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.

Selecting the Best Entity for Real Estate Flipping

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.

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?

Selecting the Appropriate Entity for Flipping Real Estate

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

Tax Scams To Be Wary Of: The Dirty Dozen List, (7-12)

Thanks for joining us again as we finish our little explainer on the 2019 “Dirty Dozen” tax scams you need to continue to watch out for this year. Every year, the IRS releases a “watchdog” style document that lawyers, investors, and even the Taxmen themselves call the Dirty Dozen. In Part One, we covered six IRS and tax scams to be on the lookout for. Let’s explore the rest of the list, and learn how to dodge the other six scams the IRS warned us about.

#7: Identity Theft Scams

Identity theft affects millions of Americans, and REIS can be at particular risk. Criminals get heated around tax season, trying to get their hands on your info for nefarious purposes like:

Filing and padding false returns with your information
Padding bogus returns with ridiculous deductions, sometimes in the names of real or fraudulent dependents
Stealing critical documents of anyone else with vulnerable information for later use
Building big files of “legend” info for tax scams from investor information leaked through agencies or listed right on the public record
Creating IDs for bogus returns based on real information
Securing steady streams of Social Security Numbers to keep their scams going

And many more no-good-nick activities. Stay safe and protect your loved ones by guarding all personal info closely, preserving your anonymity online and in your investing, and keeping your guard up during Tax Season.

#8: Nonsensical or BS Lawsuits

As shameless as it sounds, people assemble all sorts of insane cases against the IRS. Sometimes these enterprising (read: frivolous) legal minds devise cases that sound compelling to those of you who, say, don’t deal with tax law for a living. But if someone tries to recruit you for a class-action suit that sounds even a little harebrained, that’s because it totally is. Liability suits against the IRS do happen, but if you’ve got a good case, you need an attorney, not some jerk who’s calling you to hop on a grimey business-side-of-lawsuits-bandwagon.

#9: Phone Scams

Seniors, you’re at particular risk of phone scams. They go something like this: you get a call from a stranger with impressive-sounding credentials and a totally unique secret way to beat the Taxman. Just ignore this nonsense, because there’s also a more common and serious problem of people making calls claiming to be IRS personnel. Don’t fall for it.

Avoiding this scam is easy: The IRS doesn’t make phone calls. Period. Just hang up stat--and if you have a real concern about your taxes, you can locate the real office you need on irs.gov

But we all get weird calls, and here’s how to handle them: never give out personal information to strange callers. If you suspect your caller’s a robot, ask them directly (“Hey, are you a cyborg?) to see if you’re talking to a person or recording. Often these scammers are lazy, and your vigilance about avoiding strange callers’ demands and documenting without complying will keep you safe.

#10: Lying About Your Income

This can be a form of preparer fraud, but most of the time, the taxpayer is responsible. Falsifying income in any way is a horrible idea, so just don’t do it. There’s no benefit worth the trouble you can get into.

#11: Bogus Business Credit Claims

Brought to you by the geniuses who invented return padding, the practice of improperly filing business credit claims is widespread. Usually, the taxpayer just plain doesn’t qualify but takes the credit, or asserts a right to it anyway. It’s a spin on a false deduction, basically.

#12: Illegal Tax Sheltering

You can minimize taxes using many legitimate and legal strategies, as well as entities and other legal tools. But to do this, you’ve got to play by the rules. Often these problems come in the form of shady businesses promising high or even improbably huge savings. Any business directed at hiding from Uncle Sam is basically begging to get into a nasty tax dispute, and they WILL drag you into it With so many legal options for decreasing tax liability, there’s no excuse for illegal tax shelters. Or getting busted.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ

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:

Easier negotiations. Some find institutions simpler to handle than people--and often, they’re much more transparent. The banks with tons of stock are going to be more highly motivated, and therefore the most amenable to compromise during the negotiations process. Others may staunchly and adamantly demand sticker price for a given property. Your mileage will vary.
Below market price opportunities. Some banks are incredibly motivated sellers and will accept offers if their “inventory” of homes is massive or overstocked. Bonus points if you’re interested in an extremely unpopular or traditionally difficult-to-sell asset class.
Sellers are legally obligated to disclose full property records. Anything the bank knows about repairs, the property’s condition, appraisals, changes in ownership, and much more is actually information you have a legal right to. This is great for due diligence purposes.
Repairs and closing cost credit opportunities. Many institutions are all too happy to complete the necessary repairs to get your property habitable, and therefore sold. Some even will offer closing cost credits to expedite getting the property off their laundry list and into your hands.
You can buy with ordinary mortgage financing. With foreclosed properties, mortgage opportunities for you as an investor abound. Buy the property in your own name, but only one you’ve already set up your asset protection structure. Have everything you need from a legal standpoint ready to go so you can minimize the amount of time the property, and all of its liabilities, are directly attached to your personal name.

Note: You can still protect your property, even if you choose to buy in your own name to obtain financing. All you have to do is use an anonymous land trust to take the property’s title after purchase. From there, leave it in your land trust or move it into your asset protection structure. Whatever you do, your mortgage will stay the same assuming you execute these transfers appropriately and legally. An experienced real estate or asset protection attorney can ensure you do.

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:

Assemble your team of qualified professionals. Most folks like to have at least an attorney and a real estate agent on their dream team.
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.
Have the property thoroughly inspected. This will help immensely with the next steps.
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.
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.
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.”
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.
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.

Considering A Reverse Mortgage – A Unique Cash Flow Solution for Secure Seniors

Reverse mortgages have gotten more than their fair share of both good and overwhelmingly negative press coverage, so it’s no small wonder most investors and seniors are confused about what they even are. As retirees face longer life expectancies, many outlive their personal savings or Social Security plans, face mounting medical costs, and find life generally costs more than they’d planned for. A reverse mortgage may seem like an enticing way to solve many problems at once, but of course, you should never dive into any financial “solution” without understanding it well.

Today, let’s clear up some of the misunderstandings that make the world of reverse mortgages seem more mysterious than it is. We’ll talk about what a reverse mortgage really is, how this cashflow option can help certain secure seniors, which drawbacks to consider, and what to keep in mind when deciding if you’d personally like to exploit the reverse mortgage in your own real estate investing strategy. Making the best decision will require you to have lots of information. Let’s start with the basics and work our way out to the kinds of details you’ll want to ask about down the road.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan specifically available to seniors over age 62 and federally insured. It gets its name from its unique ability to allow you to borrow against the equity stored within a home already. Those of you who own outright or are close to doing so may have even gotten marketing calls from institutions that issue reverse mortgages, particularly after your 62nd birthday.

Some of the basics to know about reverse mortgages include these rules:

Loans or debts may not be outstanding on the home.
You must occupy the property as your primary residence--sorry, no investment properties allowed.
Older borrowers are eligible for greater total loan amounts because age directly correlates with limits.
Loans aren’t due until the homeowner passes away or moves.
Loan values may be influenced by the value of the home, how much equity is in the home, and other factors.
Borrowers must continue paying property taxes, HOA fees, and maintenance costs.

Why Would Senior Real Estate Investors Be Interested in a Reverse Mortgage?

Well, first, only those over 62 get access to reverse mortgages at all. But beyond this, there are reasons certain seniors may want a reverse mortgage. There are still other reasons that are unique, or made all the more pressing, if the senior considering a reverse mortgage is also a real estate investor.

Any senior experiencing cash flow issues, whether they’re as a result of an investment gone awry, out-living or under-projecting retirement savings, medical costs, the difficulty of living on fixed income, or any other reason, may consider a reverse mortgage if they’re eligible. If you have high amounts of equity in your home or own it outright, this loan option offers flexible disbursement options, meaning you don’t have to borrow the full value you can. Just take what you need.

Many seniors find this solution helpful when they have a definite, short-term need that a definite amount of cash to fix. If your need is more about your long-term budget, try to put a number on what you need for say, one year. Coming up with this type of metric will help you and anyone assisting with your financial planning determine your exact cash need, thus helping figure out what a good conservative loan amount for you might be.

What Are the Biggest Benefits of Reverse Mortgages?

Nobody would be getting reverse mortgages if there weren’t very real benefits for some seniors. The biggest issue to keep in mind as you learn about this tool’s benefits is whether they outweigh the drawbacks discussed later in your own personal situation.

You may find that answering questions about your status and goals honestly saves you lots of time, and fees, on having to pay a lawyer to review the basics. They’re your advisor, not your teacher. Lawyers are all-too-happy happy to teach, just understand that you don’t need to pay for this service.

Flexible Lending Options

Investors may choose to accept the loan as one single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans. Borrowers may choose the most conservative option that will serve their needs, a luxury not typically afforded to those seeking loans.

Comfortable, Cash-Friendlier Lifestyle

No doubt, very little cash can be converted into a great degree of comfort if you’re smart about it. If you just want to live out your golden years comfortably, you can do so and even plan to pay your mortgage off while you’re still living. We’ll discuss below why to always account for reverse mortgages in your estate plan, but for now, if you want to live it up, a reverse mortgage is an option.

Interest Limits

The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you’re not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.

What Are the Drawbacks of Reverse Mortgages?

There isn’t a financial option we’re aware of that’s all “pros” and no “cons.” Let’s break down the downsides of reverse mortgages.

Deceptive or Inflexible Terms

Sadly, not all mortgage providers are ethical. Those targeting seniors may attempt to exploit their clients perceived lack of sharpness or assume you won’t do your due diligence. To this, we say prove them wrong. Vet your company before considering a loan, and have someone you really trust who understands every word read the fine print. This could be a CPA, financial planner, family member working in the industry, or even another investor you know who’s successfully used a reverse mortgage and knows what to look for. You’re looking for anything that sales reps haven’t disclosed,terms you don’t agree to, or red flags of any sort. These are immediate cues to shop around and look elsewhere. Not all lenders will offer good terms, even if you’re lucky enough to only ever deal with the ethical ones (and few of us are so fortunate). Be on the lookout for inflexibilities as well as poor terms. For instance, reverse mortgages are often difficult to refinance, a fact that makes them less than optimal choices for some. See if this will be the case with your loan, and even ask your salesperson to see how honest their answer is compared to what their literature states. Any time a salesperson’s word vastly differs from a written offer, be skeptical.

Your Loan May Become Your Family’s Debt

If you fail to make an estate plan or somehow account for a way to pay your debt immediately in the event of your death, your reverse mortgage may be subject to probate. Your heirs, which for most people are their family and loved ones, don’t get to touch an estate while it’s being probated by the courts. If you die with a debt, it gets passed on, just like your assets and earnings do. So your heirs will be able to pay debts from your estate, but let’s just say the worst-case scenarios around this issue are heartbreaking, lengthy, frankly exquisitely boring yet brutally legalistic affairs.

If you decide to pursue a reverse mortgage, you can offset this downside by minimizing your loan to what you’re certain you can pay directly from your estate and updating your estate plan to account for the reverse mortgage. This way, your attorney’s already involved and can give additional personal advice on how to address your situation. Often, you can make plans to avoid estate planning surprises--simply remembering to is the most difficult part.

Our suggestion is to take care of this detail immediately if you end up seeking the loan. You may pay it off while alive or pre-arrange for your estate to make payments, but be advised interest will likely rise if you wait and let your beneficiaries pay off the debt.

Assets Encumbered by Debt Can’t Pass to Heirs

Suppose you take out a substantial loan against your home’s equity because of its perceived safety. If you’re unfortunate to pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home with the reverse mortgage until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs, or at least a substantial barrier to receiving their full inheritances.

Limits and Difficulties Securing Other Types of Loans

Some seniors who take out reverse mortgages later find it difficult to secure additional lending elsewhere. A reverse mortgage is fairly easy to obtain if you meet the qualifications, but it doesn’t necessarily “look good” to traditional hard lenders. This can be problematic for investors who rely on good terms to make their deals profitable.

Stay Out of Trouble if You Choose to Use Reverse Mortgages

As long as you understand the deal you’re going to sign, you should be able to intelligently decide whether the reverse mortgage will help you, particularly if you’ve got pros to help you make the judgment call. Even a close network of fellow REIs, homeowners, and smart borrowers with experience in reverse mortgages can be a valuable source of information, as can educational resources like this very online article. Learn what you can, shop smart, be skeptical. Professional advice, planning ahead, and practicing due diligence can keep you from becoming a horror story.

Tax Scams To Be Wary Of: The Dirty Dozen List, (1-6)

The IRS released its 2019 scam watchlist, affectionately known as the Dirty Dozen. What should you watch out for during this year’s tax season? Learn the latest below, and remember, it’s okay to be skeptical of any officer claiming to originate from the IRS.

#1: Illegal Use of Off-Shore Accounts

We’ve shared before about the legal use of off-shore banking, which is safe. Unfortunately, anyone illegally convincing you to use off-shore accounts to evade taxes is dragging you down a dark path. Should you follow, you’ll pay the price.

#2: Phishing Attacks

Phishing is better known as “that scummy move where people send convincing-looking fake emails to steal your log-ins.” For those unfamiliar with Scumbaggery, you’ll get an email that looks like it’s from, say, Your Bank. But it isn’t from Your Bank. It’s from some jerkface who wants you to believe he’s Your Bank, so you’ll unwittingly give him Your Banking credentials.

Watch emails closely. Unless you know someone personally, don’t take identities for granted online. An email from yourbank.com that’s consistent with other emails from Your Bank isn’t a phishing attack, and there’s nothing wrong with calling Your Bank (or whichever institution the caller claims to represent) to confirm.

Phishing preys on the implicit trust we have in our institutions and your laziness. Phishers hope you don’t look closely at the email. Awareness is your best defense.

#3: The Bogus Tax Return (Preparer Fraud)

You can avoid this one by simply ensuring your tax preparation professional is qualified and ethical. CPAs usually won’t pull this move, but fake pros crop up every year, sadly.

#4: Refund Scams

This type of preparer fraud involves shady characters claiming to be experts promising you absurdly high refunds. This should set off your BS detector--vet the provider or switch if this offer isn’t the first red flag.

#5: The BS Charity

We hope there’s a special place in the afterlife for people who invent fake charities. But hey, it’s their souls--just don’t donate to one or it’s your behind on the line. Uncle Sam can’t get your money back. Further, deductions toward fake charities don’t count, which leads us to...

#6: Return Padding and False Deductions

Yeah, people really try. Unethical preparers have been busted cooking books or creating a laundry list of bogus undeserved deductions to get a huge refund, usually to “earn” themselves a cut. The scam and how the preparer profits may vary. Consider this your fourth consecutive warning to be careful who you let do your taxes.

Including you. Many individual taxpayers have taken liberties with deductions, and even outright invented false deductions. There are times when ethical people are tempted to break the rules in life. But when you’re filling out a tax return isn’t one of those times. Save your rebellious side for the stage, the canvas, the negotiating table, the board room, the bedroom, or really anywhere that won’t get you into a hot mess with Uncle Sam. That’s not legal advice, by the way--that’s just good old-fashioned American common sense.

Keep more of your money with a Royal Tax Review

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.

Series LLC For Real Estate Investors In West Virginia

Aside from getting to live in “almost heaven,” West Virginia investors really do have something special. And we’re not just talking about the local real estate markets. From an asset protection standpoint, West Virginia investors also have more options. For instance, did you know that you can use an in-state Series LLC as a component of your asset protection plan? You can also use one from a different state if you choose. So yes, West Virginia investors can have it all when it comes to Series LLCs and asset protection. Learn more now.

Is There a West Virginia Series LLC?

West Virginia joined the club of states permitting Series LLCs fairly early on. They’ve offered an in-state option that’s a decent investment vehicle. At the very least, it’s better for investors with multiple properties or those who intend to acquire more than one property. The West Virginia Series LLC is one way you can compartmentalize assets in-state. But it’s far from your only option.

You Said West Virginia Investors Can Shop in Other States. How Does That Work?

That’s correct, you can. And it’s pretty easy. Basically, all you do is a little bit of research. You can use some of our favorite states as a starting point

Texas. Zero state income tax, strong asset protection laws, ultra-cheap formation fees.
Delaware. The state that originated the Series LLC craze is still popular for it’s famously pro-business legal system and simply being the pioneer in this area of asset protection.
Arizona. Arizona’s benefits are similar to Texas’, though at the time of this writing, slightly more expensive to form.
Wyoming. This new kid on the Series LLC block is proving effective and cheap, with low fees attracting investors from around the country.

The reality is that you can form your Series LLC anywhere, and it doesn’t have to have anything to do with West Virginia. If you love your state’s offering, go ahead and take it. But don’t forget to also research these other options thoroughly if you’re really trying to establish long-term lawsuit prevention strategies and effective asset protection.

What Else Should West Virginia Investors Know About Series LLCs?

Aside from your freedom of choice, West Virginia real estate investors should know that the Series LLC is great regardless of where you form it. It allows you to scale up easily, add new “child” Series from the comfort of home, and simplify your real estate business’s books and taxes. You can also learn more about how to strengthen your Series LLC with other legal protections such as Anonymous Land Trusts. The strength of this entity make shock you, but when used correctly, you can also count on it to cover your assets and keep you out of court

Series LLC For Real Estate Investors In Washington

Whether you’re in the big city of Seattle, overlooking the Puget sound, enjoying the highest quality-of-life in America on Bainbridge Island, walking past the wildflowers of Burien, or somewhere else amidst the greenery, there’s no shortage of beautiful views and beautiful homes in Washington State. So the Washington investor is often a sophisticated, intelligent one--the kind of investor who not only knows they need asset protection, but is pretty sure they need a Series LLC. It’s safe to say you’re highly intelligent folks, and we’ll address you as such. So Washington investors, please enjoy your personal guide to using the Series LLC for real estate investing.

Does Washington State Have a Series LLC?

Washington is not yet among the states to adopt Series LLC legislation. That means there’s no such thing as a Washington Series LLC. The state does, of course, have Traditional LLCs available if you’re determined to get a local entity. But if you want to get a Series LLC, you’ll have to play by the laws of a different state. But don’t worry, we’ll show you how.

How Should Washingtonian Investors Defend Real Estate Assets?

No matter where you live, asset protection strategy stays the same. You need to compartmentalize your assets and maintain your anonymity, and you can use a variety of legal tools as a means to this end. The ideal asset protection plan accomplishes both of these goals.

The Series LLC is a critical component of such a plan because it allows the investor to compartmentalize and grow without extra expense. The good news, Washington investor, is that you get to take your pick of any of these great states for forming LLCs:

Texas. Come on down to Texas for low formation fees, no state income tax, and rock solid asset protection laws.
Delaware. If you’re committed to staying in the North, Delaware did originate the Series LLC. It’s pricier than TX to maintain, but you do have advantages like the special Chancery courts, which are presided over by business law expert judges. It’s a pro-business state, for sure.
Wyoming. As of Summer 2019, Wyoming’s one of the newest Series LLCs that just happens to be among the cheapest. Its laws are modeled after other states with strong asset protection legislation.

Really, you can pick any state. But we recommend Texas above the rest, because that’s the place to go if you want to send this message: don’t mess with my assets. The Texas Series LLC is a great solution for the Washington investor with multiple properties, or even aspirations of owning multiple valuable assets. Other businesses may also be placed within your Series LLC structure to protect you from liability issues.

How Do Washington Investors Pick a Series LLC?

You can establish your Series LLC easily. Get in touch with an attorney who has experience forming these entities, let them know exactly what you want, and a competent attorney can lead the way from there. Welcome to the club of real estate investors who can sleep easier at night, never worrying about bogus lawsuits threatening their assets.

Series LLC For Real Estate Investors In Utah

Utah has scenery that we can confidently call serenity embodied. Whether you reside (or invest) in the bigger cities, near the brilliant Great Salt Lake, or in one of the state’s many tranquil rural areas, we absolutely understand the appeal of the Beehive State. Investors in Utah have multiple options when it comes to protecting their real estate assets, including their in-state Series LLC. Those of you who want a Series LLC often want to know if the Utah Series LLC is always best for Utah investors. The answer is “not necessarily,” because it depends on the investor. Utah investors aren’t forced to use Utah Series LLCs. Learn all about picking Series LLCs for Utah investors in this quick explainer.

How Does Utah’s Series LLC Compare to Other States?

The Series LLC is an entity you can form in over a dozen places, including Utah. What nobody tells you is that you have the freedom to travel wherever you like to form a company. And you don’t even have to physically travel to your destination state, so long as your signature on paperwork does. It can help to seek legal counsel with a presence in your state-of-formation--but an attorney in Utah may still help you form Series LLCs in other states. If one lawyer won’t or can’t, another can and will.

You can even ask your attorney their opinion on our favorite states for forming the Series LLC. In order, we’re big fans of:

Texas.
Delaware.
Wyoming.
Arizona.

These are our top four picks as of Summer 2019, although investors should recognize that the law is always evolving. Changes in law can add more states to the pool of selections, change how a state’s Series LLC works, and cause many other rapid developments that change the legal landscape. It’s always best to check with someone qualified and aware of your personal situation before establishing any company for asset protection. Even if you don’t have a lawyer, you can get a consultation with one.

How Can Investors Pick the Best Series LLC?

Picking the best series LLC will depend on you doing several basic things:

Performing good research. Of the above four options, can you think of your personal pros and cons for each? If not, keep digging for more information about these Series LLC choices.
Getting professional help. Only a lawyer can establish a Series LLC for asest protection, assist you with the necessary paperwork and property transfers, and give you personalized advice. If you want your Series LLC to do its job, an attorney’s your best bet.
Making good judgments. What does your business need most? If you save loads by skipping on state income taxes, focus on states like Texas that lack it. Strong asset protection laws are also found in Texas and the other states above, but of course they vary. Which protections matter most, and where do you think your business should be based out of? Essentially, you’re going to pick which rules you’d like to follow.

If you do those three things, you are ready to move on to establishing your Series LLC. The same is true if your attorney says it is, because above all, that’s your point person on Series LLCs for real estate asset protection. When in doubt, ask for help. Until then, enjoy your new Series LLC and the freedom from worry about lawsuits. Life is calmer once you’re protected.

Series LLC For Real Estate Investors In Maryland

Maryland is a lovely and lush state full of natural beauty and honest, hard-working people. Our Mariyland investor friends often write in with their questions about their best real estate asset protection options. Perhaps they already know that most REIs can benefits from the Series LLC, or they’re trying to figure out whether Maryland offers a Series LLC.

Is There a Maryland Series LLC Option for Investors?

Unfortunately, Maryland investors cannot yet use a Maryland Series LLC for the simple reason that it doesn’t exist. Just under 20 states currently permit the Series LLC, and Maryland isn’t on the list. But you’ve got no reason to fret: you can still have your Series LLC.

Which Series LLC is Best for Maryland Real Estate Investors?

Fortunately, the Maryland investor isn’t bound to playing by Maryland’s rules. One of the beautiful things about the American real estate industry is that you can choose which state’s “rules” you don’t mind playing by. We’ve gathered up a few of our top choices for Series LLCs for your convenience. Here are some of the states whose rulebooks we like:

Texas. Easy, cheap formation. No state-level income taxes on your business. Some save thousands by picking states with this feature.
Arizona. Their Series LLC has operational perks that help some investors.
Delaware. They pioneered the Series LLC.
Wyoming. A recent addition to states offering Series LLCs, and dirt-cheap in mid-2019.

Any of these states will deliver a fine Series LLC, and then it’s your responsibility to use it correctly.

How Do I Know if I Need a Series LLC?

It’s pretty simple: if you have real estate assets in your own name, you should consider transferring them immediately into your Series LLC structure. This removes the property from your name, and if you have an anonymous trust, the trust will hold title while the Series LLC defends the property by sticking it in a child series, by itself, protected with liability benefits and literally inside of its own company. All this company does is hold assets--and it should never interface with members of the public. If you have assets you value, you want them in a company rather than your own name. That’s one simple way to decide if you need a Series LLC.

The quickest way to figure out if you need a Series LLC over a Traditional LLC is easy. Just count up your properties. If you have more than one or plan to have more than one in the future, the Series LLC is the more economical option. File it once, and add child Series indefinitely as you acquire assets. You can easily create new Series at home or work within minutes, print it, fax it to your lawyer, and ask to transfer your new property into it. This way you can grow and defend your assets simultaneously.

Land Trust: What To Know About Your Eligibility, Rules & Regulations

We get frequent questions about rules and regulations of all legal tools used for asset protection. Land trust eligibility is no different.

Let’s just be clear that you don’t have to pass any eligibility requirements beyond being of legal age to get a land trust. That said, there are some issues to be aware of.

Are Land Trusts Available in Every State?

Regardless of where you live, you (as an investor or business owner) can enjoy the benefits of the land trust. But not all states offer land trusts--in fact, only these six have local options:

Illinois
Florida
South Dakota
Hawaii
Virginia
Indiana

But any investor can have a land trust or its equivalent--the only possible exception being those living in Louisiana, who may wish to use other types of trust or asset protection options.

Fun fact for the legal eagles in the crowd: Louisiana is “special” from a legal standpoint because they rely on Napoleonic law, more based in older French legal systems, than the rest of U.S. states which are more closely related to British common law. As a result, Louisiana REIs who wish to keep their business and entities in-state are likely to need attorneys familiar with state-specific tools and laws. The rest of us in the other 49 states (and D.C.--by the way, fantastic City Flag you guys have there!) have things a little easier.

Even states lacking land trusts have similar options by different names, “Title-holding trust” is common, but each state will have its own lingo.

Even if your state doesn’t offer a local option, it likely will default to the laws of Indiana’s land trust, which have set the tone for land trust legislation and regulation nationwide.

As with entities, you aren’t required to form your land trust in-state. At RLS we always tell our clients: if you don’t like your jurisdiction’s rules, change jurisdictions. It really is that easy. Many of our, say, Alaska investors decide to form Texas Series LLCs because they like Texas’ costs and laws better. You can do the same thing with land trusts.

What Rules and Regulations Should My Land Trust Follow?

As far as legal vehicles go, the land trust is not particularly heavily regulated. Anyone can have one, and there aren’t many restrictions at all. But not everyone will use the land trust in the same way, and there are some limits and rules-of-thumb to keep in mind.

The most obvious limitation of all land trusts is the fact that they aren’t incredibly useful beyond the realm of real estate law. The land trust, often simply called the title holding trust, can’t hold just any asset--it must be a real estate asset. If you have cash to stash, consider your off-shore banking options. As for other assets, different strategies will work for them.

The best you can do to “play by the rules” is ensure your land trust conforms to all local laws. Next, ensure your use is appropriate and lawful. If you need help determining your compliance, understanding how trust properties are taxed, or learning how your land trust works in the context of your asset protection plan, check with an attorney, CPA, or even both. Other investors can help you get ideas for using your land trust, but ultimately, counting on pros hip to your personal situation when it comes to matters of legal compliance is the smartest move.

Land Trust Best Practices

When you deed a property to a land trust, you’re removing it from your personal possession. This makes some investors nervous, but it need not, since you still receive your funds as the beneficiary. Here are a few best practices to keep in mind when using land trusts to protect real estate assets:

Ensure you get an anonymous land trust if using it for asset protection.
Use one land trust for each property you own for the best defense
Be mindful of anonymity when naming your trust: get creative and defy expectations to secure anonymity.
Get legal advice when establishing a new trust or using it for a new purpose (e.g. to transfer a property, changing the beneficiaries, etc.)
Pair your land trusts with strong entities for maximum asset protection

This last point is one we should stress: land trusts offer anonymity, while entities offer compartmentalization, and the ideal plan has both. Select the best liability-limiting entities for you, whether that’s a Traditional LLC, Series LLC, or both.

Bottom Land: With Few Limitations, Most Investors Can Benefit from Land Trusts

While the land trust has limits, so does every tool. Even non-legal tools are only good for their intended jobs. Try screwing anything in with a hammer if you don’t believe us. As for land trusts, they’re excellent for their designed purposes. To get the most out of the land trust, use it appropriately for your situation and get advice if you’re unsure what role it should play in your asset protection plan.

Land Trust: Basics for Real Estate Investors to Know

Land trusts are often the unsung heroes of the real estate investing world. You can use them to control assets rather than own them yourself.

You’re almost always better off controlling an asset than owning it in your name outright.

And that’s where the land trust really gets to strut its stuff. After all, the land trust is also called a “title holding trust” because that’s it’s main job: hold title to the property in your place. But you still get to stay in control of any property associated with your trust, and of course, any earnings the real estate investment generates. Let’s take a closer look at land trust basics you should know.

What is a Land Trust and How Does it Work?

The land trust is an asset protection tool that doesn’t get a lot of respect. There is surprisingly little buzz around this real estate tool, though it can save your assets from unnecessary legal risk.

Land trusts can form a critical part of your asset protection strategy well outside the limelight, and in fact, we prefer creating them anonymously for additional benefits. This type of revocable trust takes the critical first step in asset protection: stripping the title out of your name.

When you establish a land trust, you’re using its trustee-beneficiary structure. Your trustee may then provide for you as a beneficiary of the trust. Lawyers make great trustees because of attorney-client privilege, but you get to choose. This is how you maintain control and enjoy the benefits of property ownership while sidestepping its liabilities. It’s a pretty cool thing, in our opinion.

Why are Land Trusts Helpful for Real Estate Investors?

There are many ways land trusts can help out real estate investors. Let’s just consider some of these common uses of the land trust:

To hold title to a property in place of you personally. After all, it’s also called a title-holding trust. Nobody can personally sue you for something you don’t “own,” even if they suspect you control it in this manner.
To share an interest in property with multiple beneficiaries of your choosing. Friends, family members, anyone you like can be added as a beneficiary of your land trust for any reason. “Because I said so” is actually good enough here, legally speaking.
To disguise company ownership, as explained in this educational article about land trusts’ ability to obscure anyone or anything’s direct ownership of a real estate asset.
To pair with entities, such as traditional and/or series LLCs, for an optimum asset protection plan. When these two powerful tools work together, they can defend a portfolio of 10 or 10,000 properties of any value. This combination is so mighty and widely-useful that it can offer maximum legal protection, including total compartmentalization of assets and true anonymity which are two highly useful features of the best asset protection strategies.

How Land Trusts Best Protect Real Estate Assets

As previously mentioned, a land trust is a great tool but can be limited if used alone. It’s not intended to be your entire asset protection strategy, but rather a piece of it. Recall that properties in LLCs are generally ‘pooled’ legally, unless you use a Series LLC of course.

We’ve found that asset protection works best in layers. A land trust is a great first layer of anonymity. If your land-trust-owned property is also owned by an LLC or a Series within a Series LLC, that’s another layer. From there, attorneys and CPAs can pile on even more layers such as enhanced anonymity, the addition of a shell corporation, and plenty of other legal and tax tricks.

What Do I Do to Form a Land Trust?

Land trust eligibility isn't the same in all states. The only universal pieces of the land trust formation process are these:

Contact a real estate attorney
Let your legal expert know you’re interested in using land trusts to protect rela estate investments. You can ask questions of your prospective attorney, such as what experience they have in this area, to get an idea of their comfort.
If you’re not sure a land trust is for you, your chosen professional should be able to at least offer some advice on your situation or a referral to someone who can help you out. Sometimes we just end up in the wrong person’s office--and lawyers and clients can be bad matches for tons of different reasons, none of them having to do with your indisputable good looks, charm, and glittering personality.

Your lawyer will be able to give personalized advice upon agreeing to help you. Thanks for learning about the benefits of land trusts with us today, and please leave any questions you still have in the comments if they aren’t addressed in our Land Trust FAQ.

Land Trust: The FAQs

If you’ve started learning about the land trust recently, questions are common. We’ve gone ahead and made some primers on what a land trust is and the benefits of the structure, but today, we’re going to answer your most Frequently Asked Questions about the land trust. The inboxes here at Royal Legal HQ are regularly flooded with the same questions--so we plan to start with those. If you have more, just let us know, because we’re always happy to answer your questions--in email or blog format. Let’s dive in.

Land Trust FAQ #1: I Heard Land Trusts Can “Get Around” the Due-on-Sale Clause for Easy LLC Transfers. Is it True?

Yes. Really. We have clients use land trusts for this purpose regularly: to obtain better financing for an investment property. We’ve outlined the basic method before, but here are the broad strokes:

Let your lawyer know what you’re up to.
Buy in your own name for optimal loan terms.
Transfer your property into a land trust.
If desired, move the property from your anonymous land trust to the LLC of your choosing
Enjoy the sweet relief of never worrying about the DoS again.

It really is that simple. We’ve never known someone who got in “trouble” because the worst thing that can happen with this method is receiving a love note from the bank. If this happens, your property can revert back to your name. You know, where it was in the first place.

If you still want to protect the asset, it’s likely you made a misstep the first time. When executed with professional help, few investors ever get a letter from their bank because the bank is none the wiser. Breathe. Due-on-sale violations aren’t punishable by hard labor It’s not a crime to get better deals, and each piece of this plan is perfectly legal.

Land Trust FAQ #2: Do I Need Separate Land Trusts For Each Property?

Ideally, yes. While one land trust is better than none, the optimal strategy is to use one per property. That way, you can really enjoy each land trust benefit for each and every property, whether the benefit you want is:

Anonymity. Each trust will have its own name, and you can preserve anonymity better by using one per property
An easy way to split up Beneficial Interest in the property
A good way to use one or more properties to off-set the costs of major expenses such as a surprise medical cost or college tuition (Fun Fact: Our founder Scott Smith actually used a land trust to help himself pay for law school!)
Asset isolation. Individual land trusts provide more legal separation of assets, the other key to your lawsuit prevention strategy aside from anonymity

Land Trust FAQ #3: Some Blogger Said Land Trusts Aren’t the Same Thing As Asset Protection? WTF?

Regular readers now wondering if we’ve been lying about everything all along like scorned spouses, slow your roll. Actually, anyone with this question can slow their roll. First of all, was Some Blogger a credentialed asset protection attorney? If not, exactly what makes them an expert on the topic? You can look up our credentials, read our reviews, etc. Do the same and check your source.

Considering the Source of Legal Opinions

You’re looking to see if their opinion on asset protection is any more valuable than say, our opinion on the best color for your living room we’ve never seen (Coral. Totally go with coral).

See the problem there? We don’t know what we’re matching to, what you like, or anything about you. Also, we’re lawyers, not interior decorators. Our lead attorney Scott Smith freely admits lacking interior decorating expertise--perhaps it was this lack of talent that forced him to turn to law, which he’s pretty darn good at. Remember, he used a land trust to offset law school costs. Did Some Blogger?

Scott’s opinion is the same as everyone else’s at RLS’s. Land trusts are a valuable component of an asset protection plan. That’s it.

By the way, even if Some Blogger is or claims to be a lawyer, remember this: no blog should create some kind of surprise attorney-client relationship. So, they aren’t your lawyer even if they are a lawyer. And just for the record, that same concept applies to this blog, even if you think our pearls of wisdom are awesome. That doesn’t make you a client; it makes you a passionate reader. We love both at RLS.

Bottom line: land trusts alone won’t always protect assets, but an asset is better protected in an land trust than in your own name. Land trusts aren’t an entire asset protection plan, but rather part of one.

Land Trust FAQ #4: Same Thing As Asset Protection? WTF?

This ties back into #3. Land trusts aren’t a complete asset protection plan, but they have their place. What role the land trust will play in your plan is a professional’s place to help you decide. Regardless, this lesser-known tool can help most investors achieve their goals.

Land Trust: The Benefits Of The Structure

As we continue our series on the land trust, it’s time to turn our attention toward the major benefits of this structure. Whether you are old friends with this time-tested real estate tool or have never heard of it in your life, the land trust or title-holding trust can truly be the real estate investor’s best friend. Let’s get right into the three most essential benefits of the land trust, an under appreciated yet powerful legal tool.

Benefit #1: Land Trusts Protect Your Anonymity

If most intelligent people are given the choice between anonymity and oversharing, they tend to like the former. Anonymity makes lawsuits a serious pain, and can actually prevent them if the other party isn’t particularly motivated. Learn more about the inherent benefits of anonymity for asset protection. Or, learn how to get even better protection from the next tip.

Benefit #2: Land Trusts Make Lawsuits Against You Harder

The land trust’s anonymity powers help it prevent lawsuits. Anonymity alone is rarely a good asset protection plan. But by the same logic, it’s impossible to have a highly effective, what we like to call “judgment-proof” package.

Anonymous land trusts can own companies, disguising you personally and your ownership.
Your entity strips the asset of inherent liability and separates it legally from you.
In the event of a lawsuit, entities are legally separate from you and your assets (when structured properly).

Trusts are more difficult to sue than individuals. Trusts paired with entities are even more difficult, and we’re about to explain why in detail. Pay attention if you’re looking for an ironclad asset protection strategy that stops suits before they start at all.

Benefit #3: Land Trusts Kick Ass at Preventing Lawsuits When Paired With Entities.

Of course the asset protection folks save the asset protection benefits for last. But think about it: anonymity is something you need, and the land trust removes property from your own name. It doesn’t have to stay there, though. You can reduce your chances of a lawsuit against you to almost “none” by simply pairing the land trust with an appropriate entity. We’ll give you the play-by-play of both why you need to do this and how.

To build a high quality asset protection system, pair the humble land trust with a liability-limiting entity. This is a highly intelligent, easy-to-manage, cost-effective way to approach a basic asset protection strategy. Here are the very broad strokes of real estate investors effectively pairing entities and land trusts actually looks like.

Protecting Assets With One-Property-Per-LLC Strategy

First, think of one of your investments. If you don’t have one, imagine your dream spot--maybe in a place you’d like to vacation to. Now, we don’t want anyone coming after that badass property in court. So you might stick it in a Traditional LLC. An ideal strategy is compartmentalized as well as anonymous.

Compartmentalization is the second key of your plan, and it’s your entity’s main job. One Traditional LLC can protect one asset completely as a holding company, or you may choose to use it as a shell company to assume operations for a Series LLC.

Series LLCs are ideal for the investor or multi-property owner because you can have as many “compartments” (Series, miniature liability-protected companies) as you like. Learn more from our educational Series LLC content on this structure’s benefits, uses, and FAQs. But for now, just understand that the Series LLC achieves perfect compartmentalization, with each of your assets snugly secured inside its own Series.

Compartmentalization compliments anonymity brilliantly, and is indeed what we call one of the pillars of asset protection. If your assets aren’t connected to you, and nobody can figure out who the hell you are, you because a righteous pain to sue.

Bottom Line: Land Trusts Have Many Benefits for Real Estate Investors

The list above is far from exhaustive. There are many more nuances and benefits to land trusts, some of which may apply only in certain situations. For instance, some married couples love them because they allow for a legal ownership method known as tenancy-by-the-entireties. Land trusts can be used like savings accounts backed by appreciating assets, as estate planning tools, for executing transfers around the due-on-sale clause, and many more cool legal tricks.

Just know that using this tool can get you all sorts of perks, and don’t overlook land trusts when constructing your asset protection strategy. You’d just be cheating yourself.

The Real Threats to Your Self-Directed IRA & How to Defend Against Them

One of the many reasons real estate investors love the self-directed IRA (SDIRA) is the control they have over both their assets and participation with traditional custodians. But many investors are also aware of the SDIRA’s relative security as an asset protection tool. If you weren’t aware of this benefit before, you are now.

Don’t make the same mistakes other investors make. Watch out for threats to your SDIRA’s security. If you establish an SDIRA, it’s smart to do what you can to protect it; read on to learn how.

How Safe Is Your Self-Directed IRA?

When pros like attorneys discuss self-directed IRAs being “safer” than other investment vehicles, they’re referring to safety in two senses of the word. Your SDIRA isn’t “safe” from any type of attack, but it does protect you legally:

From lawsuits against you personally over plan assets
From direct attacks, as IRAs are extremely difficult to sue compared to individuals or companies

So, this article isn’t intended to suggest IRAs are inherently risky, just to remind you how not undermine its protections. The sticky reality is that for real estate investors, self-directed IRAs can be riskier when they own assets (including REI property) that have liabilities attached.

Your Biggest Threat: Prohibited Transactions Explained

The biggest way you can be a danger to yourself and your self-directed IRA is by performing prohibited transactions. The prohibited transaction rules are a gift from our buddies at the Department of Labor. Basically, there are things you can’t do in a business context with your SDIRA:

Self-dealing is the term for doing business with yourself via your self-directed IRA or other qualified retirement plan (QRP). You can’t do this, frankly, because of too many opportunities for corruption.
Disqualified People.The DOL isn’t dumb. They disqualify certain individuals, namely relatives, spouses, and other types of people you might form “sweetheart deals” with like business partners. So to keep everyone playing fair, plan participants can’t allow their plan to make transactions with anyone the DOL labels a “disqualified person.” Expect to pay hefty penalties if you do.

For your convenience, we’ve compiled an educational resource about avoiding prohibited transactions, complete with examples. Our prohibited transaction resources can help you educate yourself to the point you avoid engaging in such transactions with your self-directed IRA. The only downside to the SDIRA’s freedom from custodians is such freedom means you are responsible for dodging prohibited transactions.

How to Protect Your Self-Directed IRA

You have additional options for protecting your IRAs. For those of us concerned about our real estate assets, the liability-limiting powers of the SDIRA LLC offer an elegant fix.

Consider a Self-Directed IRA LLC for Liability Protection

The ideal legal tool for a long-term SDIRA owning REI is the SDIRA LLC. This variation of the retirement plan is hybridized into an entity, a more secure option for investors.

The SDIRA LLC is an alternative to the IRA Business trust, another option for IRA-owned entities. Real estate investors are attracted to the LLC option because of its strong liability protections. Using an SDIRA LLC gets investors the flexibility to buy real estate with IRA funds and the protection of an LLC, or the best of both worlds.

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.

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.

Understanding How Important Rental Property Liability Protection Is for Modern Investors

Are you a landlord? Do you run your business in a haphazard and lax manner with no regard to how your tenants and other potential litigants perceive you? Are you totally clueless about how to reduce risks and limit personal liability? Then you’re what we refer to in legal circles as a high-profile target. You’re basically walking around with a “SUE ME!” neon sign on your forehead. To understand the importance of taking a proactive approach towards rental property liability protection, you need to be aware of some of the flimsy and not-so-flimsy reasons that can result in substantial damage awards.

7 Ways You Can Lose Your Shirt Without Rental Property Liability Protection

Disagreements

The number one reason for lawsuits is disagreements as demonstrated by one of our clients. You can do very little to prevent them from happening, even on your best behavior. If you don’t have an asset protection strategy in place, then you might as well hand over the keys to your castle to a complete stranger. We recommend setting up a Series LLC and shell companies to hide your assets from litigants.

Injury on the Premises

You will be held personally responsible for injuries to tenants and guests that occur on your property. If the litigant can prove that the injury was caused by negligent behavior on your part, then you might be in for it.

Dangerous Conditions

Sometimes, it’s not even necessary for the litigant to prove negligence. If they can show that you know, or should have known, about a dangerous condition on your property and you failed to remedy it or give adequate warning, then you will have to pay up.

Vehicle Liability

Any vehicle used by your business including those of employees and agents can result in a claim that can expose your business to a liability. It may have nothing to do with your tenants but you may have little recourse if you have not adopted smart liability protection strategies.

Dogs and Critters

Pets and other animals can also expose you to liability. This is the reason why most landlords prohibit dogs on their property. While you won’t necessarily assume liability for your tenant’s dog, all that the litigant needs to prove is that you “knew” or “should have known” the dog was dangerous or that you exercised some control over it. As you can imagine, it wouldn’t take much doing to prove this.

Security Issues

It’s not your responsibility to protect tenants from criminal acts. However, the law has evolved to a point where it’s possible in some circumstances to take responsibility for the tenant’s security. You’re expected to keep the common areas such as stairways, hallways, and elevators safe from criminals.

Bad Tenant Behavior

You may assume liability for the bad behavior of a tenant. If you are aware of any obnoxious, unlawful or other bad behavior by tenants, you should take the necessary steps to protect the other affected tenants. Failure to do this could result in a lawsuit.

There are plenty of lawsuits based on liability claims that can arise from other sources such as invasion of privacy, libel, slander, and discrimination based on religious beliefs, race, or even evictions. This is why you need to establish an LLC as the first step towards protecting your investment from liability claims. We can help you come up with an asset protection strategy that will hide your personal assets and make you an undesirable target.