Hey guys, in this video I'm going to teach you all about the proper
use of limited liability companies when it comes to investing in real estate.
For those of you who don't know what an LLC is, it's a limited liability company.
It's a great way to protect your personal assets while investing in property.
So whether you're first getting just getting started
or you're already experienced in real estate,
this video is going to be for you.
I'll be going over the basics of how LLCs is work and some tips
on how best to make them work for you.
Now real quick, if you want to learn more about how
to properly structure all of your real estate investments
and protect your assets, you can register for our Free Tax
and Asset Protection Live event at the link below.
For those of you who are new to investing, let me start by explaining
what exactly a limited liability company is.
All right, so here's an LLC.
Just take its name.
Break it down.
Limited liability company.
It's a business entity that protects you.
And the nice thing about it
is that there's two forms of protection that come from using an LLC.
So let's say this is my company.
You have what is called inside protection and outside protection.
So I'm down here. I'm the member in this LLC.
Let's say that this this LLC owns a piece of real estate.
Now, if something goes wrong with that real estate and the tenant is injured,
then a lawsuit is going to be brought against a limited liability company.
For example, one of our clients
just recently was notified of a lawsuit that they're being sued.
They live in California and they have a property in Florida.
Well, the tenant on the Florida property injured themselves
on their walking up the stairs.
And so they hired attorney.
And now that attorney is suing this client
personally because that property was in their own name.
Now, if this individual had seen this before, the harm occurred
and they'd created a limited liability company,
then that claim would not run to the individual investor themselves.
The claim would go to the LLC
so the creditor would be forced to sue the LLC.
What that's going to do is it's going to contain
that liability inside of that, that LLC.
So if a judgment was entered against it for, say, $300,000
and the assets of the LLC or only 100,000, well, the most
the creditor is going to get is the 100 can equity in the property,
the other 200,000 they'll never collect on it.
So that's one benefit.
The second benefit of the LLC, what it provides
is that for the limited liability company, you have outside protection as well.
So if I got sued personally then that claim should stay out here
and it should not impact my property
itself because the LLC keeps that liability outside.
Now how can an LLC be used for real estate?
So this is a thing that comes up a lot.
People always want to know,
how am I going to put this LLC to work in my real estate investing?
All real estate investors at some point in time
have been confronted with whether or not they should use an LLC.
And it really comes down to where you're at with your investing.
You currently have rental property or you considering
purchasing some rental real estate.
So if you currently have a rental real estate, then what I would tell you is
you should set up a limited liability company
and you should place your property inside of that LLC.
You're going to deed it into the LLC for that asset protection
that we've been talking about.
Now, if you're just getting started, you don't have any rental property yet.
This is a situation then where you have to analyze,
all right, how you're going to acquire that property.
Are you going to pay cash or are you going to get a loan for it?
If you're going to pay cash for your property, then make most sense.
Then to create an LLC to take title to that property.
But on the other hand, if you're going to use financing,
let's say you're going to go out and work with a qualified mortgage
lender like Wells Fargo
or a broker that, you know, well, then it doesn't necessarily matter.
You don't need to set up that LLC right away for that property
because you're not going to be able to close in the name of the LLC.
So what I would recommend if you don't yet have real estate
and you're going to be financing with a traditional lender,
then get the property in once you've secured the property or what
we call once your money's gone hard and you know you're going to have that,
you're going to close on that property, then set up the limited liability company,
and then you can move that property after closing.
So you initially you closed in your own name
and then you've got your LLC set up over here
and then you'll transfer that property into the LLC after you've closed.
That's how you should consider setting these things up.
So what are the benefits from using an LLC from a real estate investor standpoint?
We're really comes down to asset protection.
That is the main benefit why we should be using LLC for investing.
And the thing you need to I think you should look at is
when you're setting up an LLC, a common mistake that I see
a lot of people make with LLC is in their real estate investing
is they'll think, All right, I'm going to put
three or four properties into this one LLC.
And in fact, I have a client right now I've been working with.
They have 17 properties inside of one LLC.
Now, I highly discourage you from adopting a strategy like that,
because if something goes wrong with one of these properties,
then all of your deals inside of that one LLC are going to be at risk.
So remember by example, I said a $300,000 judgment was
entered against the LLC, but if you only had 100 K,
that's all the creditors are going to be able to collect on.
Well, in this case, if they're 300,000, they'll be able to go against
every single property inside of that LLC.
So it's better to adopt a strategy,
in my opinion, where you set up one LLC per property.
If you watch my other videos, any of my other videos where I'm talking about LLC,
as you know, I out on this topic that using one property
per LLC is the best approach because it limits
your overall risk exposure for your assets.
Because I mean, just think on this.
How long do you think it took that individual to acquire 17 properties?
It just didn't happen overnight.
And now you're going
to put all of those properties at risk for one ridiculous lawsuit.
I don't think that makes financial sense to do that.
And using your LLC is what you're going to do if something goes wrong.
The most I've put at risk is just that one property.
Now, are there any drawbacks to using an LLC as a real estate investor?
Well, the drawbacks that I see when it comes to using an
LLC are really client generated or people set them up.
If they don't know how to set them up the right way,
they can create problems for themselves in the way they create them.
For example, I see a lot of times where people set up LLC, let's say
it's a husband and a wife here investor and both of them want to own every LLC.
5050 Well, the issue that you could come up there
is that I'll run into these individuals.
Will I have an LLC and then they're filing ten
tax returns for each of those LLC.
Have to file a return.
So that's a drawback.
If you're not setting them up the right way so they don't have to file
tax returns, it can get quite expensive to set up the LLC or I'll see clients.
I'll have 12 limited liability companies.
They have 12 separate bank accounts created
because they don't understand that you can use a management entity
and you can reduce the the complexity of running your structure.
So the problems that come from using LLC are typically driven
by the advisor who doesn't understand them or the individuals setting them up
because he don't realize
there's different ways of creating LLCs for their real estate.
So how do you set up an LLC for your real estate investing business?
I'll just tell you this you can go to legal doom
or zoom like I like to refer to it.
And, and, and you can set it up on your own
and kind of hope that you get it right.
You can go out and you can hire professional, but ask yourself,
Do you know what you're doing when it comes to setting up that LLC?
Does that professional know what they're doing?
A lot of times people assume just because the person
that they're talking to is an attorney or they're a CPA, that they understand
your business.
The thing that I've discovered in my own real estate investing over the past
20 years, you know, grow a portfolio over 300 properties.
You learn a few things along the way.
And that is not a one size fits all approach.
You have to understand the strategies that you're considering starting with
and then create the structure around that.
So so if you're wholesaling your flipping BRRRR strategy, short term rentals,
different strategies require different types of structures.
So you could set up your LLC on your own,
but would it be the right structure for your business?
In my experience, most people don't set it up the right way
because they don't understand the business or they'll go out there
like there's this
another client that I've been working with wanted to set up a 1031 exchange,
and we're talking about buying a replacement property.
And they said, Well,
before you go forward, let me see a copy of your operating agreement.
She sent over the operating agreement,
and I'm looking through the operating agreement and it has the LLC
name set up there, but it states that the LLC was set up in Ohio
when originally when it's actually a Wyoming limited liability company,
it states that there's a different manager involved in the LLC,
somebody I don't even know who that is. And she didn't know who it was.
And what I figured out
by looking through the operating agreement,
she grabbed a form document and just didn't do a good find
and replace, and she was about to turn that over to the exchange.
A commentator and the lender who was helping finance the deal.
On the back side of this 1031
I said, Hey, this could have possibly hung up
your deal here and screwed up your closing.
Because when someone looks at that document,
they're going to see that
you're not taking this business seriously like you should be.
So I really don't think people should set up their own
limited liability companies for real estate. So
a lot of you have existing LLC.
So could you use an existing LLC to invest in real estate?
Well, that just depends on what that LLC is doing.
So let's say this, you have a an LLC that you set up and you were using this
LLC for delivery service for a number of years.
You're going out there and you're delivering products
and maybe you had a few mishaps along the way, maybe one or two accidents.
And now you decide you shut that
that business down and you're no longer doing it.
And so you know what, I'm going to use that LLC
and buy my first rental property, put my rental property into there.
Well,
what happens with these types of situations with with businesses
that have current that have been run in the past inside of an LLC,
you have what's called statute of limitations.
That means if somebody was injured
in one of those accidents, they have typically three years to sue you
or maybe your business entered into a contract with this individual
who feels like I didn't get what I what I contracted for.
They may have six years to sue you.
So if you have an existing limited liability company that was engaged
in a different type of business and now you want to convert it
over to a real estate LLC, I would just say, don't do it.
It's better just to shut that business down and any claims that are associated
with that business disappear with that business and set up a new one.
It's no different than if you were flipping property.
So if you're flipping property with an LLC, I'll tell you sell your property
and then shut your LLC down and get rid of it.
Now, why would you do that?
Well, the perfect example is another client that I've worked with.
She had flipped a property in New York to two attorneys.
Now, that's a biggest mistake you made right there.
Never sell a property to an attorney, let alone two of them.
They bought the property.
Two years later, they figured out, Oh, well,
my home inspector missed something on the inspection.
This is a problem. It's going to cost us some money to repair it.
We want to hold the seller liable.
So they started a lawsuit against my client.
Well, actually, what they did is they they started a lawsuit against my client's
limited liability company that she sold the property from.
Just think if she had sold the property and now she had a new property
in that LLC, those attorneys could attach that new property.
They could file this pendants, tie that deal up so she can't sell it.
Or if she does sell, they get paid. But she was smart.
What she did, she followed.
My advice is, after she'd sold her property, she'd Sutter shut her LLC down.
These attorneys are suing an LLC that's no longer in existence.
How long do you think that lawsuit is going to last?
Not very long, because that LLC is no longer there.
They have nothing to attach to. So.
So if you're getting started in real estate, my recommended option,
if you have an existing LLC, it has not been used.
Yes, you can use it.
Make sure the tax collections are right as well.
That's another issue that you have with LLC.
But if you've already used an LLC, don't don't use it for your business.
Now what are some things to keep in mind when create an LLC for real estate?
Well, I just mentioned one of them taxes.
Right?
When you're setting up a limited liability company for your real estate investing,
make sure that you're making the proper tax selection.
You can create an LLC that's disregarded
for federal tax purposes so does not have to file a tax return,
could be a partnership, could be an escort, it could be a C Corp.
Now each of those tax federal tax elections have their pluses and minuses.
You want to make sure that the LLC you're creating chooses the proper
tax selection, so you're not going to be overpaying
or losing out on on some of the benefits of owning investment real estate.
So so that is a big concern to keep in mind creating an LLC.
The other thing is make sure you have an operating agreement
a lot of people think have to do is register it with secretary of state
and then it's good to go.
We actually need to draft and operate operating agreement.
That operating agreement should reflect the type of real estate
activity that you're running through that business.
And the other thing that I would tell you to keep in mind
is that if you want to create
a great asset protection structure, it starts with anonymity.
I've got a lot of videos on my channel discussing anonymity
with limited liability companies and here's the thing about it.
When your information gets put out there,
if you're going to file an LLC on your own
and you're going to list your information on the filing,
which you have to do
if you do the filing on your own or in many states,
if you're the member manager, your name and your address will be listed there.
You just lost out on.
One of the greatest benefits of having LLC is is that you can set them up
so that your tenants and creditors, they don't even know that you have them.
And so if you're thinking about setting up a limited liability company,
I would strongly suggest that you look at using
an anonymity structure in your planning to create that LLC,
so you protect yourself from creditors and from disgruntled tenants.
Hey, if you like this, you want to learn more.
I want to invite you to our Tax and Asset Protection Workshop,
where we go really deep on into limited liability companies, land
trusts, corporations, wholesale trusts, and how to use them
in your real estate investing.
How to set them up the right way if you want anonymity.
Not only do we cover that, we talk about tax planning for real estate investing.
So many people don't realize how many benefits are available under the tax code.
If you're a real estate investor
and you don't have to be a real estate investor,
if you're a small business owner, you should come to this event.
You're going to pick up some nuggets that you're not going to learn anywhere else.
I can guarantee you that we have a tremendous tax department inside of
Anderson that works with individuals just like you to reduce your taxes.
And the best part about this event, why you want to be there is because not
all you're going to hear me talking about asset protection,
liability planning, where you're investing in my partner Tobi talking about taxes.
I know you're going to have questions and at this event you're going to get
those questions answered live by attorneys and by CPAs and tax strategists.
That will be on the event with me answering
those questions that come up during the event.
So you want to learn more about there.
Make sure you click on the link and you get to that event.
Otherwise, I wish you the very best with your investing.