Buy & Hold 101: Asset Protection and Privacy - How We Do It
Holy moly, we are back with the 6th blog in this awesome ongoing series about buying and holding. Before we talk about asset protection and privacy, let’s do a little review for you folks so you’re not completely lost. So, whether you have been following along or not, please take a minute and read up on these previous helpful and informative blogs:
- Buy & Hold 101: First Steps to Owning Cashflow Real Estate
- Buy & Hold 101: Different Types of Cashflow Rentals
- Buy & Hold 101: How We Find Good Property Manager
- Buy & Hold 101: How We Find Good Quality Tenants
- Buy & Hold 101: How We Screen Our Tenants
Yowzers! I know it’s a lot of info, but it’s totally stuff you need to learn, and now we can get down to business…
Privacy, Protection or Both?
Okay, so let’s talk about asset protection versus privacy. First off, understand that there are certain things that, like a trust, are going to need privacy versus things like an LLC that will give you protection.
Let's start with the most basic things…
First, don't buy and sell in the same entity you buy and hold. Do not mesh the two together. Separate your fix and flip business from your long-term buy and hold.
Privacy through Land Trusts
You can purchase a property in the name of a trust. So you’d create this trust paperwork, which is nothing more than a set of documents, and instead of purchasing the property in the name of an LLC, purchase it in the name of a trust.
Who should be the trustee of the trust? In my opinion, an out-of-state attorney is the best. But you could put anybody who's out of state as your trustee – just make sure it’s someone you really trust, such as a good friend or family member.
They're going to be the trustee of the trust, but you or your LLC (or some other legal entity that you own) will be the beneficiary of the trust.
So, you now have two things going on: A trust and a beneficiary.
I like to describe the trust as an "artificial force field." Here’s why: On public record, when people are doing research on a property, they're going to see that the trustee is – I guess you would call it – the legal owner of the property. They have the legal ownership, whereas you are the beneficiary, and you're hidden behind the trustee.
(Some states force you to disclose who the beneficiary is and there are actually several ways around that, but we’ll save that for another time.)
It's important to have privacy. When you have four rental properties, it's probably not that big a deal. You won't have a huge target on your back. When you own 20, 30, 50, 100+ rental properties+, you better be implementing as much privacy and protection strategies as possible. I can’t stress that enough!
That's where your attorney's going to become so, so vital to you. When you're interviewing your real estate attorney, they'd better know about estate planning and different methods, such as limited partnerships versus LLCs and how to structure different legal entities to give you the most protection.
The attorney better be familiar with the laws for that specific state. So make sure before you implement a land trust that you sit down with your attorney and understand how to make it legal in the state in which you are doing business.
Protection through LLC Separation
As far as protection of your newly acquired assets that you're going to work so hard to get, we want you to focus on placing each property into a separately owned LLC.
I’d say that's probably my #1 suggestion.
You want to either separate them into their own individual entity, or group them into a series, where on the surface, they’re all in one, but underneath they are separate as well. This offers your more layers of protection.
This one time I had an attorney who blew my mind with his ignorance. I sat down with the attorney and the conversation went kind of like this:
Me: You know what, Mr. Attorney? I don’t think you are telling us the right thing to do here.
Attorney Guy: Oh, I don't mess with any of that LLC, partnership, corporation crap. I mean, I've got four kids, I just put it in my kids' names. (Two of those four kids had driver’s licenses).
Me: So why do you do this?
Attorney Guy: Well, that way, then they can't see that I'm the owner. I'm separated from it and they can't come after me.
Me: You mean to tell me that you think… if you put the name of your daughter (who's 17 and has a driver’s license) on it and then she gets in a car accident and kills somebody… you think that they're not going to find you and come after you?
That's the craziest thing I've ever heard from an attorney.
Always, always, always know:
You need to separate. The more layers of protection you have, the better off you're going to be.
Protection through Limited Liability Corporation
Let's talk about a limited liability corporation, which is, in my opinion, considered to be the most inexpensive and overall best asset protection available for holding a rental.
Set up an LLC, put a rental property in it. Simple as that.
If you have another 5 rental properties, it works great. Each LLC you set up is going to have an EIN number (which is the tax identification number) and you're going to have to set up a bank account to run all the expenses through.
Let's say you have 5 rentals, you're going to have 5 different sets of accounting processes and paperwork to do at the end of every single year. But, if you're married or you have a partner, there could be a better way, especially if you're holding more than 5 rentals…
That's where you actually create a multi-member LLC (let's say between you and your wife or you and your partner) and your properties are located in limited liability companies underneath that multi-member LLC.
At the top is the multi-member, and the multi-member owns all of your series of limited liability companies that are underneath – the ones that your actual properties are in are pass-through entities. There is no EIN number, there's no bank account, everything passes through to the multi-member and you only have one multi-member K1 to actually file at the end of every single year.
So, find a knowledgeable lawyer to provide legal counsel to recommend the best strategy for privacy and asset protection. Ask for recommendations, do your research and interview an attorney before you put them on your team. Make sure they have a full and complete grasp of this stuff.
Okay gang, we’re gonna stop here for now. I know it’s a lot to take in, but this is stuff you need to know so you can protect your business and keep adding to your portfolio.
Next up in this awesome Buy and Hold series, we’re gonna cover how to research your rentals, and then once you’re a landlord what you’ll learn (the hard way).
See ya soon,