees.
The Investment Company Institute – the national association of U.S. investment companies, estimates that about $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion (only 2 percent) are in Self-directed IRAs.
The land trust is a very powerful tool for the savvy real estate investor. A land trust is a revocable, living trust used specifically for holding title to real estate. Each property is titled in a separate trust, affording maximum privacy and protection.
Here are seven reasons to use land trusts:
1. Privacy. In today’s information age, anyone with an internet connection can look up your ownership of real estate. Privacy is extremely important to most people who don’t want others knowing what they own. For example, if you own several properties within a city that has strict code enforcement, you could end up being hauled into court for too many violations, even minor ones. Having your real estate investments titled in land trusts makes it difficult for city code enforcement to find who the owner is, since the trust agreement is not public record for everyone to see.
2. Protection from Liens. Real estate titled in a trust name is not subject to liens against the beneficiary of the trust. For example, if you are dealing with a seller in foreclosure, a judgment holder or the IRS can file a claim against the property in the name of the seller. If the property is titled into a trust, the personal judgments or liens of the seller will not attach to the property. This effectively separates the owner or seller from the property.
I know of some people who have become totally caught up in the euphoria of newfound knowledge and just couldn’t stop buying audio programs and attending very expensive seminars and bootcamps. This seminar junkie must have spent at least $50,000 within a 12 month period and still hadn’t bought their first investment property. They were just bouncing around from one great idea to the next.
I don’t know whether, in their case, it was because they were just caught up in the excitement of that environment, whether it was their way of convincing themselves they were active when they may have been too scared to get started, or they were honestly trying to find the best strategy for them. I’m guessing it was a mix of these things.
I also know of an investor who took quite the opposite approach. He stumbled across a pretty good investing strategy and didn’t check out any other alternatives but went ahead and spent over $10,000 getting a good education in that one area. He went on to build a decent portfolio over a few years but then realized there were some even better strategies out there.
This second story isn’t so bad because he built some success and he could afford the further education he now sought. However, he told me once that it was a little disheartening because if he wanted to pursue a different strategy he had to start the learning process all over again and it felt very much like he had his “ladder to success” leaning against the wrong wall. And even though he could now afford the education more easily it was still another $5,000 – $10,000 that he could have avoided spending. If only he’d done his homework first.
For those of you wondering, a Series LLC is a regular LLC with a twist – it can have an unlimited number of subsidiaries (called Cells), and each subsidiary is treated as a separate structure where liability is concerned – if you set the structure up and run it properly. So far eight states have Series LLC legislation on the books (Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah). But even if you don’t live or own property in one of those states, you can still use a Series LLC by qualifying it to do business in the state(s) where you want to operate.
I think this is perhaps the ideal structure for real estate investors (and anyone else) who wants to keep their assets safe without spending all the profit on legal structures.
Here are my 3 favorite reasons to use a Series LLC with real estate:
By now I am sure you’ve heard that it is legal, permissible, and profitable to invest in real estate using your self-directed IRA, SEP, or Roth IRA. If you’ve been using this technique, you know the drawbacks – delays in funding, fees from your custodian, potential lawsuits against your IRA.
Well, there’s a solution… the LLC-IRA.
Instead of investing directly from your IRA, we set up a single-member LLC that is owned by your IRA. Your IRA account is the sole member of the LLC. The LLC is a legal entity that has powers and protections that are not possessed by any individual or by any regular IRA.
The combination of the self-directed IRA custodian and the LLC produces great results. This is an entirely new type of LLC, not your run-of-the-mill LLC you may have done before. It generally requires an attorney to draft the operating agreement and provide an opinion letter to your IRA custodian. If the LLC operating agreement is improperly drafted, the entire LLC-IRA may be disqualified and taxed.
Lawsuit Protection of Your IRA Account