The perfect entity and tax structure for rental property investors

0:00you might not need any llc's at all if you're a person that has no assets and you don't care about your credit right but that's probably not any of us you know those of us that are out there that are we at least probably have good credit because we're we know we need that for financing right and we probably maybe have anywhere between you know one to five properties it's pretty typical and those might be single family homes and so then what we come into is like say well okay what what do I need in terms of protection then well definitely recommend you still have insurance remember insurance is our best first line of defense but we don't want to trust a profit-seeking corporation to have our best interest at

0:48Heart it's not in the nature of what they are right they're really good at getting the low dollar claims but when things get expensive their business model tells them to deny coverage which leaves the people suing you and then all kinds of headaches unless you have asset protection put in place and that the LLC structure so what I recommend everybody do that's in the single family home space is to form a series LLC as you can form it either dexas Delaware Nevada or Wyoming you can use it anywhere inside of the United States based upon the Full Faith and Credit Clause of the US Constitution the same reason you can form Delaware llc's and Delaware and use miv Wells same reason you can form Series llc's in one state and use them everywhere too and you want to form in one of those four states because those are the only states that have charging order protection meaning that if I sue you the individual I

1:36Can't get to your LLC which I know that sounds crazy you would say why you know why would they ever have you know any other way point but you know like there States like California and many many other states where they don't they don't protect you from in that way so you want to make sure where you form your lsy is just as important as what kind you form and I just gave you the secrets just now got it and I've heard other attorneys talk about like very complex setups where like a corporation owns the LLC and you know there's I think the whole the whole reason for it is an anonymity you know do you recommend that or is that Overkill well

2:25We have a a strategy in which what we use is types of what are called re vocable grantor trusts they're like anonymity trusts that are used like private property trusts or land trusts are all the same type of trusts they don't provide any protection on their own but what they do allow you to do is to create anonymity and it's pass through for tax purposes there's no bookkeeping no anything there's no yearly maintenance that you have to do U for any of that so what that means is you can actually form a series LLC in one of those four states and then the net effect of it is that when you create the trust like a trust that will own the LLC and the trust will own the any of the underlying properties you end up with complete anonymity so but it doesn't cost you anything extra so it's very very simple and easy to do

3:13It that way and it keeps your cost down among other things got it oh interesting and it's the same trust that you would you know create for like estate planning right like to in order to be able to pass your assets along or is this separate separate trust from a legal standpoint the technical answer is it is the same type of trust because it's a revocable grantor trust but inside of reable grantour trust there's hundreds of different kinds of trusts some of them are called private property trust some of them are called living trust some of are called land trust and it depends upon what is going to be the function of that trust so we also will have a a revocable gr tour trust but designed in a way to be a living trust as part of your estate plan plan so your estate plan and that living trust will actually

4:02own The Entity structure with of your series LLC and the anonymity pieces that are put in there which will in turn own all of the underlying properties and assets like your brokerage account extra cash you might have your real estate Etc got it okay interesting and then the series LLC I know a lot of people have questions about that like what's the difference between a series LLC and just a normal LLC it's free baby that's what's great about the series LLC you can create you create one parent entity so you have one entity to file one entity to maintain and they can have an unlimited number of children underneath it and each child is called a child series just like you know human children free to create you don't got to do much to do that right and that

4:50you can create an unlimited number of them for free and there's no additional filing fees and no additional entities to maintain when you do that so that's what makes it ideal for the single family home investor is because now with the series LLC for free you can bucke tize each asset and hold each asset anonymously and hold your whole company anonymously and doesn't cost you anything extra to do it so that way if they ever come to seee you doesn't look like you own anything if they ever come after any one of the properties they can't find out that it's connected to any other property so that they're like I don't know if this guy's even worth suing at all and if they do actually decide to sue the most they can get to is one property which means you're not you're sitting there being like okay great can I lose one property and still be okay in life I definitely can contrast this to the people that are just

5:38owning everything inside of their own name when they get sued what the position they're in is if this doesn't go right I lose everything it's a very different circumstance yeah and so for for that then it sounds like do you have to have a separate business bank account for each one and a separate set of QuickBooks do you recommend or or no I don't do all that that's too much work yeah what you just what you do is you just do a single set of books and a single bank account at the parent level right and then inside of your books just tag the income and expenses or classify that for each property right and that that's really really simple to do you're like okay cool this is an expense for property a this is income for property a right and you can do that in QuickBooks really really simply you can also do it in Excel I mean legally you can actually just write all the

6:27Stuff down on a piece of paper if you wanted to and that technically is like a set of books you know for what the court is concerned about and if you do it that way it's going to hold up in court you're not going to have any piercing of the veil issues or anything like that and and and you should be you know you'll be good to go wow yeah because I I just always assume that youd pierce the corporate veil if they're in the same bank account or same set of books you know that it all has to be sort isolated well what they're trying to answer the question is is are you operating these as separate businesses and the way that I know they operating things as separate business like you are separate from your business and the businesses are separate from each other is if you can tell me about the money what's the story about the money and the story about the money is well you need to tell me e companies keep track of their money separate from each

7:15Other right that's how you know how well a company is doing well as Real Estate Investors we should be doing that anyway how do I know what the ROI is on my property or my depreciation schedules or my expenses for taxes if I'm not tracking it throughout the year I'm not doing my work to help my CPA right if I'm I'm not doing that so we just you just do that and then okay so great now we're in front of the judge they says well are you treating these as separate businesses you're like yeah look it's a separate you know legal I can show you the money you know is separate right and that I have it accounted for separately and it doesn't matter that's in the same you know bucket of a bank account got it okay I I imagine there's a lot of people people listening that that don't have it set up this way they have individual llc's

8:04Do you recommend that they re just start series LC and then just quick claim their properties into it or what do they do from here you know it can depend upon some of the expense issues that come in to like what does it cost to maintain those entities every year because what we're talking about us you know being able to get into a place where it's a lot cheaper to maintain easier to maintain easier perform and function so on that sense I'm like well I I mean it's hard to answer you know because I'd have to know more details about their case what one thing I do know is that for everybody that's making over $150,000 a year my firm is actually so good at tax that it pays for all of the entity formation all of the estate planning all of like the tax strategy tax filings and everything CU

8:53We're we just are so good at being able to save money at tax for especially For Real Estate Investors because that's our real specialty that comes into it so that's what I usually tell everybody I was like if you're making good money if you're not making any money then you need to find the cheapest PL people you can possibly do because you just need to figure out how to make more money right but once you start making money then the game shifts and the game becomes like saving money on Tax becomes a big win for you right moving from a 30% tax bracket to a 10% is you know 20 to $30,000 every year that you could be saving right and so that's why I tell everybody like it's worth coming and talking to us if you're making significant income above 150k per year as a household because very likely there's a win in their Force that's going to make sense to to

9:41Form a partnership yeah yeah and I want to learn more about some of those tax savings opportunities but I was curious on the The Entity protection side of things obviously a lot of Real Estate Investors like to partner it's it's pretty common practice in when you're investing you know maybe one person has the money the other person is going to do the Sweat Equity or has the deal what's the best structure then for a partnership do you recommend then a separate LLC or just doing a joint venture or how how do you recommend people tackle that so it'll depend because every most everybody is acquiring properties with some sort of financing in place right so what we a lot of times what we have to do is say well how are you going to be getting the financing right

10:30So if you're looking ins the side of the multif family space you don't have any other option besides to form a single purpose LLC in the state where the where the asset is located and you'll have to do that for the financing institutions to be cool with it and then you'll work from there about great how am I going to split this up with my partners okay you're going to be a 50% member interest I'm going to be 50% my 50% member interest is going to go to my series LLC which is my asset holding company which also happens to own my brokerage account and owns my single family homes and whatever right so I have these like satellite llc's that I have with partners that own the apartment complex right and and in that sense for every new apartment complex we're going to form a new LLC because that's what the financing institution wants to see right now we do have some clients

11:19That come through that say Hey you know what we're going to do is me and this partner we're actually going to go and we're going to go buy a bunch of single family homes together over the course of the next three to five years and so in that circumstance what ends up happening is we'll form a single series LLC and with the series LLC that we have we will then create just the partnership and the series LLC well typically will acquire the properties and with their personal name to be able to get take advantage of the you know conforming loans that have cheaper interest rates and then they'll deed the property into a land trust that's owned by the series LC which is the same thing that happens with an individual but here it's just going to be inside of like a partnership so it's actually

12:08The asset that determines What entity structure you're going to use and then we split the ownership interest of that enti structure into each individual's asset holding company oh