What is up YouTube? This is Mentorship Monday. If you guys want to be a guest on Mentorship Monday
Live just email us at HelpMe@derosagroup.com. That is HelpMe@derosagroup.com and do not forget
to smash that subscribe button. Justin Fraser, what are they going
to get in this episode? Today's episode was awesome.
We break down the difference between JVs and LLCs, partnerships, how do you do it? How do
you structure your deals? And stay tuned to the end to figure out Matt's best idea for
how to invest across state lines and what Matt is going out to buy today so that you can do that.
JV, ABC, LLC, East Coast family. One, two, three. Let's do it.
There you go. Check it out guys.
What's going on, everybody? It's Matt Faircloth. Welcome. Welcome to the
Mentorship Monday Program. I am here with my co-host of Mentorship Monday, Justin,
the Justin Fraser. Who do we got? Who's our- We have Mr. Dave Campbell. Dave,
how are you today?
Doing well. Hey Matt, Justin. Thanks for having me on the show. I really appreciate it.
Thanks for coming on, man. Thank you for being here.
How can we brighten your day? My question is basically I'm getting to the point
now, which is why I bought your book, and I love the book by the way, thank you. Raising Private
Capital. Huge shout out. Great book. Because I'm going to be in that situation I think very soon,
which I want to start to raise my own private capital to accelerate the real estate process.
I think I've reached almost my limit of advance of where I'm at to be able to purchase properties
on my own with my own capital. With that, I'm looking more of the actual tangible logistics
of forming the partnership. You touch on JVs and you touch on formulation of an LLC. In which
situations would you do each and then sort of a broader question is have you ever seen partnership
form outside of those two? Just something unique that maybe I'm not thinking of?
Getting creative now, right? Okay. So, I've done JV deals. I've done plenty of LLC deals
and I consider LLC deals to be like, we have partnerships with investors that are LLCs,
we have LLPs and we have LP deals. They're all kind of the same and I've discovered over
the years it kind of doesn't matter, but LLC really is the one that's the most common. So,
discarding the LLP and the LP stuff as something different, the only other thing that you could do,
that I've heard of anyway, and people are more than welcome to offer it up, right? Trusts,
meaning like a trust with a beneficiary trustee kind of thing. I've not done that.
I've never done a deal with the trust. And so, I don't think I'm the right speaker on that.
Okay? But I do know that exists. Justin, real quick. Have you heard
of other ways to structure deals with partners or investors that it's not an LLC? Not a JV?
On the equity side, no. Of course, there's debt options for partners, but
you're not going to bring them in necessarily on an equity side. LLCs I would say are the
most common and probably the way to go. And there's a lot of creativity you can
bring into the LLC too, Dave. So, it's not like the LLC really ties your hands. The operating
agreement really opens you up to a blank slate and there's all kinds of stuff you can talk about.
Right. Right? Don't look at it as limiting,
right? Because the LLC actually has a lot of beauty to it in that it's a pass through entity,
so you can pass through losses. There are other entities out there. You could do
deals with a C Corp or something like that. There's a reason why people don't do that.
It's because it's not really structured for real estate deals, C Corps aren't and other
types of company formats and stuff like that. So, getting down to JV and LLC, what is a JV? A
JV is a hybrid of an equity deal and a debt deal. A debt deal is where the lender lends you money.
They're on one side of the transaction, you're on the other. An equity deal is where they're riding
sidecar with you in your deal, alongside and if you win, they win and if you lose, they lose. That
is an equity deal and a debt deal. A JV is really what your lender, the person providing debt,
becomes an equity partner of yours too. And they still are entitled to certain things that
debt gives them. So, maybe a monthly payment, maybe a flat, like a guaranteed minimum on a
rate of return that they get. Not a pref, but they still get a flat interest rate. And they can be
protected with a debt instrument or something like that, but on top of what their note payback is,
is a chunk of your profit. Okay? Okay.
That's the JV. Now, if you think about that, okay, so if I go into debt with somebody, if you think
about that's what a JV is, it starts to lend itself towards a short term deal, but you don't
want to go and commit to debt and equity like that, getting both of those obligations long-term
into a deal. So, the way that I've seen JVs work and the way that I've seen ... Hard money lenders
are big on doing JVs. If you have proven yourself to them that you are a good borrower and they see
upside and they love you or whatever, they will be all about doing JVs with you, but you'll
rarely see them talking about doing long-term rentals because most JV people want an out,
right? They want to see an exit at some point. So, JV deals work better for fixing flips,
right? Okay.
For adding value and then reaping that value out through a sale and then you both part ways and
move on down the road. A lot of reasons for that, it's tough tax return wise to continue
to maintain that JV. If you're going to do it long-term as well as do an LLC. That's
why JVs tend to work a little better on flips, right? LLCs are great for long-term holds.
Short answer to your question is LLC, long-term hold, borrow a strategy, value add, whatever it is
you want to do, if you want to hold the property and have depreciation and have depreciation losses
come through and have that trickle down to investors behind you and alongside you,
LLC, that's what you want. We did a JV deal on ... We built a bunch of townhouses with a JV and it
worked out really well. Investor made a lot of money. We did really well too. So, that's a JV
that works because there's a beginning, middle and an end and it's a 10 month cycle.
Okay. Just one follow-on question. Please.
Let's go down the LLC route. Let's go.
So, you're looking for a long-term partnership with a guy or an entity, let's just say-
Or a gal. Come on. Or a gal. You're right. Diverse inter-persons.
You're in one state, this person's in another state, the named rental is in another state. I
think you'd want to form the LLC in the state that the rental is at, but I just want confirmation on
that or is there some- Why?
Actually, I don't know. You know brother, you're on my
quiz show now. Right? Yeah, right.
Why do you believe that? Well, I think I'm just going off of nothing more
than my own experience. I have an LLC in North Carolina, but I used to live in North Carolina.
And so, it was formed there because the properties were there and I was there in this case. So,
I guess this a little bit different of an example, so it just made the most sense. So, I guess-
Well, if it helps you, you're right. So, that is what you want to do.
Okay. All right. I'm right, but I don't know why.
You got him all uncomfortable. All right. I have no idea. I don't know.
Here's why. Here's why you want the LLC in the state that you own business because
the state you're doing business in is going to charge you ... You're going to file a tax return
because you made revenue in that state. Right? So, that's where the rental income came in and
that's where the money was made. So, you will owe a tax return in that state. Why would you
set up an LLC in California while you also buy a property in North Carolina or why you do business
in another state? If you're not doing business and transacting commerce in the state the LLC
is set up, that doesn't make sense to me. And hey, I should say now, I'm not a CPA, not an attorney,
but it just seems to make sense to me. And my CPA told me that that's what we're supposed to.
So anyway, I believe that you should set the LLC up in the state where the property
exists and then where you are and where your investors are, that's secondary.
Justin, what do you think? Yeah. I'd say the only caveat to that is you hear
a lot of people talking about setting up in states that are tax friendly, Nevada, or maybe Delaware.
I think for smaller scale, things like what you're doing, I'd take Matt's advice. Absolutely.
It's another reason we're building in Nevada, Wyoming is because they're non-disclosure states.
So, if we owned an LLC and somebody decided to sue the LLC, there's no way of finding out
who's behind it in those states. Oh. I did not know that. Okay.
Yeah. It's not public record. It's like none of your damn business kind of state,
who's behind this LLC. It's called piercing the corporate veil, meaning getting through the
company to get to whoever's standing behind it. You can do that a lot easier in other states, but
you hear people doing these whacked out, I'm doing a Nevada C Corp and a Wyoming based whatever. It's
because those states don't disclose who controls and owns those companies very easily or at all.
That's really the only caveat. I think it makes sense to have an LLC where you're doing business,
but if you have an LLC that has properties in multiple states, what then? Right?
Yeah. Well, I've heard a strategy. We've only been in that boat one time and it did not make me very
happy because we had to pay multiple tax returns and stuff like that. The strategy I've heard then,
let's say we've got Dave Campbell with his awesome LLC that decides he's going to buy
a property in North Carolina and South Carolina. Okay. The way I've seen it done is you're going
to have either a series LLC or a sub LLC that's going to own your North Carolina property and then
another LLC in South Carolina, that's going to own the property in South Carolina and both those
two LLCs flow up to a parent LLC that you own that's maybe in one state or the other state.
It's a pass through entity, so it may still not work that way. I don't know. I'd talk to a CPA.
But yeah, I think that for multi-state ownership like that, Justin, it probably gets a lot weirder
and a lot more difficult. Yeah.
I guess keeping it the cleanest would be having the LLC in each of the states, but if you
really, really wanted to have it all nested under one LLC,
there is a way to do it I guess. Yeah. It depends on your goals too.
If you're going to have one LLC and one property in 50 states, right? And you going to have 50 LLCs
to manage, that could be kind of tough. Sounds like a good goal.
Right. You're going to make a big ass mess. It sounds like an operational nightmare.
This is a big stinking mess right there is what that sounds like.
Okay, maybe two or three in two or three areas. Like you go buy an RV just so you can go on the
road to go look at your properties. That's it. Like, "You going on a road trip?" No,
just running business. Just touring. Then wherever you go in the US,
it's tax deductible. There you go. Right.
Yeah. That's true. Yeah, it's true.
You're right. There you go.
So, Dave, great question. Just how to structure deals with investors is a core
base question as you grow in the real estate business and everything like that. And using
the right entity, using the right structure is absolutely imperative to do it the right way.
Yeah. And to maximize profit for your investors,
maximize a decreased risk exposure for yourself and that's why these things are out there.
Well. I appreciate it, gents. Thank you for having me on firstly, and then also thanks for the
clarifying answer to the question. It definitely helped a lot as I move forward and I think I'm
going to be in this boat here pretty soon. Nice going.
Great, Dave. Great to meet you. You too. Thanks guys. Appreciate it
Thanks for watching guys and have a
great profitable week. Great profitable week.