Did You Know Selling Your Property 'As Is' Can Get You Sued?

You might think selling your property “as is” means you're covered if something goes wrong. The reality is that selling a property "as-is" can get you sued. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

Why the As-Is Clause Alone Doesn't Truly Protect You

It doesn’t matter if you were unaware of the defect(s) that later become issues. The buyer decides whether or not to bring a claim, and if they do, you’ll need to defend yourself in court. The mere allegation of fraud can be enough to warrant a trial by jury.

Don’t assume you can automatically settle out of court. Due to the courts' stance on property fraud, litigators incentivize the plaintiff to drag you through litigation.

The True Cost Of 'As Is Property' Fraud

When it comes to lawsuits, the losers pay for everything. The first expense is your attorney’s fees (~$10,000), followed by the plaintiff’s legal fees (~$10,000). Finally, there are the damages, which tend to range between $5,000 – $15,000 based on average claim costs.

In other words, a run-of-the-mill lawsuit costs up to $35,000. However, a few states allow plaintiffs to take triple damages.

Protect Yourself By Beefing Up Your 'As Is' Contracts

This is why a professional asset protection plan makes economic sense. Attorney’s fees from a single lawsuit can offset the cost of your plan.

If you want to take your chances without a plan, then you need to upgrade your “as is” clause. I add the following text to my contracts. It provides several additional layers of protection against claims of property fraud.

My Bulletproof Protection Clause

THE PROPERTY IS CONVEYED AND ACCEPTED “AS IS,” IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS OF WHATEVER KIND, LATENT OR PATENT, KNOWN OR UNKNOWN, AND WITHOUT REPRESENTATION OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR WARRANTIES OF TITLE AS MAY BE SET FORTH AND LIMITED HEREIN.

GRANTOR MAKES NO REPRESENTATIONS AS TO THE PRESENT OR FUTURE VALUE OF THE PROPERTY OR ITS PRESENT OR FUTURE SUITABILITY FOR ANY PARTICULAR PURPOSE. FURTHER, GRANTOR HAS NOT MADE, DOES NOT MAKE, AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING THE ENVIRONMENTAL CONDITION OF THE PROPERTY OR ITS COMPLIANCE WITH ANY ENVIRONMENTAL, POLLUTION, OR LAND USE LAWS AND REGULATIONS, WHETHER FEDERAL, STATE, OR LOCAL. ANY AND ALL PRIOR ORAL OR WRITTEN STATEMENTS CONCERNING THE CONDITION OF THE PROPERTY, WHETHER MADE BY GRANTOR, GRANTOR’S AGENTS, OR THIRD PARTIES, ARE EXPRESSLY DISCLAIMED.

GRANTEE ACCEPTS THIS CONVEYANCE SOLELY ON THE BASIS OF GRANTEE’S DUE DILIGENCE AND EXAMINATION OF THE PROPERTY. THE CONSIDERATION PAID FOR THE PROPERTY REFLECTS THE “AS IS” NATURE OF THIS CONVEYANCE. THIS “AS IS” PROVISION IS A MATERIAL TERM THAT HAS RESULTED FROM SPECIFIC NEGOTIATIONS BETWEEN THE PARTIES. GRANTOR WOULD NOT HAVE BEEN WILLING TO SELL AND CONVEY THE PROPERTY TO GRANTEE UNLESS THE DEED CONTAINED THIS “AS IS” PROVISION. PROVISIONS OF THIS “AS IS” CLAUSE SHALL INDEFINITELY SURVIVE CLOSING AND SHALL NOT MERGE.

IF GRANTEE IS UNCERTAIN ABOUT THE MEANING AND EFFECT OF THIS “AS IS” CLAUSE, THEN GRANTEE SHOULD CONSULT AN ATTORNEY. BUYER’S INITIALS AS TO THIS “AS IS” PROVISION_______

Using this type of language may destroy good will with your buyer, but the alternative is far worse. You shouldn't leave yourself open to a devastating lawsuit just to close a deal. The risk simply isn't worth it.

One of the reasons you want to have an attorney on your side is because you can send tough contract terms and blame it on a third party, leaving your relationship with the buyer in the clear. Don't put your reputation on the line unnecessarily: take action today. Contact us and set up your consultation before you sell your property as-is.

Interested in learning more? Check out our articles, Selling Property? Protect Yourself With A Robust ‘As-Is’ Clause and Selling Real Estate ‘As Is’: Guide For Investors.

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.

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.

The Real Estate Investor's Guide to Acquiring Foreclosed and REO Investment Properties

Warning: We cannot print today’s pieces without a frank discussion of the “f” word. Yes, the “f” word.

Foreclosure. It’s a fate we all hope to avoid personally. But as real estate investors, we also know that foreclosed homes may offer us tremendous opportunities for profit, incredible deals, and epic upselling after appreciation works its magic.

Acquiring properties that have been foreclosed, are owned by banks, or are otherwise underpriced because of related issues is a smart investing strategy for many REIs. If you’re thinking about going this route, you can’t afford not to know the following information about why and how to buy these discounted properties. Read on to learn more about REO investments, foreclosure, and how to make these assets into your next profitable investment properties.

What is an REO Investment?

An “REO” is a term for a bank-owned property. “REO” just stands for “Real Estate Owned”--meaning someone already owns the property. In the case of REO properties, that someone is always a lender. These lenders are, more often than not, banks. So all “REO investment” really means is just that the property is purchased straight from a lender, not a person.

Another thing to understand is that these aren’t “short sale” homes. “Short sales” are usually where investors can find major steals. In these sales, a homeowner is selling their home for less than they currently owe on the mortgage. Foreclosed homes have essentially been sold in this fashion back to a bank.

At that point, most banks mark the price way up--back to what the asset’s original value was, most of the time. After all, even banks want to make their money back. By the time the foreclosure is complete, the bank becomes the owner and seller. They can make any demand they like. Smaller banks may offer great deals on their homes.

What are Some Benefits of Buying Foreclosed Homes as Real Estate Investments?

The foreclosure auction can be the deal-hunting real estate investor’s best friend in this department. This is just one of your options for shopping around, but first, let’s get into why you might want to:

 

 

This is just the shor tlist of some of our favorite perks of these properties. Of course, you may reap additional benefits we can’t list because they honestly warrant an entire article of their own. But these are some of the very basic reasons why people love hunting for REO or foreclosed homes. They can be a dealmaker’s delight.

The REI’s Guide to Buying Foreclosed Homes

If the auction isn’t your scene, of course you can also buy a foreclosed-upon home directly. You’ll generally follow the same basic steps, but of course, check with your own real estate attorney before you purchase any major assets. That said, this is the basic outline of what you have to do to legally and safely acquire one of these properties:

  1. Assemble your team of qualified professionals. Most folks like to have at least an attorney and a real estate agent on their dream team.
  2. Defend your offer. Even a verbal promise is better than nothing, but ideally you’ll be protecting yourself down the line with real estate contingencies that allow you to back out at no cost if the property “fails” any of the next steps. See our previous pieces on crafting real estate contingencies to your advantage for more information.
  3. Have the property thoroughly inspected. This will help immensely with the next steps.
  4. Weigh the pros and cons of purchasing this investment. Consider your portfolio, return expectations, the amount of time you have (if any) to put into renovating this property, property management costs, and of course, a good 20% buffer never hurts a pro forma. You can also ask your team of advisors their opinion on your investment opportunity.
  5. Get the property professionally appraised. Only a real-deal appraisal will give you the true value of the home. This is vital for determining whether your deal is worth the amount of time and effort (as well as money) that you have to invest in this new acquisition. It can also become enormous leverage at the negotiating table. Getting additional discounts on these homes is easy for the deft negotiator.
  6. Bring in experts if necessary. Should any special issues arise during inspection around local law, water, ground coverage, or any other impediment to your ideal use of this property, don’t be afraid to have an expert in whatever subject come on down. You can usually secure experts quickly and easily on most common real estate problems, assuming both buyer and seller have a desire to fix the issue. While you get obvious negotiation power in such situations, you can simply ask to have the problem fixed. It’s best in our opinion to invest more in due diligence and addressing all potential issues prior to purchase than to buy on a whim and handle everything “later.” 
  7. Make your offer. If you’re buying a bank-owned property, understand you’re likely to pay sticker price for foreclosures. If you know ahead of time sticker price is well within your budget, make the exact offer if you wish to expedite things. You can try to bargain, but frankly your odds of success may vary wildly between institutions.
  8. Close. Grab your keys and get to work. You’ve either got some remodeling to do. some tenants to find, or some property management contracts to sign. Get any third parties you may need to run your real estate business.

Don’t Forget to Cover Your Assets

Buying a foreclosed or bank-owned property is no different than making any other investment from an asset protection standpoint. Ensure you handle this property exactly as you would any other REI asset from a legal standpoint. If you normally buy with your Traditional LLC, do that. If you secured financing in your own name and have a land trust ready to go, proceed with your plan. If you don’t have an asset protection plan at all, it’s time to start learning about asset protection at the very least. Ideally, real estate investors should have a trustworthy attorney who can answer asset protection questions.

Of course, asset protection experts and firms exist for a reason as well. You’ve got options for protecting your new asset, so get a plan that’s customized to maximize your business’s profits, tax savings, scalability, and success. You can find an expert on any budget to help you out, but above all, don’t hold any real estate assets in your own name over the long term. You’ve got so many alternatives that there’s no excuse, so start planning before you even think about buying.

Bottom Line: The Savvy Investor Can Win on Good REO and Foreclosed Properties

If you take nothing else away from this article, simply understand that making deals with the bank is a bit different than making deals with a person. This basic truth is the root of most of the confusion around foreclosed and REO properties. But since you’re no longer confused, you can start considering whether such investments have a place in your portfolio. Your answer will likely depend on many factors, including your age, sex, location, main career, investment class preferences, investment strategies, aspirations for your portfolio, and other highly personal details. 

But for now, at least you know the basics of how to intelligently vet and purchase these properties. Your team of advisors and even your personal investing network is likely full of insight on the foreclosure opportunities in their respective local markets. Asking around can often be the beginning of a beautiful learning experience. So don’t be afraid to ask around about how foreclosure and REO deals have gone for others in your personal and professional network.

Asset Protection For Real Estate Investors in Texas

The rumors are true, folks: everything really is bigger in Texas. This can be a double-edged sword for real estate investors in Texas, because while the state has many big opportunities for investors of any budget, the lawsuit business is also big. And real estate investors are more likely to be sued than the average Joe or Jane. So if you want to take advantage of the many opportunities and rewards available for investors in the Lone Star State, you will definitely want to be aware of the quirks of investing here as well as how you can protect yourself. A high-quality, iron-clad asset protection plan can prevent you from ever being victimized by a suit, but it will also protect the majority of your wealth even if you are sued.

In Texas, real estate investors have special concerns about asset protection that we will review below. But we will also show you how some simple precautions, the right information, and good professional help can protect your investments and other valuable assets. Let's dive in.

Why Do I Need an Asset Protection Plan?

The short answer is that anyone with assets worth having at all should have an asset protection plan. This is especially true for real estate investors, or other types of investors who own valuable assets of any type. The suggestions in this article work just as well for protecting an expensive vehicle or other asset as they do for real estate.
Attorneys are like vampires in more ways than we care to admit. Only instead of feeding on blood, we have an unhealthy dependency on money. And you better believe that we love money as much as vampires like blood. So asset protection keeps the legal vampires away by ensuring that they can't feed on your blood/money. Sucking the lifeblood out of a lawsuit makes it an unattractive endeavor for any attorney who might come after you or your assets. Even the most cash-thirsty lawyer in the world won't file against you if you're difficult to sue, or just plain not worth enough to make it a wise expense of his/her time. Asset protection makes you both of these things.

Key Asset Protection Tools for Texas Investors

The Texas Series LLC

The Series LLC is among the strongest asset protection tools that any real estate investor can exploit. Not all LLCs are created equally, and the costs and legal protections they offer depend heavily on which state the LLC is formed in. Fortunately for Texans, you can go local.  The Texas Series LLC is a highly effective asset protection structure. As an added bonus, it's easier to set up a Series LLC in your home state because you'll be free of the legal requirement to have a registered agent. Agents aren't free, so you'll be saving money by using this structure.
The Texas Series LLC is booming in popularity in part because it's the gift that keeps on giving. It operates similarly to a Traditional LLC, but has the distinct bonus of allowing you to add assets to the structure indefinitely. The Series LLC uses a parent-child structure which allows you to add new assets to the network as you acquire them. Each asset will have its own "child" LLC, complete with liability protection. In practice, this means that when you buy a new property, you will only need a few minutes at your computer and your attorney's signature to add it to your LLC network.

Anonymous Trusts

Anonymity is absolutely crucial to an effective asset protection plan. When you use an  Anonymous Trust alongside the Series LLC in conjunction with the Series LLC, your assets receive an additional layer of protection. The Anonymous Trust allows you to own and operate the Series LLC without your name ever even appearing on it.

This method protects you by making it nearly impossible to prove you own the assets in question in the event of a lawsuit. Even if someone knows you own it, they won't be able to prove it in court. The fact that you can't be reasonably or easily connected to the property will make it nearly impossible to sue you personally. Its placement in the series limits the amount you could be sued for in the first place, making both you and the asset highly unattractive targets for us money-hungry attorneys. We don't hunt if there's nothing to feast on.

Of course, there are other tools you can use to beef up your asset protection plan. Our experts combine land trusts, contracts, and many more legal and banking strategies to design the most effective plan for you.

Start Protecting Your Assets Today

Don't hesitate any longer. If you're an investor in Texas, you don't want to risk the investments you've poured your heart, soul, and hard-earned resources. All it takes is one suit to clean you out of everything. Don't let the vampires get to you. Use the tips above to form an asset protection plan that is more powerful than a house full of silver stakes, garlic, and crosses. At Royal Legal Solutions, we are here to make sure you get to keep the things you've worked your whole life for. Call us today to set up an asset protection consultation, and we will help you build the best possible asset protection strategy for your individual needs. Let us deal with the vampires while you focus on your business, free from the stench of garlic or civil court.

Thanks for reading, and if you have any additional questions about investing in Texas, fire them off in the comments below. We love making sure investors have access to this important information.
 

What is a Pass-Through Entity & How Does It Help Real Estate Investors?

A pass through entity is a business structure, such as an LLC, Series LLC, or S-corporation. We use the term “pass through” because you can claim the income of these types of businesses on your personal income tax returns. Ordinarily, you would have to file a separate return for your business (or businesses).

The chief benefit of using a pass-through entity is that you won’t be taxed twice. Nor will you end up paying a CPA  thousands of dollars to file a business tax return. Typically, other types of business structures will be obligated to file such a business return. We'll talk more about the best entity for real estate investors below.

Some of you may be starting to think this doesn't apply to you because you file a return jointly with your spouse. Well, you can relax. This poses no problems, and all the benefits described above would still apply. But there are some instances where you will have to file a separate return, despite using a pass through entity. The main case for this is if you're using a partnership return.

The Partnership Return and Taxes

Some states require at least two members in an LLC. So let’s say you file your LLC in one of these states and have another partner in it besides yourself.
In this scenario, you’re going to have to file a document called a partnership return. A partnership return is a separate return for your business itself. By separate, we mean separate from your personal taxes.

Due to the complexity of a partnership return and its filing process, you would be wise to recruit somebody to help you prepare it. I suggest you hire a CPA, ideally one who is also a real estate investor, to assist you in preparing your return. And now, onto the bigger concern for real estate investors.

Which Pass Through Entity Is Best For A Real Estate Investor?

I so love when the answers to complex questions like these are simple. This one can be answered in three words: the Series LLC. Hands down.
The Series LLC offers unbeatable asset protection, easy tax filing and is the foundation of a solid asset protection plan. To illustrate how this works, play along with the following example.

Say you own 6 properties. Instead of holding all 6 properties in one LLC, with a Series LLC you can create a “series” within your LLC. Each series will hold a single property.  So you'll have seven companies total: the parent company, and then 6 individual series for your assets.

The benefit of this is if someone sues one of your series and wins, only that one property in that individual series will be vulnerable to costly judgments. That means the remainder, and likely the vast  majority, of your wealth and assets would be protected. The Series structure protects those other assets and isolates them from the one in the line of legal fire.

Another great benefit is, no matter how many “series” you have within your LLC, they can all be filed on the same income tax return. This is a huge money-saver that you won't receive with a Traditional LLC. If you want to learn more, read my previous post about how the Series LLC works for real estate investors.

 

How to Fund Your Business with Self-Directed IRA Investors

Private companies need start-up funding.
There are trillions of dollars in retirement plans across the United States. These funds can be invested in your business.
Most entrepreneurs and investors don’t know this. Which is a shame, because everybody who owns a retirement fund is a potential source of financing. Most people who have a retirement account don’t actually know what their retirement package is invested in. This is an untapped resource just waiting for your pitch.
Industry surveys show that there are over one million self-directed retirement accounts invested in private companies, real estate, venture capital, private equity, hedge funds and start-ups.

Investing with Self-Directed IRA Funds

 
So how can you tap this wellspring? If you ask your CPA or your lawyer, they’re going to tell you that it’s possible but inadvisable. This is because they don’t have any idea how to do what you are asking them to do, or they are too shortsighted to see why you want to. Your financial adviser is going to tell you this is a bad idea because he doesn’t get the fee that he collects on your mutual funds, annuities and stocks. I’m not going to tell you this is a conflict of interest, but it does lower your adviser's motivation for alternative investments. He’s trying to make money too after all.
There are different sets of risks in private investment, so self-directed IRA investors need to be strategic. Keep a diverse profile. Don’t hitch your entire wagon to an unproven company. There will be tax and legal issues, so make sure you get help when and where it is necessary.
Selling corporate stock or LLC units to self-directed IRAs can generate capital in exchange for stock or equity in other companies. You can offer shares or units in your retirement account without going public.
This was what employees at Google, PayPal, Domino’s, Sealy, and Yelp did. They invested their self-directed IRAs before their companies were publicly traded and made enough money to retire very nicely.
Popular investment options include:

You must be in compliance with state and federal securities laws when raising money from investors.

Avoiding Prohibited Transactions/UBIT

Be careful to avoid prohibited transactions. For example, you cannot invest your retirement money with close family members. If an error occurs, an investor will have their ENTIRE ACCOUNT DISTRIBUTED. Don’t make this mistake.
You may also be subject to an Unrelated Business Income Tax. A UBIT applies to an IRA when it receives business income. Learn more from our previous article about the UBIT.
Generally, IRA’s and 401k’s don’t pay tax on gains because they’re considered investment income. When you wander outside of standard investments, such as mutual funds and annuities, you may find yourself in the cold wilderness outside of investment income parameters. UBITs are very costly at 39.6% of $12,000 of taxable income. That’s steep.
The most common situation where a self-directed IRA will be subject to a UBIT is when the IRA invests in a business that does not pay corporate tax.
If you are trying to raise capital from retirement funds, you should have a section in your documents that notifies people of potential UBIT on their investment. This doesn’t cost you, but it does cost the investor, and at 39.6% you might do some damage to someone’s retirement plans if you aren’t clear with them.
If the investment from a self-directed IRA was via a note or debt instrument, then the profits are considered interest income. This income is always considered investment income, which is not subject to a UBIT.
Many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured with the assets being purchased. In this case, the IRA ends up earning interest like a private lender.
So, to Recap (because that was a lot!)
• There are trillions of dollars in retirement plans across the U.S.
• These retirement accounts can be used to invest into your private company, start-up or small business.
• You must comply with the prohibited transaction rules.
• Anyone can invest into your company, except you & your close family members.
• There may be UBIT, depending on the structure of the company.
• UBIT usually arises within IRAs that operate businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT liability.
Retirement account funds can be a huge source of funding and investment for your business, so it’s worth the time and effort to learn how to access them as investment capital. Just make sure you follow the rules.
How you handle your retirement money matters at money matters.

Top 10 Features Of The Solo 401k Plan: Empower Your Business

Are you an independent contractor or the only employee of a business you own? If so, you may want to learn about the Solo 401k.

A Solo 401k is a dream come true for small businesses, independent contractors and sole proprietors, such as consultants or freelance writers. A Solo 401k Plan can be adopted by any business with no employees other than the owner(s).

The business can be a sole proprietorship, LLC, corporation, or partnership. The Solo 401k is a tax efficient and cost effective plan offering all the benefits of a Self-Directed IRA, plus additional features.

Solo 401k Features and Benefits

1. Easy to maintain.

There is no annual filing requirement unless your solo 401k plan exceeds $250,000 in assets. If it does you will need to file a short information return with the IRS (Form 5500-EZ).

2. Freedom of choice and tax-free investing.

With a Solo 401K Plan, you will be able to invest in almost any type of investment opportunity, including:

Your only limit is your imagination.
Note: The income and gains from these investments will flow back into your Solo 401K Plan tax-free.

3.You can get a loan.

The Solo 401k allows you to borrow up to $50,000 or 50% of your account value, whichever is less. The interest rate will be the current prime rate. You can use the money for anything you want.

4. No Custodian fees.

A Solo 401k plan allows you to eliminate the expense and delays that come with an IRA custodian. This enables you to act quickly when the right investment opportunity presents itself.

Also, because you can open a Solo 401k at any local bank or credit union you won't have to pay custodian fees for the account as you would in the case of an IRA.

Another benefit of the Solo 401k plan is that it doesn't require you to hire a bank or trust company to serve as trustee. This flexibility allows you to serve in the trustee role. This means all assets of the 401k trust are under your direct control.

5. High contribution limits.

While an IRA only allows a $5,500 contribution limit (with a $1,000 additional “catch up” contribution for those over age 50), the solo 401(k) contribution limits are $54,000.  (With an additional $6,000 catch up contribution if you're over age 50.)

Under the 2017 Solo 401k contribution rules, if you're under the age of 50 you can make a maximum employee deferral contribution in the amount of $18,000. That amount can be made in pre-tax or after tax. The after-tax method is known as the Roth account.

On the profit sharing side, your business can make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to a combined maximum, including your employee deferral, of $54,000.

If you're over the age of 50, you can make a maximum employee deferral contribution in the amount of $24,000. That amount can be made in pre tax or after tax (Roth). (Up to a combined maximum of $60,000.)

6. Contribution options.

You always have the option to contribute as much as legally possible, as well as the option of reducing or even suspending plan contributions if necessary.

7. Roth contributions.

The Solo 401k plan contains a built-in Roth sub-account you can contribute to without any income restrictions. With a Roth sub-account, you can make Roth type contributions while having the ability to make significantly greater contributions than with an IRA.

8. Tax deductions can offset the cost of your plan.

By paying for your Solo 401k with business funds, you would be eligible to claim a deduction for the cost of the plan, including annual maintenance fees.

9. Exemption from UDFI tax.

When an IRA buys real estate that is leveraged with mortgage financing, it creates Unrelated Debt Financed Income (UDFI). This means you're going to be paying a lot of money in taxes!

How much is a lot you ask? The UBTI tax is approximately 40% for 2017-2018! Learn more details about this whopping tax penalty from our previous UBTI breakdown.

But, with a Solo 401k plan, you can use leverage without being subject to the UDFI rules and UBTI tax. This exemption provides significant tax advantages for using a Solo 401k Plan over an IRA for real estate purchases.

10. Rollover options.

A Solo 401k plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP, or a previous employer's 401k plan. Which means you can directly rollover your IRA or qualified plan funds to your new 401k Plan for investment or loan purposes.
Note: Roth IRA funds can't be rolled into a Solo 401k Plan.

Still Using an IRA?

While the IRA is nice and all, it just can't compete. With a solo 401k plan, your business will pay less in tax, and you won't have to deal with the typical IRA restrictions.

Are you interested in learning more about Solo 401ks? Call Royal Legal Solutions at (512) 757–3994 to schedule your retirement consultation today.

Build Your Real Estate Empire & Asset Protection Plan With the Pros

Welcome to our blog. I congratulate you on taking the time to become the best real estate investor you can be. You've come to the right place to do it! The Royal Legal Solutions blog contains a huge amount of information related to real estate investing and maximizing your profits.

At Royal Legal Solutions, we're here to make sure you have the best tax and legal information to make the most money you can. Not only are we tax and legal professionals, but we're also real estate investors ourselves.

Our specialty is asset protection. We make sure people can't sue you and force you to liquidate your properties. We devise a unique asset protection strategy for your assets to mask your ownership and build an impenetrable legal wall to protect you from lawsuits.

An Asset Protection Strategy Is Essential

You can't expect to last long in the real estate industry without some form of asset protection. And by the way, insurance doesn't count. Insurance won't protect you from lawsuits.

The only way you can protect yourself from lawsuits is with an asset protection strategy. By using a combination of legal structures, such as an LLC, people will think twice about filing a lawsuit against you.
As a lawyer myself, you can trust me when I tell you that few lawyers are willing to try and "pierce" an asset protection strategy without being given a large down payment by a client. And why? Because an asset protection strategy makes you extremely difficult to sue.

It takes time and effort to sue someone with an asset protection strategy. And that's just to be able to file a lawsuit. Winning a lawsuit against someone with an asset protection strategy is a whole different story.
Then even if they do win, they'll get next to nothing in the first place. That's the power of an asset protection strategy, and that's why so few lawyers will be willing to try and sue you if you have one.

Start Winning Today With Royal Legal Solutions.

If you're new to asset protection, we're here to help you learn about it with our many free articles and posts on the subject. For instance, did you know that a good asset protection plan saves your money?

My name is Scott Smith, and I'm the founder of Royal Legal Solutions. I'd like to personally thank you for visiting our website. If you have any questions feel free to comment below, or call us to schedule your personal asset protection consultation.

Do You Need An IRA Custodian?

Every IRA is required to have a custodian. But not everyone needs or wants the services of a custodian. Most of the time investors are forced to use custodians due to the way traditional IRAs are set up.

A custodian is someone you need to finalize your deals. You might even have a custodian choose your investments for you. And if that's the case, you want to make sure you have a custodian who knows the prohibited transaction rules inside and out.

Keep in mind, not all IRA custodians are created equal and the IRS isn't lenient. If your custodian breaks the prohibited transaction rules with your IRA funds, you're the one they'll penalize, not your custodian.

The Self-Directed IRA Custodian

As I said earlier, not everyone wants or needs an IRA custodian. And that's where the self-directed IRA comes in. Investors with self-directed IRAs can take on the responsibilities of a custodian.

Yes, that's right, these investors volunteer to do more work. The benefits of doing your custodian's job include the following:

But you can't just become your own IRA custodian right away. You'll need to know the IRS's prohibited transaction rules. Unless you want to pay a steep penalty tax.

When you're your own custodian, you can also get an attorney who's familiar with the IRS's rules to look over your deals for you. An attorney will be able to make sure your deals are in compliance with IRS rules and not disqualified transactions.

Always remember, with an IRA custodian you get what you pay for. Same thing with an attorney. If you plan on investing purely by yourself, make sure you know what you're getting yourself into. The IRS isn't known for being lenient.

If you need assistance managing your retirement account or reviewing your IRS compliance, schedule your consultation with our online tool.

Are You Ready To Be a Real Estate Investment Pro?

Becoming a real estate investment pro isn't easy. But that doesn't mean it's expensive. There are affordable ways to become a real estate investment pro without having to invest thousands of dollars.

Let's go over those affordable ways below.

Get Real World Real Estate Investment Experience

If you want to get real world experience, the first thing you should do is find the smartest investors near you. Look for investors who are actually doing deals. You'll to find these people at meetup groups or online through websites like biggerpockets.com. You can also find some of my articles with tips for investors while you're there.

And what you're going to look for is somebody that's allowing you to bring money into a deal without having to be a huge stakeholder in any individual project.

This will give you an opportunity to work with more experienced investors on reviewing contracts, vetting deals and looking at tax and legal structures. If you're putting money into a deal with other investors, they have an interest in educating you on why this is a deal that you should put money into.

Not only are you getting a free education, you also have a chance to make money in the process. And sure, you could pay a "guru" to look over a deal with you. Just remember, a guru won't care about educating you as much as someone else who has money on the line.

So even if you're not making money in those first few deals, think of this as the cost of education and real world experience. But let's say you're not ready to invest or work right away. Don't worry, you've got another option.

Get An Education By Attending Real Estate Investment Seminars

If you can't work or invest you should look to attend real estate investment seminars. For example, here in Austin Texas we have the Austin Board of Realtors and other education-based seminars for individuals wanting to learn more about real estate investing.

Seminars are great resources. They're certainly much cheaper in comparison to the thousands of dollars you might have to pay to a "guru" to teach you something. Then there's also the benefits you reap from networking within your local community.

The people you meet at these groups and seminars are real professionals from your community. This is your opportunity to meet with other investors and professionals you can use for other business dealings you're doing.

And the seminars themselves, they're not professional CLD courses. So they're not gonna be over your head in terms of too many buzzwords. The people at these seminars are interested in communicating with you. They won't try to sell you something, like a book or a program. It's just pure information.

The Cost Of Becoming a Real Estate Investment Pro

For the price of real world experience, a valuable education and the chance to network within your community, you're looking at spending about $100. That might seem like a lot, but compared to your return on investment it's nothing.

I hope the above information was useful to you and I wish you good luck on your quest to becoming a real estate investment pro! If you have any questions feel free to ask me in the comments. And don't forget to share this blog with your friends and family on social media.

Learn more about real estate investing,  flipping homes tax free, and building your real estate dream team. I'd love to be a part of your dream team. For personalized legal advice to guide you on your path to becoming a real estate pro, schedule your consultation today.

The Two Biggest Reasons Why New Real Estate Investors Lose Money

Welcome to the real estate industry! You'll quickly find out how easy it is to lose money when you don't know what you're doing. And even if you do know what you're doing, you can still lose money if you're not careful. But let's assume you're new.

I'm not trying to be a "party pooper" or anything like that. As a real estate investor myself, I just want you to know what you're getting into. So what exactly are the two biggest reasons why new real estate investors lose money?

You Will (Probably) Make Bad Investments

While it's not necessarily a guarantee that you'll make bad investments, the probability is high. However, it's only natural to be "bad" at something when you first start doing it. *wink wink*

But is there really any other way to learn other than from your mistakes? Yes and no. I recommend new investors do joint ventures with more experienced real estate investors before they go out on their own. Just make sure you find someone who knows what their doing if you choose to do that.

So what's the other big reason why new real estate investors lose money?

You Will (Probably) Get Sued

This one might surprise you. The truth is anyone can and will sue you if you're worth enough. It could be a random person off the street or even a business partner. You never know when it'll happen, but you have to be prepared. Otherwise you could lose everything.

Luckily for you, preventing lawsuits is easier than learning how to not make bad investments. The most proven way to prevent lawsuits is through asset protection. Asset protection involves the use of LLCs and other legal structures when doing real estate transactions and signing contracts.

Like I said earlier, anyone can sue you. But that's only if you're worth enough. Asset protection can make it appear as if you're worth nothing. Or, you can use asset protection as leverage to convince someone not to waste their time suing you.

Well that's everything. As always, if you have any questions feel free to ask me in the comments below. For questions about your individual situation, contact us directly.

Real Estate Investor

As a real estate investor, you have to understand that lawsuits aren't a business.
If anybody is looking to sue you, they're looking to get money out of you.
A proper asset protection strategy keeps people from finding out what you own.
If they ever were to see you, it limits what they can get from you.
More importantly, a great asset protection strategy exhausts their will and their resources to fight you.
This keeps people from continuing with the lawsuit.
It gets them to settle early. It gets them in most cases to stop the lawsuit before it even starts.
What you have to understand is that because lawsuits are a business the main part is how do we get money out of somebody when we sue them?
This is what asset protection strategy fights.
This strategy protects the assets from being seized by somebody via a judgment. This person doesn't believe that they are getting anything out of their investment in a lawsuit.
Lawsuits are only paid for in two ways: Either you pay an attorney to sue or the attorney takes it on contingency.
If an individual is researched and found to have no assets on paper, how much money should you be willing to risk for a judgment?
Moreover, there's no attorney who is worth his salt that is ever going to take a case like that on a contingency. Contingency is free for the client. The attorney risks everything.
In addition, attorneys only accept fire cases that they are very confident they can win and collect on. So, when you ask yourself how do I protect myself from a lawsuit? what you should really be asking yourself is: how can I make it seem as if I don't own anything?
Scott Smith, an asset protection attorney for real estate investors, is a real estate investor himself and would like to help you. 

Did You Know Selling Your Property "As Is" Can Get You Sued?

You might think selling your property “as is” offers all-inclusive protection, but it actually fails to dispose several potential legal claims. The reality is that selling a property "as-is" can get you sued. A property with undeclared flaws can land you in hot water for a variety of reasons, including:

Why the As-Is Clause Alone Doesn't Truly Protect You

It doesn’t matter if you were unaware of the defect(s) that later become issues. The buyer decides whether or not to bring a claim, and if they do, you’ll need to defend yourself in court. The mere allegation of fraud can be enough to warrant a trial by jury.

Don’t assume you can automatically settle out of court. Due to the courts' stance on property fraud, litigators incentivize the plaintiff to drag you through litigation.

The True Cost Of 'As Is Property' Fraud

Expect to spend $5,000 – $10,000 minimum in the event of a lawsuit. This is just the cost required to reach a trial: there’s no guarantee you will win. Think of it as a chance, and only a chance, to defend your honor.

When it comes to lawsuits, the losers pay for everything. The first expense is your attorney’s feels (~$10,000). This is followed by the plaintiff’s legal fees (~$10,000). Finally, there are the damages, which tend to range between $5,000 – $15,000 based on average claim costs.

In other words, a run-of-the-mill lawsuit costs up to $35,000. However, a few states allow plaintiffs to take triple damages.

Protect Yourself By Beefing Up Your “As Is” Contracts

This is why a professional asset protection plan makes economic sense. Attorney’s fees from a single lawsuit can offset the cost of your plan.

If you want to take your chances without a plan, then you need to upgrade your “as is” clause. I add the following text to my contracts. It provides several additional layers of protection against claims of property fraud.

My Bulletproof Protection Clause

THE PROPERTY IS CONVEYED AND ACCEPTED “AS IS,” IN ITS PRESENT PHYSICAL CONDITION, WITH ALL FAULTS AND DEFECTS OF WHATEVER KIND, LATENT OR PATENT, KNOWN OR UNKNOWN, AND WITHOUT REPRESENTATION OR WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR WARRANTIES OF TITLE AS MAY BE SET FORTH AND LIMITED HEREIN.
GRANTOR MAKES NO REPRESENTATIONS AS TO THE PRESENT OR FUTURE VALUE OF THE PROPERTY OR ITS PRESENT OR FUTURE SUITABILITY FOR ANY PARTICULAR PURPOSE. FURTHER, GRANTOR HAS NOT MADE, DOES NOT MAKE, AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS REGARDING THE ENVIRONMENTAL CONDITION OF THE PROPERTY OR ITS COMPLIANCE WITH ANY ENVIRONMENTAL, POLLUTION, OR LAND USE LAWS AND REGULATIONS, WHETHER FEDERAL, STATE, OR LOCAL. ANY AND ALL PRIOR ORAL OR WRITTEN STATEMENTS CONCERNING THE CONDITION OF THE PROPERTY, WHETHER MADE BY GRANTOR, GRANTOR’S AGENTS, OR THIRD PARTIES, ARE EXPRESSLY DISCLAIMED.
GRANTEE ACCEPTS THIS CONVEYANCE SOLELY ON THE BASIS OF GRANTEE’S DUE DILIGENCE AND EXAMINATION OF THE PROPERTY. THE CONSIDERATION PAID FOR THE PROPERTY REFLECTS THE “AS IS” NATURE OF THIS CONVEYANCE. THIS “AS IS” PROVISION IS A MATERIAL TERM THAT HAS RESULTED FROM SPECIFIC NEGOTIATIONS BETWEEN THE PARTIES. GRANTOR WOULD NOT HAVE BEEN WILLING TO SELL AND CONVEY THE PROPERTY TO GRANTEE UNLESS THE DEED CONTAINED THIS “AS IS” PROVISION. PROVISIONS OF THIS “AS IS” CLAUSE SHALL INDEFINITELY SURVIVE CLOSING AND SHALL NOT MERGE.
IF GRANTEE IS UNCERTAIN ABOUT THE MEANING AND EFFECT OF THIS “AS IS” CLAUSE, THEN GRANTEE SHOULD CONSULT AN ATTORNEY. BUYER’S INITIALS AS TO THIS “AS IS” PROVISION_______

Using this type of language may destroy good will with your buyer, but the alternative is far worse. You shouldn't leave yourself open to a devastating lawsuit just to close a deal. The risk simply isn't worth it.

One of the reasons you want to have an attorney on your side is because you can send tough contract terms and blame it on a third party, leaving your relationship with the buyer in the clear. Don't put your reputation on the line unnecessarily: take action today. Contact us and set up your consultation before you sell your property as-is.