Hey, what's up, guys. It's Clint Coons here.
And in this video, we're going to talk about the five mistakes that I see
real estate investors make when it comes to their asset protection.
Okay. Let's get started.
Okay.
So what is the first mistake that I commonly see whenever I sit down
with a new investor client that has already had some structuring going on?
It's at the Choose the Wrong Entity.
You see, when it comes to real estate investing, a lot of times
people either have an existing entity that they're trying to then turn from
a business into investing in real estate, or they just set it up wrong from
this get go because they didn't understand how they should be setting it up.
Now, what do I mean by the wrong entity?
It really comes down to taxation.
So when we're talking about limited liability companies,
which most people
are going to use, I'll set up an LLC for their rental real estate.
You've seen my other videos on this throughout my channel talking about LLC.
The problem is, how is that entity taxed?
You see, when you're using rental real estate,
if it's an investment property, you want that income
and that depreciation to flow out so you can take it on your 1040.
You also want to be able to have flexibility with your structure.
So if things need to change, such as you want to refi the property,
you can take the property out and it won't create any adverse tax consequences.
So the mistake they see a lot of investors have made over
the years is that when they create a structure,
many times they will elect S-Corp taxation for that LLC or possibly
they already have a limited liability company that's treated as an S-Corp.
Maybe they have an existing corporation right here
when this is an S-Corp or even worse
yet a C corporation, and then they buy a house
in the name of that company because for a lot of us it's like we set up a new one.
If I've already paid to set up this one company.
The issue is, is that when you use an S
or a C corp, any B an LLC taxes and so or C Corp
or just a traditional corporation, is that if you ever need to move the asset
out of that company, it's a taxable event.
And so here's what happens.
Oftentimes you meet people that have set up an S-Corp
or they have multiple properties inside of it.
And then they they want to adopt a strategy
where we're going to create multiple limited liability companies like this.
We want to shut this one down, transfer these properties out and put them in
separate LLC.
So we're minimizing our overall risk exposure.
The issue is that we can't do this.
We can't pull them out of that company because it's treated as an S-Corp.
They're going to get hit with taxes if we did that.
So we're forced to come up with a hybrid structure for them.
Typically, which means you create LLC up here
and you drop them down into that one structure.
I should cut a video on that to do tell people how to fix their S-Corp
screw ups if they've already started investing in real estate.
That's a video for a different day.
Okay.
So this brings me then to my second issue I see with people who set up
structures for their real estate investing, and that is
when they create the structure, they don't think about anonymity.
So they're creating that limited liability company here
that they're going to set up, say they want to invest in in Ohio.
So you create an Ohio limited liability company and you never consider
consider the ramifications that if you set this up,
you're going to be listed on the LLC, you're listed
as the organizer on that company because you submitted the filings,
you could be listed as a member or manager of the state collects that information.
And then once the deal is done and you have your property inside of there
and you later decide, hey, I watched this guy in YouTube named Clint
and he's talking about the benefits of anonymity, and I really want that.
And so ideally, what we would like to do is take you out, right?
Put in a Wyoming LLC down here and make this
LLC member managed by the Wyoming LLC
so your name doesn't appear on the Secretary of State's website.
It's going to be the Wyoming LLC
The problem is you're in the chain of title, meaning that
you're in that chain of paperwork that was submitted initially.
And if we attempt to do this little strategy right here,
somebody could figure it out.
All they have to do is research this entity and see that three years ago
you created it.
Now, granted today you're no longer listed on anything associated with that LLC
because it has your new Wyoming holding company there,
but it's still traceable back to you.
So if you want anonymity, you have to start with that.
Strategy to begin with.
So you first start with this entity here.
Then when you create this entity up here, you don't do the filing.
You hire someone else to do it.
Like my company, Anderson, we will do the filing so your name doesn't
ever appear on anything that's submitted to the state.
Okay, great. So that's number two.
Unable to obtain anonymity.
Now, the third mistake that I see people make with their structuring
is that they've created their LLC right here.
And don't worry about the colors today.
I'm not doing Wyoming and blue and stuff.
I'm just I'm just spitballing here with a pen.
So we've got this Wyoming.
We've got an LLC set up, and now we have this property
right here we had to take title in our own name
because we're using Freddie Fanny to buy it.
And now we want to deeded into this limited liability company.
So we prepare what is termed a quick claim
deed to transfer this property into the LLC.
The issue with using a quick clean deed
is that when you transfer property via a quick claim deed, if I
if I'm doing the research on this title transfer and let's say that your name
doesn't appear here,
we don't know who owns this LLC because you you didn't screw up.
And number two, you used anonymity to begin with.
The thing is, is that if I see a quick clean deed going from an individual's
name, to it to a business entity, I know that person is still the owner
of that business entity, even though they're not listed there. Why?
Because no person would ever accept a quick claim deed
if they're buying a piece of property.
Think about it.
When you bought your house
or your rental property, did you take a quick, clean deed?
No. Why not?
Because a quick claim deed is like an as is when you buy property houses, you
take whatever you get.
When you accept a quick claim deed, you're getting whatever this person holds.
And if that person doesn't own anything or it's fully encumbered,
you take all those encumbrances that come with that property.
That's why people don't accept quick claim deeds from sellers.
So I know now that this was not a bona fide
transaction, that this isn't some third party here
because they would never take a quick claim deed from this individual.
So you just clued me in the only time this is going to take place
is when you own the entity because you trust yourself.
You know what's going on with the property. Right.
That brings me to number four.
In the mistakes that we see many times when people create limited
liability companies and they file the entity with the secretary of state,
they think, Oh, I've got an LLC and they stop right there.
That is a problem.
What you need now have is an operating agreement.
All right.
This needs to get set up and the operating agreement spells out
what happens with your limited liability company, who the members are,
who the managers are, how distributions are going to be made.
More importantly, the importance of an operating agreement
is so that if you're ever dealing with a title company or a lender
and they asked to see a copy of it,
you want to make sure that that operating agreement carries weight.
So what do I mean by that?
Let's say I'm going to borrow some money
when I'm trying to work with the LLC to get this loan done.
It's a non-qualifying mortgage and they ask to see a copy of my
LLC and I send over my articles of organization.
No operating agreement.
Well, most lenders will expect that anybody who set up an
LLC has drafted an operating agreement that spells out
how the company is to be run, not just the filing with the state.
So then what I've seen people do before is a jump on the Internet.
They print out a six page operating agreement they found for free.
Maybe it's on an E jet printer and half your ink is running out.
And so it went from black to graves.
It goes down, they throw it on their desk where they just had a cup of coffee
and there's a coffee stain on it.
And then they sign it and they turn it in to the lender
or the title company and they say, Hey, take me seriously.
Now come on. What do you think they're going to do?
They're going to realize
that you are not taking this business seriously, that you're just doing this.
You're going along trying to put things together on a shoestring.
And so that's going to give them pause when you set up an LLC.
What's important and what I say is critical
is that you draft an operating agreement
a that's represents what the company's business is, right?
So the operating agreement, if it's rent or real estate,
it's going to talk about
rental real estate, or if it's flipping, it's
going to have provisions for flipping inside of there.
But more importantly,
the operating agreement looks like it was done professionally.
That's going to help you do more.
So it's critical that you draft an operating agreement.
Now, the last mistake
that I see over and over again with limited
liability company or asset protection for real estate investors
is that once this structure is in place and it's set up
many times, we're moving from a place where you own the property, right?
Then we're dealing it into the LLC,
not using a quick, clean deed, but using a warranty deed.
I didn't tell you that you use a warrant, and now it's in the limited
liability company,
but you still have your tenants right, that are renting the property.
And what do you do?
You keep collecting the rents directly from your tenants
and you're not running the money through the LLC.
That is a huge mistake because if anything goes wrong,
the perception is that, A, you owned the property.
Now somebody could say, Well, you can look that up on title Clint.
You could see that the LLC owns the property.
So even though I was collecting the rents, I'm not the owner of the property.
But the problem is, is that you expect the LLC to protect you.
Now, if you're running the money from the tenant directly to you
and then it goes into your personal checking account, you've got a problem.
You're ignoring the separate ness of that limited liability company.
And by ignoring the separateness of the LLC, the courts will do it as well.
So if you make this mistake and you're running money
directly yourself, then you definitely need
to run it back to the LLC and then take out a distribution.
This is how the money should go.
They got a distribution out of your LLC.
What I recommend people do is that after they put their property into the LLC,
contact your tenants, tell them, Hey, there's a new owner on this property.
Going forward, please send all payments to X, Y, Z, LLC.
So you got your bank account here, tenants paying the LLC
and then you're taking out your distribution.
So those are the top five mistakes I see Real estate investors
typically make when they're setting up their asset protection and going forwards.
I know you will no longer have that problem.
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