✅ Checklist for Buying & Managing Your First Investment Property

You’ve finally decided to get into the real estate game, but now that you’re faced with the task of purchasing your first investment property, you’re just not sure where to begin.

Investing in real estate can be an effective way to bring in additional cash flow and grow your savings. But accurately assessing your chosen market and finding the right building can be complicated. The following tips will help you research various neighborhoods, decide which type of property is right for your portfolio, and spruce it up for your first tenants without breaking the bank.

Deciding Where To Buy Your First Investment Property

When you decided to invest in real estate, you might have assumed that you would purchase a property within your own city’s limits. But in some areas, even prices for investment properties in need of extensive renovations can be prohibitively expensive.

Don’t hesitate to look at properties in other cities where your dollar can stretch further. Just make sure that if you choose to do this, you have the guidance of an investor-friendly real estate agent who is familiar with the area and home prices (Austin homes have sold for an average of $425,000 over the last month). Check out neighborhoods in cities with expanding job markets and a high demand for rentals.

The Right Type of Property

You may be torn between purchasing a single-family property or a multi-family building. According to Rentler, single-family homes can be easier to manage because you will be working with fewer tenants, but with more tenants paying rent in a multi-family property, you’ll be able to make more money off your investment. Before making your decision, consider how much time you will have to attend to your tenants’ concerns.

Buying Your First Investment Property

To buy the ideal property, you could work with an agent, or you could go down a different route and purchase a turnkey property from a real estate company. According to Fortune Builders, turnkey properties are typically move-in ready when they hit the market, so you won’t have to spend as much on maintenance or repairs, and the company will handle many important management responsibilities. However, first-time investors should be aware that this path to investment property ownership can be quite expensive.

Renovating Your Investment Property

After putting a portion of your savings toward your down payment, you may not have much to spend on repairs and cosmetic work for your property, so you may want to explore cheaper options for renovations.

For instance, carpeting is an affordable flooring option, and you can lower the cost of carpeting by utilizing carpet tiles (DIY installation averages $575), personally removing your existing flooring, and purchasing your materials from big-box home improvement stores. Other budget-friendly renovation projects include swapping out older fixtures like faucets in your kitchen and bathroom, updating lighting, and adding more shelves and cubbies to create extra storage space. You can save big on all your renovations by using your own tools and materials whenever possible, waiting for deals at hardware stores, and enlisting your family and friends for help.

Write Up the Lease

You need to draw up a lease that will protect the financial interests of you and your tenants. Nolo recommends being very clear in regards to your repair and maintenance policies and your terms for your tenant’s security deposit. Have a third party look over your lease before you begin advertising to prospective tenants. This will help ensure that you did not forget to include any important details.

Finding Tenants For Your Investment Property

When it comes to choosing tenants, careful screening is key. You want to find a tenant with steady monthly income, a rental history clear of evictions, and plans to stay in the area for the next few years. Make sure to ask for proof of income and previous landlord references!

As you research potential investment properties in your area, it can be tempting to jump on the first good deal you see. Although you may be eager to purchase your new asset, intensively researching every aspect of your preferred real estate market will help you invest your money wisely, increase your income, and even purchase additional investment properties in the future.

Benefits of Forming an LLC (And A Few Risks)

By reading this article you are either a real estate investor or an aspiring real estate investor. You have surely talked with people discussing LLCs (Limited Liability Companies.) One of the struggles investors run into is finding reliable information that they can trust. Learning about the benefits of forming an LLC is no different.

Today I will tackle how to start an LLC. I will also list the risks involved in operating an LLC. After all, knowing the weaknesses of an entity can allow you to build a stronger strategy. This allows you to sleep well at night knowing all your bases are covered.

Benefits of an LLC

There are many benefits to using a LLC as the foundation of your real estate business. The most important benefit is that this entity limits liability and minimizes personal exposure in the event of a lawsuit. When a LLC owns a property it will be responsible for the property in court, not you. If the lawsuit it lost, the losses are limited to what is in the LLC.

Avoids the issue of “double taxation.” The LLC gives you the ability to file the property as a pass-through entity. You list any profits, or losses, on your personal tax return. But LLCs are flexible! They can be taxed differently depending on your needs. See our article on the tax benefits of the LLC for more.

The LLC can be formed and operated in all 50 states and is uniformly upheld across the United states. You can choose to form a LLC in your local state or in a any other state, depending on your needs.

A LLC can also function as a “operating company.” Sometimes also referred to as a “shell company.” Using a LLC in this way allows investors to limit their exposure even further! Utilizing a LLC as an operating company means that it holds the liability for your business operations. The difference is that you don’t place any assets in it. When it gets involved in a lawsuit you aren’t risking your properties, just your LLC. This article and video explains what this structure will look like.

Risks of an LLC

There is no “perfect” business entity, and the LLC is no exception to this rule. The important thing is to understand its strengths AND weaknesses to ensure your asset protection strategy is effective.

Most LLCs will have an annual fee and corporate management requirements. This will vary from state-to-state, so be sure to know what your state requires.

You need to form and operate the LLC to ensure it provides the liability protection you want. If you don’t form and operate the LLC properly, you are investing into an entity that does not protect you! This type of work needs to be done right the first time. You can also pay someone experienced who will file the entity and teach them you how to operate it right from the start.

The LLC will require separate banking, records and tax returns. This is to ensure that you are able to prove it operates separately from you. This also means more work for you. Once you get the hang of these entities it is very simple, but the learning curse can be rough.

All properties owned by a LLC are held in a “pool,” and are not protected from each other. This is why we recommend that investors with more than a single investment property use the series LLC instead.

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

5 Strategies For Protecting The Equity in Your Personal Residence

Equity stripping is something of a varsity-level real estate move, but it’s also an asset protection classic for a reason. The whole idea is to make your property look extremely undesirable on paper, even if it’s a beautiful and pricey asset to behold. Today, we’ll be talking specifically about five ways to protect the equity in your homestead or personal residence, and you’ll be icing greedy litigants and creditors in no time when you follow our tips.

1. Know Thy Homestead Exemptions (And Use Them!)

Ah, the homestead exemption, arguably one of the best “gimmes” a homeowner can get on the equity stripping front. Understand first that American law provides greater protections for our personal homes than any investment.

Now, the exact value of your personal homestead exemption depends on a variety of factors, including where you live. Each state’s formula for calculating homestead exemptions is different, so your mileage may vary. But everywhere that has a homestead exemption option is giving its homeowners a gift of sorts. For instance, one of this tool’s main uses includes capping creditors’ abilities to tap into your home’s equity to satisfy a debt. If your state offers an exemption, you should most likely take it (unless professionally advised otherwise).

If you do some research and learn your state doesn’t offer such an exemption, don’t fret. That’s what our next four tips are for, and you can make up the difference by using some of the other tools explained here such as home equity loans and lines of credit.

2. Obtain a Friendly Loan

Friendly loans may come from actual friends or even institutions where you have a good reputation or rapport. Any loan with good terms or lien constructed deliberately for equity stripping likely meets the investing definition of “friendly” lending. There’s nothing inherently unfair, wrong, or illegal about receiving a favorable loan or gift from a person or business.

Of course, finding and securing friendly loans can be tough, particularly for newer investors or homeowners. Those who follow our next tip won’t have this issue.

3. Create Your Own Mortgage Company

Even seasoned REIs rarely know you can legally do this. Creating your own mortgage company for equity stripping is surprisingly easy, and incredibly effective. You use your own Traditional LLC to issue yourself notes. You can proceed to use it for your homestead or your investment assets, assuming your coloring within the lines of the law.

Learn more from our explainer on how to form your mortgage company and start your equity stripping strategy. This basic premise can be used to completely encumber a property, making it repulsive to the career litigant and (often more importantly) their attorney. After all, the lawyer who sees equity stripping knows they won’t be getting paid. Not until the mortgage is paid off, anyway. And given you’re the one setting up the terms, you can make this part easy.

4. Use a Home Equity Loan or Home Equity Line of Credit (HELOC)

Both home equity loans and home equity lines of credit (HELOC) offer handy tools for the homeowner in need of equity stripping. The loan version is limited to the amount of equity presently in your home. Those who take out home equity loans receive the equity value in a single lump cash sum, a “riskier” move for the lender than a line-of-credit.

By contrast, HELOCs are easier for most people to qualify for, and for many homeowners, easier to manage. When you have a HELOC, you only touch the money when you need it or for a planned reason. Both of these home equity-reliant options encumber your home further, serving your creditor and asset protection goals.

5. Second Mortgages May Be Options for Seniors

Qualifying seniors who own their homes outright may use second mortgages as both a way to get some much-needed cash on a fixed or dwindling income and for protecting their homes. Second mortgages may be difficult to qualify for, will be limited to seniors with high equity in the home, and can certainly have drawbacks, so learn the specifics about second-mortgages before considering using this type of encumbrance for equity stripping.

Using Corporations to Manage Real Estate LLCs: The REI's Basic Guide

It’s important to set up your real estate LLCs the right way.

Improperly established, noncompliant or mismanaged LLCs are pointless at best and costly at worst. Your entire asset protection can be undermined by one poorly structured or managed entity, because the entity is such a crucial piece of any asset protection plan.

No matter what kind of real estate LLC you use—Traditional LLC, Series LLC, a combination of both, a special variation like a married couple LLC, or even multiple LLCs with other structures on top—you must ensure your business choices are clearly conveyed in your paperwork. This includes your Operating Agreement, which can be amended, but functions as your LLC’s Bible. So, it’s actually best to get your agreements with any partners, rules, expectations, and plans for dividing profits and losses in lockstep and recorded in ink accurately from the moment you form the company.

It’s equally critical that you know who is going to manage the LLC and how. After all, you do get to make this decision. All too often, members of multi-member LLCs don’t understand the depth of their options, but you’re not going to be one of them.

Here’s the straight dope on using a corporation to manage an LLC, what alternatives you have, and how to decide if corporate LLC management is right for you.

Can a Corporation Manage an LLC?

Usually people ask if a corporation can own an LLC, but this is an example of someone asking the wrong question for the information they seek. Of course a company can buy an LLC, but we’re referring to using a corporation in lieu of a single human manager.

So yes, a corporation can manage an LLC. But it’s far from the most common type of LLC management.

Ways You Can Manage Your Real Estate LLC

To know if going the corporation management route is right for your LLC, you’re going to have to consider the other ways investors manage their companies. Most people go with one of two options:

Member-managed LLCs. These are by far the majority. Power tends to be divided equitably among the members. A single-member LLC is essentially managed this way by default.
Manager-managed LLCs. We’ve talked about manager-management concerns and tools here on the RLS blog before and encourage you to learn more. But essentially, an LLC that appoints a manager will legally give that manager certain powers. Doing so is essential so the manager can do their job of running the LLC’s daily operations. Managers may buy or sell assets, hire and fire employees, and take other actions that directly impact members. Members must have confidence in their manager and protect themselves with a well-crafted Operating Agreement.

Investors usually choose their management style. If you have a great person in mind and nobody on your team will rise to the occasion, a manager’s a great way to go. If each member has confidence the manager is trustworthy, and all ensure that the Operating Agreement of the LLC accurately reflects their desires, then a manager can be a great thing for a real estate LLC.

When a corporation manages your LLC, you can think of the corporation as standing in for a human manager. There’s actually a long history in American law of treating corporations as people, a concept known as corporate personhood in legalese. Depending on the type of corporation you form, you may have several individuals collectively making decisions about your daily operations. Note that your corporation can actually have an unlimited number of managers internally.

Check out our article, Manager-Managed LLCs vs. Member-Managed LLCs: What’s Best for Real Estate Investors?

How Do You Form a Corporation to Manage Real Estate Investments?

Forming a corporation is easy. All you really need to form one is the help of a business or real estate attorney.

But first, are you sure you need a corporation? For many investors, using a corporation is overkill. Most are just fine with cheaper entities.

You need to have an idea of what you want to do. You also need to be clear on what a corporation actually is. First of all, we’ve got two options: the C-Corporation and S-Corporation. Of the two, the S-Corporation is far more popular.

Corporations require many more legal steps than LLCs, including:

Naming a board of directors.
Mandatory meetings (complete with required minutes).
Maintaining corporate compliance (which is far more challenging than with alternative entities, almost always requiring some form of professional legal or financial help).
Tax, legal, and regulatory compliance concerns.

Some businesses need the benefits of corporations, so the regulations are simply the price of admission.

A corporation only helps protect your assets if it’s in lock-step with your business plans. For this reason, many investors choose to form their own. That way they can be sure the corporation is friendly to the LLC.

As I said, using a corporation is overkill for many real estate investors. Most are just fine with cheaper entities.

A Happy Medium: The LLC Taxed as an S-Corporation

The most obvious alternative to a corporation is using a more traditional management style for your LLC: member-managed or manager-managed. But you’ve got creative entity options, too. We’ve talked about some LLC and Series LLC perks already, but did you know that your LLC can be taxed as an S-Corp?

Real estate investors opt for this choice because:

LLCs taxed as S-corps receive pass-through benefits and can possibly save some investors thousands in taxes, just as an S-Corp can
LLCs are easier to set up.
It’s cheaper. One filing fee, one Operating Agreement, no meetings or minutes or boards to handle or worry about paying.
Asset protection for active businesses is ideal for this structure. House flippers or vacation renters are examples of “active” real estate businesses. S-Corp structures are ideal for these, but the LLC taxed as an S-Corp is a cheaper alternative if an S-Corporation isn’t practical.
It’s easier. Most of the time, LLCs are hands-down quicker and simpler to form than a permanent corporation. Try using a Joint Venture agreement alongside this entity to test out a new potential S-Corporation set-up.
Corporations are best suited to larger businesses. By “large,” we mean the kind where a C-level executive team, board of directors, and stock options aren’t just givens but important details.

Now that you’ve gotten the basics down, consider the details of your jurisdiction. In many states, including Texas where Royal Legal Solutions is based, you can convert an LLC into a Corporation. This detail may be helpful to ask your attorney about if you’d like to use an existing corporation. In states that permit such conversions, an investor with an unused LLC may be able to save some major cash by converting into rather than forming a corporation. That said, always check with your personal counsel to be sure this is true for you.

Making the Choice: Is A Corporation-Managed LLC Right for Me?

Determining whether corporate management is the best move for you will depend on several personal factors. You may first consider whether such management is necessary. Small businesses may find that a corporation is more trouble than it’s worth, and that an LLC or two-company Series LLC and shell corporation structure is more effective. Professional help from a qualified real estate lawyer will be a necessity regardless of your entity choices.

While the vast majority of investors decide against managing their real estate LLCs with corporations, your situation may call for such a structure. Learn what you can about your alternatives such as taxing an LLC as an S-Corporation, as well as using other structures or management styles.

We believe it’s best to assess your members’ basic needs and study corporation management before making this judgment call. So keep reading. Finishing this article’s a great start. But we hope you’ll continue learning the best strategies for managing your business.

How the SECURE Act Weakens 401(k) Protections (& What You Can Do)

It’s hard to deny that one in five Americans not having put a single cent towards retirement is a social problem. But the policy solution Congress is enacting to address this issue may affect your 401(k).

As investors, we love the 401(k), the 1978 amendment in the Tax Code that quickly became one of America’s favorite retirement savings vehicles. But Congress is actively changing your 401(k)s legal protections. We’re not letting any of our readers get blindsided by changes in law. Unfortunately, the well-intended GOP bill with the stated goal of encouraging more Americans to save has real consequences that threaten all account holders.

Here’s what the folks in Washington are up to, and why some policy experts and scholars fear the 401(k) will be ultimately weakened and undermined by the SECURE Act.

Summer of Savings or Losses 2019? Congress’s SECURE Act Threatens 401(k) Protections

As of August 1, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House of Representatives. “Passed” is actually an understatement, given the bill flew through the House with a landslide 417-3 vote in favor of passage. We feel current projections anticipating a similar cruise through the Senate are likely accurate, and time will tell.

That said, keep in mind a bill can change substantially in the days, even hours, before its passage. Whether it’s amended in committee, filibustered, or provisions shuffle in and out at the last minute, there are many ways a bill can change in the moments before it becomes law. There is a distinct possibility that the bill at the time of this writing won’t be the exact version that passes, so confirm any effects you expect to personally impact your retirement plans.

Now’s a great time to remember that not every legislator reads or fully endorses every item in every bill they pass. Doing so takes hours of specialized time. So often, tucked within popular provisions are smaller edits and amendments that can actually make a massive impact if they become law. The changes to 401(k) protections are simply an example of this phenomenon.

For more information, see our article, How The SECURE Act Impacts Inherited IRAs.

Your IRA’s Not Safe Either: Certain Beneficiaries Can Kiss Stretch IRA Strategies Goodbye

The long-beloved stretch IRA is no longer a viable strategy for children of IRA beneficiaries. The conventional estate planning and asset protection wisdom that has historically worked in these cases must change with the law. Even our attorneys used to recommend stretch IRAs for child beneficiaries, who are now excluded from stretching IRAs along with other non-spouse beneficiaries.

Fortunately, there are reasonable accommodations for certain situations, such as beneficiaries with chronic illnesses or disabilities or beneficiaries within 10 years of the decedent’s age, but otherwise, if you are the beneficiary of an IRA, you have to take your distributions within 10 years now. You no longer can rely on the stretch method to spread a large IRA over a lifetime, a tactic long used to preserve wealth within families.

Now, you have to use it within a decade or lose it.

Update Your Estate Plan and Asset Protection Strategies to Account for New Changes

The best way to prevent any of SECURE’s possible negative effects in your own life is to plan around them. Keep eyes on the law, especially in its final form, and don’t be afraid to ask your own trusted professionals about possible impacts on either your asset protection strategy or estate plan. After all, the two are linked.

Given we can no longer fully endorse the same-old 401(k) asset protection advice, we encourage investors seeking alternative asset protection vehicles to consider forming a living trust to address estate planning needs. This flexible vehicle remains unaffected by these legislative changes.

Most Americans who participate in 401(k) plans will likely need to make some adjustments to their estate planning, and some may opt to change course in their retirement savings altogether. Whether changes will drive Americans away from the enduring 401(k) or legitimately promote access to retirement accounts is a policy question that only time will answer.

Selecting the Appropriate Entity for Flipping Real Estate

Flipping is just different than other investing strategies. In terms of both the financial aspects and legalities of running this type of business, there are a few things flippers should know about organizing and defending their real estate portfolios. Chief among the things every flipper should understand is how to construct an asset protection strategy that adequately defends against lawsuits and forms a sound structure for active real estate businesses. Here’s how.

Do Your Homework Before Forming Your Entity: Special Concerns for House Flippers

House flippers’ asset protection strategies should reflect their actual needs. Here’s a short checklist for you to consider before you start with entity formation.

When you form your real estate entity, consider how it will fit both within your asset protection and broader investment strategy. Here are some critical issues to consider:

Tax issues. Do you want the flexibility of the LLC, which may be taxed as an S-Corp or more similarly to a partnership?
The best kind of entity for an active business. The active nature of flipping is clear when we compare this REI tactic to say, buy-and-hold investing where investors hold properties for years--such investors are relying on passive income and assuming a more passive role generally.
How frequently you plan to make transactions. Many flippers will have a property bought and sold inside of a year, and certain entities are superior for frequent transactions vs. rarer ones.
Licensing and other operations issues. There may be reasons for a savvy house flipper to also acquire a real estate license (or work with a team member who has one), even if doing so isn’t legally necessary. What’s best for you in terms of daily operations will come down to many factors, including personal preference.
What percentage of business is your flipping activity? If you are exclusively a flipper, you will almost certainly require a different approach than an investor with only minor flipping activity or who doesn’t rely on flipping transactions for profit.

If you have specific questions about these concerns in your life, speak with a qualified real estate attorney as well as an advisor you trust familiar with your investment market(s). Let’s shift gears and dive into the decision-making process you’ll use to select the entity for your flipping business.

REI Entities for House Flippers: What’s the Best Choice?

We’ll talk about a couple of popular choices for house flippers. Ultimately, the only way to know for sure what will be best for your business, portfolio, and plans will be the product of conversations with personal advisors. But feel free to use these rules of thumb as a starting point for your research and discussions about forming an entity for flipping real estate.

We’re going to talk about key strategies for house flippers with the understanding that flipping is a form of active trade. LLCs and S-Corporations are popular options. Learn more about the entities you can use and the key questions you’ll need to answer below.

The Limited Liability Company: How to Flip Houses With an LLC, Series LLC, or Both

It’s vital that those engaged in active real estate flipping businesses find a way to limit the many liabilities that can accompany this investing method. For many flippers, the Limited Liability Company helps square both the issue of liability and how to formalize the flipping business.

Now, the Limited Liability Company comes in a few variants. You’ve got your Traditional LLC, an affordable classic; the Series LLC, which allows you to quickly create an infinitely scalable network of mini-LLCs, as well as ways to use both types of LLC together for a formidable asset protection structure.

We hope to help you make the best decision for you by explaining how these companies protect your assets, how you can use them, and ways to approach some of the choices you’ll have to make whether you establish one Traditional LLC or a two-company structure. One of your unavoidable decisions is how your LLC will pay taxes, and yes, you get to choose.

The Tax Choice: Should You Consider Taxing Your Real Estate LLC as an S-Corp?

One reason flippers like LLCs is because you have options for taxation. LLCs may be taxed like partnerships or as S-Corporations. Making the S-Corporation judgment can be difficult for any investor, and we strongly recommend involving an REI-savvy CPA. But here are some things you can discuss with that professional, or anyone else assisting you with forming your real estate LLC.

S-Corporation makes sense as a tax savings strategy for some investors, but of course we all know there are no legal silver bullets for tax minimization. One huge benefit of using the LLC in general is pass-through tax treatment, which is still available if you’re taxed as an S-Corp. LLCs are beloved pass-through entities for investors, meaning profits and losses are simply recorded on the company members’ respective personal income returns.

There are certain advantages of S-Corp taxation for house flippers:

S-Corporations are legally separate from the members of LLCs for liability purposes.
S-Corporations and LLCs offer easy ways to add and account for new members.

Be aware you may hear discussions of the S-Corp vs. the LLC as if this is an either-or proposition. Resist the temptation to listen to such reductive views, because you truly can have it both ways. One could in theory form a separate S-corporation entirely, but for most investors, opting to use an LLC taxed as an S-Corporation is a simple choice that preserves the beneficial features of both entities. Even better, the LLC taxed as an S-Corp is easier to run than a fully separate S-Corporation (complete with its many legal requirements). Not every flipper will even benefit from S-Corp taxation, but enough do that you should consider all options.

Combining Entities for Greater Protection: How to Use a Traditional and Series LLC Together

Some investors may be happy with a single entity, but many of our flippers and other investors love the tried-and-true method of pairing the Traditional LLC with the Series LLC. Under this model, the Traditional LLC serves as your operating or shell company. It manages day-to-day activities like collecting rent, paying employees, etc.

Meanwhile, your Series LLC functions as an asset-holding company. This company must never interact with the world, because that’s what the Operating Company does. To maximize the Series LLC’s effectiveness, all you do is create as many Series as you have assets, direct your attorney to help you make the appropriate transfers so each asset is in its own Series, and ta-da. You’ve got yourself a basic two-company structure. Use it correctly, and it can protect your real estate assets for life.

Using your entity correctly means ensuring liabilities go where we want them. In the case of the two-company structure, that Traditional LLC is the company we actually want a would-be litigant to come for. It doesn’t own anything. The company that does own all your assets, the Series LLC? It hasn’t ever been exposed to those liability-magnet business operations. By separating these functions structurally, you prevent many lawsuits before they even begin simply because it’s harder to sue this structure than a person. The system works, and your assets stay under your control.

No matter what you decide, trust your experts, be transparent, and fearlessly gather information. We’re here to help you while you learn the best way to establish your flipping entity and protect your new business.

Selecting the Best Entity for Real Estate Flipping

Do Your Homework Before Forming Your Entity: Special Concerns for House Flippers

House flippers’ asset protection strategies should reflect their actual needs. Here’s a short checklist for you to consider before you start with entity formation.

When you form your real estate entity, consider how it will fit both within your asset protection and broader investment strategy. Here are some critical issues to consider:

Tax issues. Do you want the flexibility of the LLC, which may be taxed as an S-Corp or more similarly to a partnership?
The best kind of entity for an active business. The active nature of flipping is clear when we compare this REI tactic to say, buy-and-hold investing where investors hold properties for years--such investors are relying on passive income and assuming a more passive role generally.
How frequently you plan to make transactions. Many flippers will have a property bought and sold inside of a year, and certain entities are superior for frequent transactions vs. rarer ones.
Licensing and other operations issues. There may be reasons for a savvy house flipper to also acquire a real estate license (or work with a team member who has one), even if doing so isn’t legally necessary. What’s best for you in terms of daily operations will come down to many factors, including personal preference.
What percentage of business is your flipping activity? If you are exclusively a flipper, you will almost certainly require a different approach than an investor with only minor flipping activity or who doesn’t rely on flipping transactions for profit.

REI Entities for House Flippers: What’s the Best Choice?

The Limited Liability Company: How to Flip Houses With an LLC, Series LLC, or Both

The Tax Choice: Should You Consider Taxing Your Real Estate LLC as an S-Corp?

S-Corporations are legally separate from the members of LLCs for liability purposes.
S-Corporations and LLCs offer easy ways to add and account for new members.

Combining Entities for Greater Protection: How to Use a Traditional and Series LLC Together

Interested in learning more? Check out our article Real Estate Flipping: LLC Taxation Issues To Know About. You can also see our article over at BiggerPockets called What’s the Most Powerful Business Entity for House Flippers?

Manager-Managed LLCs vs. Member-Managed LLCs: What's Best for Real Estate Investors?

When you establish an LLC, you must plan for its management. LLCs may divide decision-making powers among members or select a manager. If your LLC is single-member, you assume managerial powers, but multi-member LLCs must decide. To make the best choice, check out our breakdown of member-managed LLCs, manager-managed LLCs, their differences, and how to address concerns around manager-managed LLCs.

Member-Managed LLCs vs. Manager-Managed LLCs: The Key Differences

Every LLC must decide between a member-managed or manager-managed structure. A member-managed LLC is the norm. These function like democracies, as power is equitably divided among the members. A manager-managed LLC, however, designates one person for managerial powers. Manager-management can help particularly large companies make decisions.

Whether the manager’s a “professional” or picked from the LLC’s members, the critical thing to know is that they have power over the entire LLC. Consider these company-wide powers delegated to managers:

Ability to enter the LLC into contracts
Hiring and firing powers over LLC employees
Authority to conduct daily business, including handling debts, writing checks for employees, and more
Borrowing or investing company funds
Buying and selling company assets

If you’re appointing a manager, read your LLC’s paperwork carefully before signing to ensure power is limited and manager responsibilities are clear. Even LLCs using managers don’t surrender these member powers:

Replacing the manager
Amending the operating agreement
Selling or dissolving the business
Other “major business decisions” defined by state law

Managers of LLCs must meet more compliance criteria than members. Managers have to play by both the rules of the company and the law.

Making the Choice: Does Your LLC Need a Manager?

The manager holds a specific legal role. You may select a “professional” manager, as some multi-member LLCs do, or select a manager from among your members. But here are the key issues to be aware of should you choose this route:

Authority issues. Managers in these types of LLC hold a great deal of authority, often disproportionate to members.
Daily Operations. A perk of using a manager is having a designated person to handle day-to-day operations: collecting payments, hiring contractors/employees, paying debts and taxes, etc. If you can perform these duties, you may consider volunteering to manage if your LLC collectively prefers a manager structure.
Asset concerns. The ability of managers to buy and sell major assets may prove problematic for real estate investing.

The good news is this: for every concern you have, there are ways to address it.

Using a Manager-Managed LLC: Tips for Mitigating Risks

A beautiful thing about the LLC is you have choices. Once you’ve made decisions, they’ll be in plain black-and-white ink for anyone to read in the form of your Operating Agreement. This is your LLC’s Bible.

For instance, some of the concerns about abuse of power are easily prevented by addressing these possibilities and creating checks (like requiring a member vote) in your Operating Agreement. You may choose to make amending the Operating Agreement more difficult or bar managers from making certain calls without member consent. In fact, any matter you’d like member consent on can be accounted for before LLC formation.

The best way to control for problems is in your Operating Agreement prior to forming your LLC. Of course, LLC members truly worried about hierarchy can side-step the entire issue easily by simply forming a member-managed LLC.

An Investor Profile: An Inside Look At Real Estate Investor Dmitriy Fomichenko

Dmitriy Fomichenko’s area of expertise is a little different than the more traditional real estate investors we’ve covered before. He’s a man of many talents, but his truly remarkable expertise is in using self-directed accounts, such as self-directed IRAs (SDIRAs) and Solo 401(k)s, specifically as a real estate investment vehicles. Dmitriy’s unique knowledge and methods are worth noting for any real estate investor wanting to expand their possibilities and portfolios.

Dmitriy Fomichenko: Self-Directed Real Estate Investor, Expert, Broker, and Advisor to REIs

Dmitriy started his career as a financial planner, diving into REI himself in 2000. He’s a licensed Real Estate Broker in California, though he owns property in multiple states.

By day, Dmitriy runs his financial advising firm, Sense Financial. He advises REIs about their options, particularly with the under-appreciated Solo-K and other self-directed accounts, including their Roth variants. He’s helped hundreds of investors during his career.

Since making decisions about which account is best for an individual investor is personal, advisors like Dmitriy can help explain options. Unlike traditional retirement accounts, Dmitriy specializes in those with checkbook control, a feature that allows you to make nontraditional investments. When self-directing, you’re no longer confined to the products offered by your financial institution/custodian. As long as you avoid prohibited transactions, these accounts help protect real estate assets and diversify your retirement funds into nearly anything: cryptocurrency, commodities, you name it.

How the Solo 401(k) Helped Dmitriy Fomichenko Win Big (And How to Avoid Losing Big)

Dmitriy stopped by the Royal Legal Solutions soundstage to chat with our founder and lead attorney Scott Royal Smith about two deals: one great, one poor, but each involving a note and a self-directed 401(k). It’s a rare Best Deals-Worst Deals mashup. We loved hearing Dmitriy share why he loves the Solo 401(k), how he made these investments work for him, and how others can use this vehicle for real estate investing too.

Dmitriy was also humble enough to tell us exactly how he wiped out: “I failed to do my due diligence.” Fortunately, this setback was a springboard into better investing because he chose to learn from his mistake. Check out Episode 8 of The Real Estate Nerds Podcast to hear Dmitriy’s story and some of his sought-after expertise for free. It’s one of our favorites, and highly informative.

Bottom Line: Keep Your Head on Straight and Know Your Real Estate Investing Options

Dmitriy’s advice to investors is to learn what you can about all of your options, including his specialty, self-directed retirement accounts. Even non-investors can benefit from self-directed accounts for a better retirement savings vehicle with tax advantages. You can also learn from his own investing story. “While I ended up winning,” Dmitriy explains about his two notes, “What I want investors to take away from this story is that you’ve got to do your due diligence.” Perhaps it’s this cautious approach and humility that keeps Dmitriy a success. Thanks for joining us, and please feel free to reach out if you’d like to learn more about a particular investor in future versions of this column.

Finders' Fee Arrangements for Real Estate Investors: What You Need to Know

Finders’ fees can have a few meanings in real estate, but generally the term refers to the chunk of change a “middleman” in your deal can take. Sometimes they’re gifts, other times it’s a commission or percentage. Usually, real estate agents pay finders’ fees, not investors directly. But it’s also true that commercial REI transactions will almost always involve paying at least one finders’ fee. So what’s an investor mixed up about this concept to do?

Read on, that’s what. Today we’re breaking down everything you need to know about real estate finders fees, what’s normal, what’s not, and even what’s illegal. By the time you’re done, you’ll understand how finders’ fees work and protect yourself from unethical people in the real estate game.

What is a Real Estate Finders’ Fee?

A finders’ fee may is also often called a referral fee (or even “referral income”). It’s a type of commission paid to a middleman of some kind for brokering your real estate transaction. Such fees are indeed commonplace, but they’re also regulated by law. For instance, some states have laws prohibiting paying finders’ fees to “unlicensed persons.” Usually, these types of laws are designed to prevent real estate agents from paying such individuals--not the original customer.

That said, most states have laws that allow intermediaries to request anywhere from 3-35% of the deal’s value. Does that mean you have to pay it? Of course not, but some folks will pay on the high end to get the pad of their dreams, so you can’t really blame these middlemen and women for trying. Hustlers have to hustle, after all.

Real estate agents are the big gatekeepers to the world of finders’ fees. Realtors and agents across the country use finders’ fees to encourage business contacts to remember them if they hear of someone property-hunting.

There are, of course, licensed brokers whom it is absolutely ethical to pay for tips on clients, property types or asset classes, neighborhoods or names of individuals preparing to sell, and of course, individual deals. While the type of conduct one may engage in to secure a lead may vary by state, because again, that’s the level at which this concept is most regulated, finders’ fees are indeed fairly universal to real estate investing. Federal and state law generally permits licensed individuals to collect fees within reason. They may be the reward a licensed broker gets for:

Locating a property with certain specifications for a client.
Finding a client/buyer interested in a property.
Closing a real estate deal.
Otherwise facilitating a person’s real estate acquisition or sale.

What’s the Point of a Finders’ Fee?

Now that we’re clear about what finders’ fees are, let’s talk about why they still exist in real estate. First and foremost, it’s important to recognize that finders fees are a form of incentive that keeps the entire buying-and-selling economy of real estate humming along for us investors to come in and capitalize on. The finders’ fee is the incentive, essentially, for making a deal happen: after all, that’s what this REI game’s all about--making the best deals possible.

The whole idea is that but for the intervention of your intermediary, the deal wouldn’t have happened. Or at least, this assumption has fueled the continued existence of finders’ fees. Whether this underlying assumption is true in your case is a completely different discussion, but it’s accepted enough in the REI world that the practice continues.

What Should Real Estate Investors Know About Finders’ Fees?

We’re all likely to encounter the finder’s fee, so the best thing to do is be prepared. At the very least, we can come armed with the knowledge of what’s normal and what’s not, even if this is our first ever real estate transaction.

Remember that even if you are new to the game, you can act as if you’re not. Act with the confidence of the knowledge you gain here and anywhere else you study investing strategy. If you don’t yet believe in yourself, it’s a good investing psychology practice to learn to believe in your abilities and brain first. Let’s talk about some of those sticky situations where you’re going to be hit up for money. It’s best to at least not look surprised (unless you’re handed an absurd number), so these tips should help.

What’s Normal With Finders’ Fees

Since finders’ fees help make the real estate world go ‘round, you can absolutely expect to encounter them during the deal-hunting or deal-making process. It’s just part of the game.

Your real estate broker informing you they plan to pay a finders’ fee isn’t unusual. It’s even better if they ask and get your opinion or thoughts.

Ordinarily, these fees are paid between brokers, and real estate agents draw up “Cooperating Agreements” to streamline the referral and payment process. Basically, the agent can pay a broker out according to a pre-existing contract.

Keep in mind there’s more than one “normal” way to pay finders fees. Agents usually make payments, but sometimes if there is no contract, they will simply write a check as a “gift” to your friendly intermediary. This is a perfectly ordinary practice and shouldn’t alarm you. As you can see, most of the time you as the investor don’t make a payment at all.

What’s Not Normal With Finders’ Fees

First of all, you’re never legally required to pay a finders’ fee. It’s a practice in the industry, and nobody is legally entitled to such payments. Not agents, brokers, or anyone else. They can ask, but under no circumstances do you have to pay.

Anyone who says otherwise is generally just trying to hustle you in some form or fashion. So move on and feel free to place such people on your personal blacklist.

Unlicensed middlemen also fall in the “not normal” category. If a person can’t explain their job, how they became involved in the transaction, or who they specifically know involved with your deal, this is a major red flag. Fees paid between brokers and licensed agents are common--after all, it’s good for everyone to pair up customers and properties, and frankly, some people will always have more of one than the other. But you don’t want to pay just anyone: make sure they’re really facilitating your deal in a meaningful way.

What’s Straight-up Illegal

An investor directly paying finders’ fees is bizarre. Sometimes it’s illegal.

You never have to personally pay a fee just because a person says they helped your deal happen. A friend’s referral can actually become illegal if say, you’ve paid that friend for other business referrals and they claim to have facilitated your real estate transaction.

When someone requests a finders’ fee you think is off, don’t pay it. Odds are good it would be illegal in the “friend” situation (unless you’re certain your soon-to-be-ex-friend is an appropriately licensed facilitator under state and federal law). Never pay anything if you’re not sure it’s legal, or if your gut’s just screaming not to.

Finders’ Fees: The Informed Investor’s Way

Understanding both the law around finders’ fees and what you’re personally willing to pay is important if you’d like to define personal boundaries around this matter. You can always choose other real estate agents if your agent’s policies are wrong, unlawful, or just not your style. Knowing when to pay and when to walk away can make you the smartest investor in the room.

How to Control Property Without Owning It: 3 Simple Methods

We often emphasize that fabulously wealthy folks don’t own assets, they control them. It’s something we point out often at Royal Legal Solutions, because you don’t have to be rich (yet) to borrow a few things out of the Fabulously Wealthy Playbook.

Let’s do a quick crash course in the top legal ways to control property without owning it for asset protection purposes.

Method #1: Use Land Trusts

The handy anonymous land trust is one of the easiest methods of controlling property without owning. The trust simply holds title to the property for you, removing your name from any public record. You get anonymity, become tougher to attack legally, and are legally separate from the asset but reap its rewards as the beneficiary of your land trust.

Method #2: Use Liability-Limiting Entities Like LLCs and Series LLCs

Another great way to control an asset is with an entity. We like those that limit liability, because they help protect your assets in the event of a lawsuit or threat.

Examples of the kinds of companies we’re talking about include:

The Traditional LLC (short for Limited Liability Company)
The Series LLC
The Delaware Statutory Trust for California investors

Each of these entities offers liability limitations inherently. You’re separated from your assets and any claims around your real estate can’t affect your personally. So say a tenant goes careening through your deck and hurts himself. He may try to sue for your property.

Depending how you set up these entities, you can either stop the suit before it starts or make it a complete waste of the tenant’s (and more importantly, his attorney’s) time. Entities can be structured to separate assets from each other, limiting how much anyone can receive by court judgment. If you set up your companies with an attorney’s help, you can own them completely anonymously, making a lawsuit nearly impossible to file. Either way, companies are much tougher to sue than people and one of the smartest ways to control property.

Method #3: Use a Shell Corporation for Property Ownership

Why should you risk exposing your personal self or assets to the world? A shell corporation can do this for you and streamline your real estate investments, too. Most investors will find the Traditional LLC works just fine for a shell corp. If you already have one and it has never held your assets, you may consider using it.

Otherwise, you can easily form your LLC; property ownership and ALL of your other real estate investing operations can be performed from there: collecting rent, paying property management, etc.

Next, you’ll need an asset-holding company for your properties. We recommend the Series LLC if you’ve got more than one property or ever plan to, because the Series LLC is a cost-effective, scalable entity option.

All this company ever does is hang onto your assets for you. NEVER do business from your asset-holding company: that’s your shell company’s job. With this kind of structure, your two companies exist to handle assets and operations 100% separately and independently of one another.

For a deeper look at all this stuff, check out our article, Control Without Ownership: The Smart Way Real Estate Investors Own Property.

Equity Sharing for Real Estate Investors: Methods for Acquiring & Protecting Your Shared Asset

Equity sharing is an increasingly popular way for investors to reap the rewards of investing even if they’re strapped for time or cash. Such arrangements can allow cash-poor or newer investors with time for pavement-pounding/vetting/reading to team up with time-strapped investors who like funding smart deals.

Equity sharing may benefit any investor. Those trying to break into REI, take heart that finding excellent deals is an incredibly valuable skill. A deal-finder will always find deal-funders.

To learn more about equity sharing arrangements, reasons real estate investors consider them, how common arrangements work, and protecting your assets when sharing equity, read on. If you want to learn a lot about equity sharing very quickly, you’re in exactly the right spot.

What is Equity Sharing for Real Estate Investors?

Equity sharing may refer to any situation where one investor pairs with others to afford, finance, and purchase an asset. The investors split all profits or losses at the ratio the agree to (which need not be “fair” or even provided all agree).

Everyone involved in sharing equity has interest in the property. Family members sometimes use equity sharing to help transition mortgaged homes to the next generation, but our discussion is confined to REI today. In these cases, the interest is a business one. Equity sharing may be used to:

Divide costs of property and improvements
Divide all profits/losses
Get people in on the same deal with minimal hassle
Allow one investor to live in the home (with a goal of paying off the mortgage)
Develop short or long-term plans for the asset

Equity sharing looks as different as the investors involved, but we’ll show you examples of your best options for asset protection of equity-shared properties. First, let’s look closely at why REIs get into equity sharing

Reasons Real Estate Investors Consider Equity Sharing Arrangements

We alluded above to one huge reason these arrangements work between investors: different investors bring different skills/abilities, pool them, then agree to share any profits or losses from the asset they have in common. While an investing newbie and more experienced partner are a common combo, the powers of any investors can be “pooled” in a complementary way. Some people mistakenly believe this is the job of a legal partnership, but with equity sharing, you don’t have to just have one “partner.”

You’re also not confined to a single method. There are many ways to legally protect yourself while sharing the equity of a property with one or more people. We’ll get into some specifics, but for now, just understand that equity sharing does not preclude you from using land trusts, LLCs, or any other asset protection tools. While your arrangement may impact how to most effectively use asset protection or legal tools to protect the equity-shared asset, it doesn’t affect the options in your legal toolbox.

What Options Exist for REIs Interested in Sharing Equity?

We promised there’s more than one way to share equity, and here’s where we deliver. These are our top three choices for protecting assets in equity-sharing arrangements.

Option 1: Go the Joint Venture Route

Using a Joint Venture for a new partnership isn’t just a smart move. JVs are also a great way to test-drive your new business relationship. See how you and your partner(s) handle challenges of the first asset in your equity-sharing arrangement while protecting yourself with a Joint Venture Agreement.

You can choose to form a venture-specific LLC to further protect yourself, your asset, and your partners. Joint Venture-Specific LLCs can last for as long as you like, or for only the period the asset is under your control. You decide terms in the beginning, when you form the LLC’s Operating Agreement.

Option 2: Use Limited Liability Companies

Owning a company with someone low-commitment. It’s not marriage: you get directions, a simple way to undo the arrangement, what’s allowed, what’s not, and literal rulebooks in the form of your Articles of Incorporation and Operating Agreement. You and your partner(s) may benefit tremendously from using an LLC to protect your equity-shared asset.

A properly established LLC prevents either you or any individual from being directly associated with the asset. You may choose to use other tools to preserve anonymity on top of your LLC. If you already own an LLC that has never done business (AKA a “shelf” corporation) you might use that.

Note From Royal Legal Solutions’ Staff Legalese Translator:

Shelf companies are not the same thing as shell companies. That little “f” makes a huge difference. Shell companies control the operations side of businesses, normally preserving your anonymity. They’re never supposed to hold assets.

Shelf companies also don’t own or do much initially. Most REIs creating a shelf company form an LLC well in advance of needing it and don’t use it much or at all. After formation, the company stays “on the shelf” until a later date. Reasons investors form shelf companies include for their own eventual needs or to sell. Banks, lenders, and even partners are skeptical of “new” LLCs. But an LLC that has been “shelved” for years can be activated by simply performing a transaction.

You can see why investors mix up these concepts. That Traditional LLCs are great entities for both shell and shelf companies doesn’t clear up any confusion.

Keep definitions straight by remembering what these entities do: a shell company hides your operations and identity from the world, just like a turtle’s shell. A shelf company, however, is one you make and stick “on the shelf” until someone needs it. Congratulations! You never have to get these ideas confused again. Back to your regularly scheduled investing content...

Option 3: Create a Private Arrangement Your Attorneys Can Agree On

Let’s say hate Options 1 and 2. That leaves literally every other legal structure and agreement, which trust us, includes many permutations of options. The quickest way for most investors to figure out their real preference is to get a trusted attorney’s opinion. If you and any partners do so, your interests may align. Your attorneys might independently give you the same thoughts, or some options and their benefits for your situation.

If you and your partners don’t wish to throw money at multiple separate lawyers (because honestly, who does?), you can always approach an impartial real estate lawyer together, tell them what you’d like to do, and ask their thoughts on the situation. Take notes! This doesn’t have to be the same lawyer who helps craft your solution. They’re just a qualified attorney you and your partners agree to trust to develop possibilities for your equity-shared asset protection strategy.

After all, none of you want your property to get taken away by a lawsuit. Proactively defending your equity-shared asset can eliminate this terrifying, but all-too-common, possibility.

How Do Deeds and Titles Work For Equity-Shared Property?

A common question is who holds title to equity-shared properties. In the case of REIs conscious of asset protection, the question is what holds title (hint: sometimes it’s an anonymity-preserving entity/trust). Protected investors don’t like leaving their names on anything, especially titles and deeds. Deeds cause equal confusion, as the deed of an equity-shared property requires each owner to clarify their relationship to every other owner

But let’s suppose, just for example, that 14 investors enter into an equity sharing agreement. Which name would the title be under?

The real answer: it depends. On a few factors.

We’ve seen some beyond-sticky real deeds where, say, 12+ people want to share equity on a property and some are married couples. If each individual records their name, remember they will need to identify their spouse and also explain all other relationships to the remaining partners (however many there are). If you’re one of our 14 investors, you’ll ID your spouse if they’re involved, then explain the relationship you have to all other dozen investors.

Or, avoid this dilemma by controlling the entity without any partner directly owning it. All options above allow for this. LLCs, land trusts, and other legal options exist protecting equity shared properties. Number of partners won’t impact your level of asset protection, but can influence which option you want to use.

An Investor Profile: An Inside Look At Real Estate Investor Rod Khleif

Rod Khlief was floating in one of his indoor pools in one of many elegant properties in his multimillion dollar pool when a crushing, sinking, realization set in: “I’m miserable.”

How could this be? Who is this man? And would you believe that investors worldwide seek him out for advice?

Rod Khlief: Success is Not Fulfillment

What Rod was experiencing that evening in the pool was a type of emptiness that many don’t realize exists. So many of us pursue money with such vigor that it simply never occurs to us that the exquisitely wealthy can be, well, exquisitely miserable. Rod’s agony had nothing to do with a bad deal or money, but the fact that he wasn’t doing enough personally meaningful things with his good fortune.

He realized his bank account would never fill his soul, and that paradoxically, the best thing he could do was begin to use his abundance to help others. By giving away time and money towards meaningful causes, performing deep self-examination and spiritual work, investing heavily in non-tangible things like values and relationships, and giving up the many little ways in which he was attempting to control life, Rod finally got some freedom from this feeling. He had to break free of his own mind frame through direct action.

We hear so many times that money can’t buy happiness to the point that it’s a tired, worn cliche--and quite bluntly, one that only resonates on the most basic intellectual level if you’re not wealthy, but would like to be. Rod wasn’t any different, and it took being so miserable despite such dramatic success for him to make the real turning point in his life. He’s richer (and happier) than ever. But times haven’t always been great for him.

Bad Deals Are Lessons. Rod Khlief’s Cost $50 Million

At least Rod thinks so. He now refers to the bad deal that left him 50 million in the red as a “big flaming seminar.” We actually agree with him so much that we have made the true value of bad deals a major theme in our podcast, The Real Estate Nerds. Rod joined our host and asset protection attorney Scott Smith to share his story and some pro-tips.

During Rod’s full interview on Real Estate Nerds Episode #22, he shared the full story on what went so wrong, and much more impressively, how he recovered from such an amazing loss and went on to achieve both successes and fulfillment he had previously not dreamed possible. He passes on these lessons in resilience as a Certified Life Coach, just like his own world-famous coach, Tony Robbins.

Winning in Real Estate and Life: Your Attitude Outweighs Financial Aptitude

If you follow Rod’s advice, the first thing you need to invest in is yourself. Without the personal work Rod recommends in his many free resources, you-won’t truly grow. Investors who understand the importance of mindset and a bit of investing psychology really are ahead of the rest of the class.

And why? Because here’s the truth. Anyone can learn the numbers to play the real estate game. Anyone can assemble the right professionals and pay them for good advice. Anyone can take out a loan, hire help, or even manage property. But those who can endure the ups and downs of the real estate game without losing their center or humanity? Those are the real winners.

You won’t always win, and neither has Rod. But if you listen to him, he’ll tell you that if your drive to succeed outweighs your fear of failure, you too can have it all.

How Creating Your Own Mortgage Company Can Help Your Investment Portfolio

It may seem too good to be true, but did you know you can create your own mortgage company? It’s a great tactic for real estate investors who want unlimited equity stripping powers, as well as a solid asset protection boost. Or maybe you’re just TIRED of the convos with crappy banks. You can break free from financial institutions with gatekeepers and defend your assets with this simple method. We’re going to give you four steps to creating your own mortgage company, and some brief tips on how to use it for your benefit.

How to Create Your Own Mortgage Company for Real Estate Investing: Four Simple Steps to Freedom

Actually creating the company is simpler than you think. Let’s break down the most essential steps.You need not have anything much more sophisticated than you’d need for any other company set-up. And you can simply read for now, of course.

Here’s our most basic recipe for creating your own mortgage company in as few steps as possible. It’s helpful to think of this like a recipe card, in the old fashioned sense, but for an equity stripping mortgage company you get to control. For best results, you’ll need:

ONE Operating Company. It can be a brand new Traditional LLC. Or it could be the operating company you already use for asset protection. But you can’t use a company that has ANY assets of its own. It must be a company that strictly handles operations, often in the form of a shell company. Shell companies, if you’re not yet hip, are your face to the world for performing business while keeping real estate investment assets well-protected.
ONE Asset-Holding Company.
ONE or more helping professional (attorney, CPA, mortgage expert, etc.) or team of pros to provide support as needed.
TIME AND A BIT OF PATIENCE. You can form each of these companies within a couple months, or even within weeks. But getting your mortgage company right is worth the wait.

Step One: Use or Create a Traditional LLC

This will be your actual mortgage company, the one issuing the loans. You’ll just be able to control it with some help from a J.D. friend. If you already have a Traditional LLC you’ve used as a shelf company for a while, or one that had ONLY ever performed operations, you may be able to avoid even filing new fees in cheap state like Texas and Wyoming.

Step Two: Use or Create an Asset-Holding Structure (or Update Yours)

Series LLCs make awesome holding companies. These powerhouse entities allow you to create as many Series/mini-LLCs as you have assets. Each has liability protection, performing the same function as infinite LLCs. This structure’s infinite scaling works well for REIS with growing portfolios, streamlines business, and works well with your other structure.

In your new set-up, this the company does NOTHING except hold assets. It won’t spend one cent (or take one). Assets stay in the structure, appreciating. You want things this way to keep the actions and assets divided.

So this will be the company that holds all of your assets, including real estate investments. Your new LLC will be able to issue notes directly to the asset-holding company. Ideally, you’ll use a Series LLC so that upkeep is easy and you can scale up at any time, and make sure your asset protection strategy grows alongside your business and evolves to meet any new needs.

Step 3: Know the Game Plan for Equity Stripping

So much of asset protection is just keeping your pants up and approaching each move with absolute confidence. Do the math ahead of time, for crying out loud. Know exactly what kind of loan you can get away with issuing yourself. Do some brief research to see how much you can encumber property. Better yet, bounce your plan off of those friendly pros we keep mentioning: tax men, law men, music men, investors, stylists, or anyone with a business mind adds value to due diligence, provided you let them.

If you get lost creating your plan, dial up a free helper. The Office of the Taxpayer Advocate can actually give you tons of great, free advice on the tax consequences of your structure. Many professionals can be easily bought for under $100. That’s for just long enough to answer your burning desire questions once you've done thorough research. We can share some examples at a later date, but don’t want anyone attempting an example verbatim from this or any educational piece.

Step 4: Start Issuing Mortgages - The Right Way, Of Course!

So for our purposes, “the right way” has a nice easy definition. Mortgages must be issued by the traditional company TO the asset holding company. Money must flow in this exact direction, or the company set-up won’t be effective.

The bottom line about preserving this structure is to isolate assets and operations properly. Keep everything nice and separate, ensure money flows the right way, rinse, repeat, and enjoy your friendly mortgaged investment and easier life. That’s it. Seriously. You’re done.

What Happens if I’m Sued?

Well first of all, it’s super unlikely. With your own mortgage company encumbering a property, attorneys quickly realize it’s worthless--or at least, appears to be. Thats’ actually exactly what we want: you know the value of your property. The purpose is just to deceive others from knowing this true value. And what better way to convince someone not to sue you by making it clear from the outset you have nothing they would possibly want?

Usually the plaintiff (AKA, Jerk Who’s Suing You) will hire a lawyer, often with lots of theatrics in the office. We’re not a defense firm, but trust us when we say pissed off real estate clients are highly entertaining. This isn’t a legal opinion at all, but a personal taste--there’s nothing funnier to us than imagining that Jerk Who’s Suing You getting angrier and angrier in front of an annoyed attorney. Now, the annoyed attorney will run a quick check on you and the property. This quick little bit of research is STEP ONE for even thinking about filing a lawsuit.

You have to know who you’re suing, after all. It helps to know why. But really, what the lawyer cares about is this:

What they stand to win. Is it a juicy asset? Cash-money’s better, but an asset to seize and sell will pay the bill for a lawsuit, easily.
Whether they can win. In the case of an incredibly self-encumbered asset, even if the asset rivals the Taj Mahal, a friendly enough mortgage could render it worthless.
How soon they get paid. Even if the attorney thinks the first two items, against all odds, are slam-dunk things to defeat in court, that same attorney will balk the moment they learn the mortgage must be paid off before they can even COLLECT on the asset. If you issue yourself a 50-year-mortgage and pay it in tiny increments, they’d know not to endure the torture of trying to get their client ot pay out of pocket. Landlord-tenant clients rarely do, preferring instead to rely on rage and self-righteousness to persuade their attorneys.

Fortunately for you, fellow real estate investor, lawyers are weak creatures with known vulnerabilities. Your asset protection plan protects you strongly by protecting you against not the Jackass Suing You, but their attorney. The moment the two don’t have the same interests any more? That’s the moment the lawsuit ends--well before anyone can even draft anything to file!

It’s liberating, right?

Do I Need Any Other Special Mortgage Licensing?

No, not if you are executing the mortgages correctly in the state of Texas. But that’s just my state--your state may have stronger or weaker regulations.

Specialized advice on this from an attorney with experience in this specific type of move in this jurisdiction may help, or you may simply hire a mortgage broker. Use these conversations to gather some intel about mortgage options on your investments. If you collect enough data, it will become clear that issuing your own mortgages is a legal golden ticket. It’s how you break free of banking as usual and afford to develop a portfolio that can build wealth quickly.

Use some of that investor creativity if you’re extremely concerned about legal compliance, pick up the phone, and ask at least another investor (if not some kind of pro) for help.

Wait, You’re SURE This Whole “Making Your Own Mortgage Company” Deal is Legal? Why Spill the Secret?

Yes. It’s really that simple. All you’re doing is using the structures and strategies that have long been available only to the wealthiest of wealthy investors.

Do you know the difference between Beachcraft Rich and Learjet Rich? We can actually use it to make a broad marker of kinds of investors.

Consider this. Each investor has a number for this thought experiment, and yours may be zero, but think about how you WOULD pay if you were rich. Then consider how rich you’d have to be to play along and feel good about it. Sounds fun, let’s give it a try, shall we? Finding out if you’re Beachcraft rich or Learcraft Rich is easy.

Imagine you need to go somewhere by plane, but have no desire to avoid the airport. Would you spend:

$750,000 on a beachcraft to take you and your friends/family to your destination.
$1.5 M on a Learjet for the same purpose.
Remember: this is JUST TO AVOID THE AIRPORT. Because it’s a pain, you don’t feel like a complimentary patdown. Hell, the pettier the reason, the better.

Keep in mind this is a one-time rental, not a purchase of a craft you get to keep. It’s not EVEN an asset or investment.

If you haven’t picked up on it, people who will say yes to Offer #1 are “Beachcraft Rich.” People who pick #2 can burn $1.5 Million on a last-minute Lear Jet simply because they don’t feel like enduring the horrors of the modern airport are officially Lear Jet Rich. If you're this rich, congrats on even reading this instead of luxuriating in your customized personal massage pool or whatever it is the obscenely wealthy do in their spare time.

Seriously--you had to be at least Beachcraft Rich (if not cruising up on Lear Jet Rich) to get access to asset protection just a few short decades ago. And it’s one reason I enjoy spilling the secrets of the rich: we live in the modern era. We all have an equal right to the information we’re smart enough to find.

The times of rich families winning alone are over. Welcome to the information age. Our era rewards the good research--even for you, fellow investor.. Now, go enjoy the benefits of your own mortgage company: equity stripping, asset protection, and of course, the priceless joy of liberty from banking-as-usual.

Tax Consequences For Section 280A and Airbnb Vacation Rental Assets

Do you have properties you’re using as vacation rentals, short-term, or mid-term rentals? If so, or if you are considering listing part or all of an investment property on Airbnb or any other online platform, this article is for you. Vacation rentals have become an increasingly popular way to maximize profits on investment properties. That said, to run your vacation rental business legitimately, you need to be certain to cross your “t”s and dot your “i”s. Because this type of use is a fairly new byproduct of the gig economy, regulations and laws can change quickly. Even the insurance industry has caught up at this point. So of course the Tax Man has. The smart investor must be mindful of not only their state and local legislation, but also how these types of investment properties are taxed. Here’s our little crash course on the subject to get you started.

What Type of Airbnb Host Are You?

Of all the questions that will help determine your tax responsibilities vis a vis Airbnb profits, this is both the most qualitative yet critical. Your answer is the difference between “not a penny owed” and “Get out your checkbook.”

Depending on which of these two criteria you fall into, you may not have to report at all:

Your home is only on the Airbnb platform for 14 days or fewer of the calendar year. Pocket your funds and enjoy the thrill of beating the system. No reporting necessary.
Those who rent their home over 15 days out of the year--including spare rooms, part of the home, etc.--will have to report any income derived from such rental on Schedule E of their tax return.

Section 280A is the part of the Tax Code that makes these definitions for personal and rental use and otherwise lays out the rules investors must play by. Fortunately, it isn’t all bad news though. Here’s a quick breakdown.

What is Section 280A? Does it Matter to Me?

Section 280A of the Internal Revenue Code isn’t just a novel way to kill conversation during date night--it’s the Taxman’s guidebook for how you get to use your home in the course of business. In fact, Section 280A has made a cameo right here on the RLS blog before in our breakdown of the Home Office Exemption (a worthy read if we may say so ourselves).

If you’re renting your home or any piece of it for profit for fifteen or more days annually, then Section 280A matters to you. This is the portion of the Tax Code that will dictate what must be reported, which records matter, and perhaps most importantly for lots of you, which deductions you can take on your short term rental real estate business. If you’re considering entering this market, it’s wise to become hip in the ways of managing your records and taxes. You’ll find yourself coming back to 280A in some form or fashion a few times before Tax Season is over.

Get in the Habit: Accurately Report AirBnb Income and Expenses

Regardless of how long you plan to be in the vacation rental game, one area you cannot get sloppy on is bookkeeping. Now don’t worry, there are no new fancy systems to learn here. You’re free to self-organize to your heart’s content. Here’s what the Tax Man cares about if you’re hosting over fourteen days out of the year:

Income records--either supplied by or matching those belonging to your platform.
Major expenditures and platform fees.
Any record of an expense you may later take as a tax deduction

Now, Airbnb might report your earnings. They have to, beyond a certain point. Airbnb users with over 200 individual transactions or earning in excess of $20,000 within a year can expect Airbnb to report these figures. This is yet another good reason to always start with the records you have on the platform itself, but keep your own for accuracy reasons. You may be one of the many users that falls somewhere in between “occasional” and “frequent.” Whatever your situation, keeping your own records guarantees you’ll have at least one full set of documentation.

What Deductions Can I Take as an Airbnb Host?

Fortunately, there are tax benefits as well as obligations that you may enjoy related to your vacation rental business. This is why documenting expenses can be so critical to maximizing your tax savings on these properties.

You probably already know there’s a bit of overhead to hosting, and in some areas, quite a lot. That’s why these types of expenses are generally deductible on your taxes:

Rental expenses
Cleaning and maintenance costs
Depreciation
Advertising and marketing expenses
Background and credit checks
Damages, if applicable
Rental upkeep
And more.

Basically, if it’s a real and justifiable business expense, you can likely use it as a deduction too. If there’s some unique cost related to your property, make a note of that. It never hurts to ask your CPA about costs like specialty insurance or anything you explore explicitly for your short term or vacation rental business. These are all possible--not certain--deductions you can exploit. Your asset protection entity may also be of assistance in managing taxes, so be sure to let your relevant professionals know how you control the rental asset. If you live in the home, this may not apply directly, but it’s still good to know where the divisions between your personal and business-owned assets are.

How Can I Bolster My Vacation Rental Business’s Chances of Success?

Following the above advice to the letter is a great start. But on top of excellent record-keeping, there are some other pro-tips to keep in mind when you establish your Airbnb or short-term rental business. Here are a few to get you started.

Offer Excellent Service

This may seem obvious bordering on cliche, but it also happens to be the truth. If two businesses offer the same product or service for the same price, how do you decide who to go with?

Really?

Think about it for a moment.

Now think about what would make an outstanding vacation rental. Really practice empathy and put yourself in the position of your likely traveler demographic. Write down everything that comes to mind, and aspire to offer the level of customer service you’d expect in a place twice as nice as what you’re offering. Hosts who go the extra mile tend to be rewarded on the Airbnb platform with designated statuses, high booking rates, and even featured listings. Truly offering the best experience of the space you have available, whether it’s a humble lodging for a solo traveler far from home or a beach condo for a family getting away from it all, will make you stand out on the platform and with your clientele. So go the extra mile.

Expect the Unexpected & Offer Simple, Thoughtful Solutions

Airbnb has lots of great advice for hosts. You can expect to go through more things than an average household: linens, cleaning supplies, trash bags, even certain food and beverage if you offer it. Get all the free information you can, but also plan for emergencies.

Here’s a common one few will warn you about: the need for an extra mattress. A $40 Walmart mattress not only could bail a guest out of a bad situation or furniture malfunction: it also counts as an extra bed to offer future guests. Think ahead about common mishaps, and if you can’t anticipate them, at least try to be available to respond. Consider also the types of items people forget when traveling. How many times have you found yourself without a hair dryer (an actual amenity you can list on Airbnb, for the record), deoderant, feminine products, contact fluid, Advil, or some other cheap but oh-so-essential item? After all, those are things you tend to need quickly when you need them. Keeping guest bathroom drawers stocked with such basics will put anxious guests (or those who meet a traveling misfortune) at ease.

Bonus: Those loving gift baskets? You can write all their contents off later.

Have a Plan for Responsiveness

We all know nonsense just happens when you travel. Planes are late. Layovers extend. Baggage gets lost. These types of situations can leave new Airbnb travelers feeling especially nervous. But the beauty of the platform is that you become that person’s touchstone to the city. If you cannot personally manage your Airbnb offering, it really is a good idea to get some full-time assistance.

Responsiveness is actually measured by the Airbnb app. Hosts with high levels tend to perform better. If you aren’t able to manage your property alone, recruit a friend, family member, or even friendly graduate student to help. Offer them a fair price to help you out wherever you need. Maybe that’s just a modified maid service, maybe it’s help maintaining your account, or even a hybrid of the two with your own needs mixed in. Just be sure that if you do hire an individual, you are clear on their role as a contractor. It never hurts to solidify even the most informal relationships with a solid contract.

Choose the Right Professionals for Help

Knowing when you need a lawyer or CPA can be critical. The smartest investors generally have a real estate attorney involved when it comes time to buy, sell, or transfer property. Many will set up asset protection systems in advance but also use their attorney for advice on growing their business. CPAs are more essential for tax-specific questions, though you will generally find real estate attorneys are at least aware of the issues likely to affect clients.

Nonprofessionals can also be helpful to you. Form your own personal-professional network of fellow Airbnb hosts, and don’t be afraid to make a few “aspirational friends” along the way. You know, the kind you want to be like. Following in the footsteps of someone who has had success is a good way to learn the industry quicker--and see your profits faster.

Lower Your Capital Gains Taxes

Capital gains taxes are the bane of investors everywhere.

There's no wonder they stoke a little resentment among real estate investors: Uncle Sam likely had little to do with the profitability of your property. But you’ve still got to pay up.

And of course you should, but not without knowing a few of the ways you can lower your capital gains taxes or make their payments more manageable. Here are some of our top practical tips you can really use to handle cap gains taxes.

Can You Get Rid of Capital Gains Taxes?

Not entirely, at least not usually. But that doesn’t mean that they cannot be managed. What we can absolutely do is look at creative ways to lower our tax rates, ways to pay our taxes that will work out to our advantage, and any circumstance that could cut us a break. So that’s exactly what we intend to do.

The following are a selection of the tactics investors like you can use to make capital gains taxes more manageable. You may find one, several, or even a completely alternative method works best for you. Think of these techniques like tools in an arsenal that you can get out at will. In some cases you may find you’re able to get your costs so low as to be almost negligible. At the very least, you should be able to cushion the blow. Let’s talk about deferment first, then move on to some methods for reducing your overall costs.

Deferring Your Capital Gains Taxes - How To

Since we can’t simply abandon our capital gains tax obligations, we have to approach the problem with a bit more nuance and creativity. While we can’t make the taxes disappear, we can absolutely put off paying them by employing various tactics. Let’s talk about some fan favorite techniques for deferring these payments.

The Clever 1031 Tax Maneuver: Drop and Swap

You can also use a 1031 Exchange to delay the problem of capital gains taxes. Now, if you go about using this method, you’ll want to bone up on the requirements for 1031 exchanges. Essentially, the idea is that as long as you’re willing to sell your property and use the proceeds to purchase a similar one, you can defer paying the taxes for as long as you have the second property. Where you go from there is totally up to you. In theory, you can drop, swap, and swap again until the end of time if you can meet the basic 1031 rules. You usually have 180 days from closing to reinvest, for instance. Properties must also meet certain legal requirements. Learn more about using the 1031 exchange for real estate success now.

Pour Your Capital Gains into Opportunity Zone Investments

The U.S. designated certain economically depressed areas ‘Opportunity Zones’ in 2017. To attract investors like us, capital gains reinvested into opportunity zones get a few preferential perks:

Provided profits are reinvested and held in an Opportunity Zone, deferment of capital gains taxes for up to eight years.
Overall decreases in tax amounts. After five years, you get a 10% reduction and a 15% reduction after holding the property for seven years.
You can also get a full exemption from taxes on all future capital gains on the investment itself once you’ve held it for at least 10 years. So on top of reducing your original capital gains payment, you’re preventing a future one from developing and accruing.

Some creative and hands-off investors take advantage of funds known as Opportunity Zone Funds, which are usually collections of properties pre-selected by a firm, fund, or financial institution. This method may appeal to someone wishing to take advantage of these tax opportunities but lacking the time or ability to do thorough due diligence alone. It’s also a way to test the waters on this strategy if you’re considering incorporating it into your long term plan.

Methods for Reducing Capital Gains Taxes Entirely

While we can defer capital gains with many tools, there are ways to also simply lower the number. But you’re definitely not going to like all of them. Yet you may find lower capital gains taxes as a silver lining in a less-than-desireable financial situation or as an unexpected result of your circumstances. Here are some ways to reduce the overall tax burden easily.

Sell When Your Income is Relatively Low

If you’ve had a “low income year,” that’s actually a good thing for your capital gains tax rate. After all, it’s directly linked to your tax bracket and therefore your income. If you’ve had a year where you’ve only earned passively or simply not earned for any reason, this can be an ideal time to sell your property. You’ll pay less in taxes than if you sell when you’re in a better position overall.

Know What Expenses to Track For Primary Residences

If you’re in the position of selling your primary home, you may be able to deduct certain expenses from your cap gains taxable income. Chief among these are any costs you pay to improve or renovate the property and any expenses associated with the sale of the property. Such expenses might include fees paid for professionals, appraisals, inspections, and of course, any upgrade--no matter how small--is worth documenting. As long as you document the expense, you can later use it to your advantage.

Let Your Asset Protection Entity Ride to the Rescue

We’ve talked before about the critical role your entity plays in your asset protection plan And while asset protection is a completely valid reason to set up these types of business structures, you can also enjoy tax benefits on top of your peace of mind.

Which tax benefits, of course, will depend on the type of entity, whether you’ve made certain choices regarding how the entity is taxed during formation, and of course, the rules we all have to play by to keep our friends at the IRS nice and happy. But let’s take a look at an example, shall we?

Edmund Green is a Texas-based investor who uses a Traditional LLC shell company and asset holding company to defend his real estate assets and other valuables. He’d heard through the grapevine that asset protection entities could be used for equity stripping. Never one to just take anyone’s word for matters affecting his finances, Edmund decided to bounce the idea off of his CPA and was able to save himself far more than if he’d continued operating as a sole proprietor. With the help of his attorney, he has established his asset protection plan and it essentially hums along in the background while he lives his life and runs his business. The last time we talked to Edmund, he didn’t have any complaints. And his strategies can work for others, too. That said, it’s crucial that you ensure your asset protection plan is tailored to your personal needs and goals.

If you’d like to follow Edmund’s example, you easily can. Take a look at the structures you’re considering using for asset protection and do a bit of very basic research. More importantly, make notes of any questions you come up with as you read and learn for your own experts.

Bottom Line: Capital Gains Can Be Managed, and Often With the Same Tools Protecting Your Assets

When you establish entities, trusts, and other asset protection structures, you almost always have a tax opportunity. Do all investors take advantage of all of their opportunities? Certainly not. But some will go further for you than others. However you choose to handle your capital gains taxes, simply being aware of the opportunities at your disposal puts you a cut ahead of the clueless investor waiting to be blindsided by the problem. As usual, proactivity will place you in a better position than procrastination.

Crowdfunding Real Estate: Is it A Safe Investment Strategy?

As with anything new that breaks from tradition, crowdfunding real estate investments stokes fear in some. We find many of the more irrational fears to be iterations of Internet-phobia backed by little evidence. Some people simply hear words like “Internet-based” and assume risk without actually getting the facts about crowdfunding for investors. The truth is, as usual, more complex. Like anything in the world of real estate or investing, crowdfunding is not without risks. But those risks can be mitigated, and there are also benefits to using crowdfunding platforms.

What is Crowdfunding? How Does Crowdfunded Real Estate Investing Work?

Crowdfunding is a concept you may already be familiar with through sites such as GoFundMe, Kickstarter, and certain charity platforms. If not, these are sites that allow a person’s social network to contribute toward a pre-selected cause, whether that’s helping a friend repair a car or kicking in on another’s healthcare costs. The same principle can be applied in real estate since 2012 legislation made some critical changes in law that permit crowdfunded real estate investing.

Prior to that point, investors were usually career pros who had plenty of capital that many Americans simply don’t have access to. Crowdfunding has helped change this trend by opening up real estate.

As you many have gathered, this more open market makes it possible for more people to invest. With crowdfunding, you don’t need a lot of money to invest in a portion of a property. Other benefits include the fact that more established crowdfunding platforms are highly transparent, allowing you to do your own due diligence more easily, though many services give you a boost by also thoroughly vetting the investments listed. Crowdfunding allows for easy and flexible diversification. You can easily get in on a broad variety of types of assets, strategically spreading out your wealth and creating a safety net.

Risks of Crowdfunded Real Estate Investment Plans

Regular readers may recall that the only two ways to lose money in real estate are bad deals and lawsuits. Essentially, most of the risk of crowdfunding is that investors could make bad deals. The reason why actually has nothing to do with crowdfunding specifically. Any investor can make a bad deal for any number of reasons, regardless of how it’s funded.

Another frequently expressed risk is that the investors who are getting into the market via crowdfunding platforms won’t be as knowledgeable, and therefore, more likely to make bad deals. Neither problem is insurmountable.

How to Address the Major Risks of REI Crowdfunding

Let’s take a closer look at the knowledge concern. Fortunately, you can always do things to increase your level of knowledge about this or any subject, and you’re actually already doing it right now for free. Keep reading. Perform your own research, talk to investors who have used the tactics and tools you’re thinking about using yourself, and vet potential platforms carefully. Due diligence is ultimately your responsibility. If still in doubt, contact an expert for help. Taking all these steps thoroughly and in earnest will close knowledge gaps.

As for making good deals, experience is a fine teacher, but mentors help too. Having a qualified team of experts on hand to look at your deals, assist with business structures, and develop tax strategies can also be incredibly valuable. Our skilled real estate attorneys can assist you with all of this and the legal structures that will best protect your new assets.

An Investor Profile: An Inside Look At Real Estate Investor Kathy Fettke

There’s no question that California investor Kathy Fettke is a woman of many talents. You may have already heard of this active investor, author, mentor, and coach through her business and educational efforts. Kathy is the CEO of the Real Wealth Network and the host of the Real Wealth Show. Her work throughout different areas of the real estate industry offers her multiple angles of insight into single-family investing and other approaches, which fortunately, she’s all too happy to share with the rest of us.

Kathy Fettke’s Real Estate Investing Philosophy and Expertise

Kathy is the ultimate example of the student becoming the teacher. When her family experienced a personal tragedy involving her husband’s health, she began researching building wealth as a stay-at-home-parent. Soon enough, she was sharing her findings on her newly-formed Real Wealth Network with others in her position throughout the country. Out of her own studies into the world of real estate investing, she has led others around the world along the path to investing success.

Learn More About Kathy’s Investment Network (And How to Build Your Own, Too)

Kathy was kind enough to drop in and chat with our CEO and lead asset protection attorney, Scott Smith for our Real Estate Nerds Podcast. We learned about her real estate debut, gained some insight into a poor deal, and took down plenty of tips on getting through the inevitable market emergencies that will affect anyone who is in the real estate game for the long run. Tune in to learn from some of Kathy’s most powerful first-hand experience.

On The Danger of Not Listening to Your Own Advice

It’s funny how even experts can ignore their own advice. In Kathy’s case, doing exactly this led to one of her worst deals of all time. Historically, when she has needed to evaluate a market, she’s always looked at two metrics: job growth and population growth. Following jobs served Kathy well in her early career, though when she was excited about a potential investment in Boise, she deviated from her usual pattern, ignoring the job projections.

Bottom Line: Assemble an Investment Team to Weather Any Storm

If Kathy could give one key piece of advice to real estate investors, whether new or more established, it would be this simple truth that has played out in her own life. Get the best people you can as mentors, partners, and professionals. She believes her own mentor’s experience weathering a market downturn has taught her to do the same. Since most investors will eventually encounter a downturn, she recommends building your own REI dream team with the expertise to endure. For Kathy, picking her team wisely is critical: “Would you get into an airplane with a pilot who had only flown blue skies? No. You want to know that they can survive the storm.”

If you’re still working on your own real estate dream team, don’t forget that Royal Legal Solutions can always assist you with crafting the real estate business you dream of. We also would love to hear from you about whether there are any specific investors or subjects you’d like to read more about in these profile pieces. Consult our team of asset protection experts or contact us directly with your thoughts..

Tax Responsibilities for Airbnb Hosts & Vacation Real Estate Investors

The vacation rental industry has been booming for some time now, with no signs of slowing down. In fact, it’s how some people get into real estate: by realizing the income from renting a room in one’s home is pretty nice. More investors and ordinary folks are taking advantage of platforms such as Airbnb to maximize their real estate income. If you’re one of them (or thinking about becoming a host), you should be aware of your tax obligations. Here’s the quick and dirty guide for the vacation rental investor.

14 Days: The Magic Number

One simple way to avoid extra tax expenses is to limit vacation renters to a two week stay annually. The Tax Code only kicks in the costs discussed below for visits over this time period. So if you, say, are an occasional user of Airbnb or tend to only have very rare short guests, you won’t need to report the income. But here’s the catch: you can’t deduct your business expenses on unreported income.

When Do You Have to Report Income From Airbnb?

If you meet the following conditions, you must report and pay taxes for your vacation rental business:

You have guests on your property for over 14 days.
You occupy the home for over 14 days of the year or 10% or more of the days you’re renting.

If you live in the home you’re renting, that means you will have to distinguish which portion of the mortgage is related to personal vs. business use. Property taxes and interest will also be recorded on Schedule E of your tax return.

You May Get a 1099 From Airbnb

Airbnb might send you a 1099-K, the type of 1099 for third party transactions. If Airbnb withholds funds for any reason, you’ll also receive notifications of withholdings at your mailing address.

Not everyone gets a 1099-K from AIrbnb. However, if you earn over $20,000 or make over 200 reservations in a single tax year, you will receive one. Airbnb will also report your earnings.

Other Tax Issues for Vacation Rental Investors to Note

Everything discussed above pertains to federal law. But Airbnb investors must also conform to state and local regulations. Airbnb and vacation rental regulations change fairly rapidly and vary dramatically from jurisdiction to jurisdiction.

Occupancy taxes. This matter is extremely location specific. Check your local laws or talk to an attorney to cover your bases.
Sales taxes. Generally you will be expected to collect sales taxes.
Here are some examples of taxes your city or state may apply:
Any business taxes if you are using an entity for asset protection. Some states will require income tax in this case. But it’s worth it to defend your assets.

The best thing an investor can do to ensure they are complying with all state and local laws is to acontact a qualified real estate attorney. A small fee for a bit of legal advice that could keep you away from a tax dispute is totally worth it.

Intelligent Ways to Work With A Real Estate Investment Sponsor

In the world of crowdfunded real estate, many investors feel lucky to get an offer for sponsorship at all. Some get so excited that they overlook details that may later come back to eat into their profits. The reality is that you do you have the luxury of being picky about your sponsors. In fact, you have to be. Not everyone is an angel investor out to selflessly help you get a leg up in the world.

Real estate sponsors, of course, must have something to gain from the transaction. This is only natural and fair, but some purporting to help you may be using dirty tricks for their own selfish ends without your knowledge. This article is here to let you know about some of the most common traps investors fall into so that you can avoid becoming the next sucker.

Today, we are going to talk about three major dealbreakers that you should watch out for when seeking sponsors for your next real estate deal. We will also give you some tips to avoid dishonest deals, and more information on how to protect yourself as a crowdfunded real estate investor.

Let's dive right in.

Dealbreaker #1: Capital Calls After The Initial Investment

A capital call is basically the right to demand money from you. While these are a normal part of crowdfunded investing, legitimate deals will not come with repeated capital calls. This principle applies whether you're dealing with a peer sponsor or a crowdfunding platform.

Demands for money that just don't seem right are a sign that the sponsor intends to make money off of you as well (or instead) of the investment. Just say no.

None of this information should scare you off of crowdfunding online. Check out Adam's article on the best ways to raise capital online for more information on safer, smarter ways to get the funds you need.

Dealbreaker #2: Lack of Transparency

You don't want to deal with anyone who has something to hide. There are two issues you must be crystal clear on with any deal:

Right to Inspect Books. As a business partner, you have the right to review the records of your business. Most states have enshrined this into law. However, some shady "sponsors" may attempt to have you sign a waiver of these rights. Don't do it. If you're even presented with such a waiver, the potential sponsor deserves a hard pass. Think about it: what possible motivation could a sponsor have for not wanting you to be able to see the books on your own investment? I can think of many, but none of them are good.
Membership Rights. You need to clearly understand the rights you have on your investment. A sponsor who is cagey on this matter is likely angling for an unfair split. This problem can be easily resolved with an ironclad Partnership or Operating Agreement. I tell my clients to form an LLC, then help them craft the perfect Operating Agreement for their needs.A sponsor who is willing to sit down with you and an attorney to create an Operating Agreement is a good sign. They are showing you a willingness to collaborate--an important quality in a business partner. The opposite is also true. Anyone resisting a transparent agreement spelling out membership rights should be regarded with suspicion.

Dealbreaker #3: Unclear or Excessively Wordy Contracts and Offers

If your potential sponsor gives you an offer that is indecipherable, this can be a red flag. Whether it's an offer filled with legalese a Supreme Court Justice would need a dictionary for, or simply worded in a way you can't understand, this can turn into a big problem.

How You Can Protect Yourself

A bad contract doesn't necessarily mean the sponsor is duplicitous. There are a broad range of reasons why an offer may be unclear (we're looking at you, free Google contracts). So before you bail, try the following strategies.

Ask for clarification. You will want to pay special attention to membership rights. If you can't make heads or tails of your rights regarding your crowdfunded property, you could end up on the losing end of profit division.
Never sign anything you don't understand. Once you sign any legally-binding document, you're locked in.
Have an attorney review your document. It's always a good idea to have a qualified attorney on your real estate dream team. Ideally, you want someone who has extensive experience in real estate law. If the attorney is an investor themselves, that's even better. Your attorney will be able to quickly decipher the legalese and let you know if the offer really benefits you.
Suggest using a single-purpose LLC instead. A single-purpose LLC is an LLC that you form with your investor and any partners for a one-time deal. Smart investors have been using them for joint ventures for decades. This strategy will protect you because you will create an Operating Agreement for your LLC. The Operating Agreement will clearly spell out essential things like which membership rights each party has, how profits and losses will be divided, and what happens when the deal is over.

Do Your Homework on Potential Real Estate Sponsors

If you've ever wanted to play detective, now is the time. Here are some tips for researching your potential sponsor.

Look at Their Record

Never take someone's word that their ventures are always successful. Research the person offering to sponsor your investment thoroughly. You can get started yourself by reviewing their online presence. Social media, reviews of companies the sponsor owns, and a quick public records search of their name and companies they claim to own. At a minimum, you are checking to see that they are who they claim to be.

Connecting with your local investment community can also give you more insight into your potential sponsor. Ask around among other investors to get an idea of the person's reputation. You may hear some gossip, so take that with a grain of salt. But if you can find someone who has actually dealt with your potential sponsor before, that individual could give you a very clear idea of what it's like to do business with the sponsor.

Finally, you can directly ask your sponsor about previous deals, then fact check their claims. An attorney can be a huge help here. For instance, if your sponsor claims to own something, your attorney can investigate these more thoroughly than you can. A good attorney can do things like check tax returns to verify whether the sponsor's previous investments were as profitable as claimed.

Don't rely on a single piece of information. Take everything you learn as a whole to get a good idea of whether your potential sponsor is the kind of person you want to deal with.

Ask Questions

Successful real estate investors ask questions. Lots of questions. If this feels rude to you, allow me to be blunt: get over it.

Actively investigating potential investments and those offering to sponsor them is vital to ensuring your deal goes through the way you want it to. In addition to knowing what you should ask about potential investments, it's also critical to know how to handle potential sponsors.

It's best to be direct with your questions. Dancing around the subject in an effort to be polite is a waste of everyone's (possibly very expensive) time.

It's important to note that how a sponsor reacts to questions can tell you a lot about their motivations and character. If a sponsor is evasive or vague when you ask questions, then it may be time to move on. If a sponsor gets aggressive or defensive when questioned tactfully, get out. Even if they aren't trying to hide anything, you don't want to be stuck in a business relationship with someone who flies off the handle in a normal conversation.
If a person can't handle the pressure of an ordinary business conversation, odds are good they will react even worse to the inevitable stresses of managing real estate investments. Move on to someone with a cooler head, if only to guarantee smoother, more pleasant interactions.

Bottom Line: Be Willing to Walk Away From a Bad Sponsor

When you're looking for someone to sponsor your investment, the search can feel desperate. This is particularly true if you are new to crowd funded real estate, or even real estate in general. You may even perceive that you're in a position of no power. But this simply isn't true. You always have the power to walk away. And if you detect any of the red flags mentioned above, you likely should.

Unscrupulous people can smell desperation like sharks can smell blood in water. Even if you have yet to make your first investment, patience and thorough investigation of potential sponsors will pay off in the long run. No sponsor at all is better than a dishonest or questionable sponsor.

If you still have questions, or want to learn more about protecting your assets as a crowdfunded real estate investor, schedule your consultation with Scott Smith, Esq. here.

Understanding 1031 Exchanges and Asset Protection Entities

Anyone keeping up with real estate market trends or news will inevitably encounter mention of the 1031 exchange. The 1031 has even made its way into investment jargon, as if we need more confusion in that area.

Some people insist on using “1031” as a verb, as in when you overhear that investor at your MeetUp group asking his buddy: "Should I 1031 that property for the condo down the block?"

While we can’t condone the use of this verbiage, we can say the 1031 is useful. But it’s no wonder folks have questions. Today, we’re here to demystify the 1031, its uses, and how it works in the context of your asset protection plan.

What is a 1031 Exchange?

1031 Exchanges, so named for the IRS code portion that permits them, are a type of real estate “swap.” In a 1031 exchange, an investor can sell one investment property and use the proceeds to buy a similar property that is worth as much or more than the one being sold. By doing so, that investor gets temporary relief from capital gains taxes.

Ordinarily, capital gains taxes would be owed upon the sale of one property. But this cost can be a major expense, one that traditionally would come out of your budget for any potential “replacement” property. For this reason, investors opt to take advantage of the 1031 exchange when possible. Without capital gains taxes in the mix, the real estate investor can easily reinvest the full pre-tax value of the first property towards a second.

But of course, it is crucial that investors considering this move are clear about what they want out of it, and whether the terms of their deal meet the IRS’s criteria. Let’s take a closer look at what is required if you want to perform a 1031 exchange transaction.

1031 Exchange Rules

For a proper 1031 exchange to take place, the following three circumstances must be present:

Properties must be similar enough to meet the legal definition of “like-kind.” Determination of this will depend on your intended use of the property, which should fit the next criteria as well. Like kind properties will have the same listed owner. Major asset class changes on their own, like switching out an office space for an apartment complex, aren’t violations of this rule. You can even swap one property for two, provided the next criteria are also met.
Properties must be investments or otherwise business-owned. Your personal home cannot enter the equation at all.
Property purchased must be greater than or equal to the value of the property being exchanged. Value for these purposes means both equity and net market value.

If the deal does not meet these terms, it won’t be possible to reap the full tax benefits of a 1031 deal. There are cases where investors who meet all but the third criterion execute “partial 1031 exchanges” on properties of lesser value, but in doing so, they forfeit the full tax protections of an ordinary 1031 exchange. Finally, keep in mind that these are not all of the requirements but simply the basics. For more information, see our article: Is a 1031 Exchange Investment Strategy Right For Me?

Plan Ahead For Successful 1031 Exchanges With Asset Protection Entities

Using legal tools like the Anonymous Land Trust, LLC, or Series LLC is great for your asset protection plan, but may pose potential issues during a 1031 exchange. We find these situations are best avoided through simple proactivity. The further ahead you can anticipate your desire to do this kind of real estate deal, the better. Let’s take a closer look at some possible problems, and why planning ahead helps.

Entity Issues: LLCs and 1031 Exchanges

The good students of the Royal Legal School of Asset Protection all know what we tell people about keeping property in your own name: just say no. Entities controlled by the investor are far preferable for several reasons. You might need one to begin with for simply conducting business. But they also make suing you personally for any liabilities relating to your investment property a chore for would-be litigants.

The Internal Revenue Code specifies that the property you take in a 1031 exchange must be titled in the same name as the property you give up. For those who purchased property in their own name for financing, then transferred it into an LLC or other structure, the titling requirement can pose issues. But if you, say, sell a property from an LLC but later learn you would need to acquire the second property in your personal name, you would be in violation of this requirement. Your exchange would become void.

Planning ahead is helpful because you can simply transfer the first property into your own name before making the sale. This will be helpful if you need financing again, and most owners of residential real estate will find that there is not an affordable and practical way to make this exchange directly to and from an LLC, even when there isn’t a particularly strong need for financing.

Properties Owned By Multiple People Through Partnerships

Issues with 1031 swaps can also come up when the initial property is owned by multiple people through a Limited Partnership. Again, in this situation, the problem is about titling. However the sold property is titled is also going to need to be the way you buy the next one. Most of the time, the same “cure” can be used as for the first problem: plan in advance regarding titling.

Sometimes, you may want to execute a 1031, but your partner wants to cash out. Investors in this position can execute a move called a “drop and swap.” Essentially, you would be bowing out of the partnership as it is currently structured. With the help of a qualified real estate attorney, you can deed property out of the partnership and into the names of each individual involved. Your legal relationship to your former partners can become one of tenants-in-common, which allows each person to decide whether to reinvest in the exchange or drop out.

Providing Your Apartment Manager “Free Rent” - Here Are The Drawbacks To Consider

Many investors would love to manage their own property, but simply can’t. If the constraints of time, living out of state, or a growing portfolio make direct property management impractical, or you never cared for it much in the first place, the job still needs to be done. So when you can’t manage your rental yourself, your job becomes managing the property management. On-site property management can look a few ways, and providing a manager all or part of their rent as compensation is an age-old practice. But before you make such a deal, learn about the risks and best practices below.

Requirements for Free Rent Arrangements

An inherent risk to these arrangements is finding yourself in an illegal one. For free rent in exchange for property management to be legal, the agreement typically must meet three key requirements:

You have to provide the manager’s housing, and it does have to be on the property you want managed. Captain Obvious makes frequent appearances in the law, largely to keep us enterprising types coloring inside the lines.
You have a legitimate business need for the manager’s presence on-site. This is the easy part. The usual fundamental reason of needing a person on location to respond to tenants’ problems is an example of such a need.
Your manager has to accept your offer as part of the job. This might sound like Captain Obvious circling back, because he also makes legal cameos to prevent people from being jerks. But this is also about clearly defining the roles of tenants versus managers.

Those are your federal legal conditions. Each state will also have different laws on this matter. You also need to ensure you’re not violating labor laws and handling the manager appropriately. Simply consulting with a qualified real estate attorney can get you up to speed on what this means for you.

Mitigating The Risks of Offering Your Manager Free Rent

Fortunately, many of the risks of offering a rent-for-management arrangement to a tenant can be mitigated. You will need at least three things:

A binding contract with your manager.
Clear records.
And a real estate attorney.

The first, and most crucial, step legally is to formalize your relationship with a contract. A contract is your place to clearly outline the conditions of your agreement with the manager: job duties, mutual expectations, etc. If your agreement meets the legal requirements, you typically have the option to hire the manager as an independent contractor. Using independent contractors in lieu of formal employees where possible saves time and money because you will have more responsibilities for employees. Independent contractors pay their own taxes and tend to have more control. But you’ll need the next two tools to ensure your contractors aren’t misclassified as employees--a costly mistake.

Keeping immaculate, adequate records is important on both sides of these relationships. Establish a timing system to track hours worked. There are free apps that allow your manager to track by task. Such tools are useful for managing independent contractors and documenting their status.

But your most important tool by far is your real estate attorney. Your lawyer can ensure you have the correct contracts, structures, and knowledge for a safe, legal agreement.