Legal mistakes to avoid when investing in real estate

0:00the very first and biggest mistake I see investors make and believe me it's not just the beginners it's people who have 20 30 40 properties is putting properties in their personal name I would never put an investment property in your personal name for legal purposes liability purposes other than your homestead but I'm saying investment properties now do not put them in your personal name that subjects you to personal liability if something happens and and probably most of your audience understands the concept but if if you were to put that property in an LLC or in Florida where I am in a land trust and we're the only state that has the land trust protection where it limits your liability no other state in the Union does but we do if someone slips and falls in that property they

0:48cannot sue you personally they can only Sue The Entity so if you have only one property in there they can only come after the equity in that property if you own it in your personal name they can wipe you out everything they can garnish your wages they can come after your bank accounts they can come after every property you own so very very very simple thing to do very simple thing to do but you'd be surprised how many investors don't do it yeah interesting yeah and and do you recommend a just a typical LLC or do you recommend somebody set up a series LLC if they're going to consistently buy more properties I wish we had Series llc's in Florida we don't Texas does I know some of the states do I would definitely do a series LLC if I could here in Florida I'm waiting for the legislature to pass it we are pushing

1:36For it it's definitely a more efficient landscape it's definitely a more efficient way to do things I think it's the future I think it just makes so much sense you know the biggest push back I get from people when I tell them my spiel about just putting it in a company's name or an LLC is like well I got 10 properties I have to do 10 llc's and 10 bank accounts and 10 Returns and you know technically if you want maximum protection yeah but I also understand there's a practical aspect of it too so you don't have to do one to one if you don't want to but you definitely shouldn't do one in 10 right like 100% of your basket you know your eggs in one basket so I think the series LLC alleviates a lot of those concerns so yeah I think that's a phenomenal way to do it okay perfect yeah I've heard a lot of people recently have have recommended that as well and I think it would have made my

2:25Life a lot easier too if I had started with that absolutely it one of the conflicting answers that I I get to is to this question if I ask a couple different attorneys they'll give me different answers but what state do you it sounds like you would recommend forming in the state where you live or invest no Wyoming okay Wyoming okay Wyoming all right so so could you potentially do a series in Wyoming then and still buy Florida properties through that series The the pro the problem is this the problem is this you have to when it comes to doing business business in the state that you're in like so we'll just use Florida because that's my state if you're going to register if you're going to do business in Florida and you know there's a whole definition of what doing business is but owning real estate is doing business here you

3:13Have to register that company here so if you even if you register Wyoming or Delaware LLC Nevada LLC whatever state you pick you still technically have to register that LLC in Florida if it's going to own property here and by registering in flor you still got to provide the same information publicly on sunbiz which is our database here for LLC information as you would if you formed to LLC here now there are still other benefits but the point is it's not Anonymous if you create Anonymous LLC and then register it in Florida now that's why I recommend Land Trust land trust for me are the best way to hold real estate it's definitely not a one-size fits-all but in Florida it's the best way to hold real estate for most of my investors and you know the more assets you

4:02Have the more complicated we can make it and the more complex we make it but if you're just holding a few properties you have you know three four five 10 properties I mean it doesn't have to be that complex I mean we start creating holding companies we start you know adding layers to it but we don't need to do that upfront you don't need to be scared about what those terms mean it's it's not it's not that scary it's actually you know to protect you but you know you don't once you get to a certain level then you have other things you're worried about right so then we take those considerations into effect and and kind of custom make a plan for you got it okay so just so I'm clear then you form initially you would form an LLC in Wyoming that's an anonymous

4:51You you wouldn't be able to see who owns that because it's a Wyoming LLC correct yeah okay and then that owns Land Trust multiple Land Trust in Florida if if you're investing in Florida that would own multiple Land Trust in Florida or if it's another state that doesn't have Land Trust llc's locally in in that state yeah you well you just you still want to use the Wyoming one because there's charging order protection and for those who don't know what that means it's essentially that the if you were to get sued it limits what the creditors can come after so you can if you set it up properly with an attorney who knows what they're doing they'll set it up so that they can't just go grab your shares or they can't force you to pull money out of that LLC and give it to them it's

5:39Only when you make distributions which you don't have to make if you're set up properly so Wyoming has statutory charging order protections which like Florida for example does not so you can manually add that in your LLC but that could be contested versus Wyoming it can't be contested it's it's inherent in every LLC so even though it's not Anonymous when you register in a different state there are still benefits to having the Wyoming LLC as the holding company so in any event I think that's a good first step even if you have to register and sacrifice some anonymity that's still better than not having the asset protection aspect of it got it okay that makes sense and for a lot of people like me and I just talked to another member of

6:28My program last week actually and and several other members are in this boat too but they've they've been purchasing properties and and have several rentals and maybe multiple States or all one state but they didn't set it up this way initially they just sort of formed an LLC and started buying whether it was in the state that they live in or or a different state so at that point once somebody has a structure in place do you recommend starting over with a new structure or you know what what's your advice around that it really depends on how exposed they are at the moment okay so I mean there's really a lot of factors but I I'll kind of keep it simple for the sake of this conversation so first of all if you have things in your personal name absolutely no no two ways about it we need

7:16To get that out right Investments number two especially well number one especially if they're risky Investments like short-term rentals like apartment complexes things where there's a high possibility of liability if you just have like a piece of land a small $30,000 piece of land out in the middle of the woods maybe your liability is lesser but in any event that's that's one consideration how is it being held currently and what is the what is the assets or what is the real estate and then you know number two we we want to look at you know how big is the portfolio what are you trying to do and then financing is a big part of it right so if you're going to refinance a lot of times we have to take well we always have to take that into account in terms of how the structure

8:04Because lenders prefer certain types of entities over other entities and we can always move those things around but at the end of the day we just want to be cognizant of that so whenever I have a client who asks me you know should I restructure I always want to know about the financing aspect of it the taxes if you set it up right that could be pretty fluid meaning you know we can have some of the holding companies as pass through entities the same thing with the land trust so you have flexibility with the taxes and then the the other consideration that I would bring up is is the you said I said the financing the type of property it is and oh and then and then you know once

8:53It's too late it's too late right so don't come to me after you've been sued and there's a judgment against you and you want to move proper around because I get that call sometimes and say you there comes a certain point where you're legally you're not allowed to do that by the court order so you can't call me then so my my point is you do this stuff up front it saves you a lot of money and time and effort and hassle on the back end it's like estate planning right like estate planning you think it's expensive now I promise you it's it's going to be a lot more expensive if you don't plan your estate properly so it's the same thing with asset protection if you don't plan your or if you don't protect your assets good up front you're going to have issues potentially you're going to have issues on the back and so you know people come to me like oh we don't have any issues yet we've never been sued and I'm I'm like thank you

9:42Like you're coming to me at the perfect time if you had been sued it might have been a much more difficult situation yeah yeah no that makes sense and and part of the reason when I talk to a lot of people who have Assets in their personal name part of the reason goes back to the financing because you know like a lot of people will we'll talk about how you know you can get up to 10 conventional loans you know investment loans before with Fanny and Freddy before you get cut off and so you know conventional loans it's very difficult to do those in an LLC it's you know primarily they're done in your your personal name so if if you if you have a bunch that are owned in your personal name and they're financed with a conventional loan could you move those into an LLC or since the financing is in your

10:30personal name does that pierce the corporate veil or are you still protected after the fact yeah so the issue with transferring from your personal name into an LLC is that technically it could invoke the Dual sale clause in the mortgage that you have or the note that you have there is an exception in the gar St Germain Act of 1980 which was implemented in order to encourage US citizens to you know start asset start estate planning so what it says is if you move your you know real estate from your personal name into a land into a revocable trust of any kind which a land trust is revocable then the lender cannot invoke the do on sale clause and so that's another reason why

11:19We like I like land trusts I think they're the best way to go now understanding not everybody not every state has Land Trust but again I mean I practice in Florida so for me it's it's the easiest and the most sensical solution to most of my clients needs and it doesn't trigger the do on sale in other states I won't give you advice in other states but but you know I do see that a lot where you move it into an LLC you just have to understand that if the lender lent you at three or 4% and now rates are I mean they're coming down a little bit but when they were at seven or eight you know might they call the loan de they could you know get that extra three or four points out of someone else else so you think it may not happen it could I've seen it happen I have stories for you interesting yeah and i' I've gotten conflicting

12:08Advice around that too so I I appreciate you bringing that that fact up because that's yeah that's that's really you all a sudden do on sale Clause would be a a nightmare if all of a sudden your your loans are all coming due so yep another question I had was around balance when it comes to how how involved I guess you should get with with an attorney early on you know there's I've talked to people who are just getting started who you know they spent it feels like they spent six months trying to identify the perfect attorney and the perfect entity structure and they've like set up like a thousand different entities that all own each other and and then you ask them how many deals they've done and it's you know they don't have any assets but they they've spent like

12:56Tens of thousands of dollars on this intricate Anonymous deal structure you know and so I there's that side of the spectrum but then there's also the side that's like I'm just going to go out and start buying stuff in my personal name and not even think about legal structure so what what's what's the right balance that you recommend both extreme situations what you just described I couldn't imagine taking tens of thousands of dollars from a client who didn't own Real Estate For Real Estate related Services that's kind of funny and then the other guy that you described as the extreme that I'm kind of you know so you need to be somewhere in the middle look I mean the reality of it is do you need an attorney to close your first residential deal like your first you know non-commercial deal

13:45You probably don't need one I'm not saying don't get one but you know the money is you're probably more sensitive to the cost and the price because you're just getting started presumably and in that case I would tell you if there's something that you're worried about or nervous about sure but if it's just a kind of a run-of-the-mill deal you have a senior investor that is kind of showing you the ropes maybe you're JV with somebody you know maybe you don't need one but I think as you progress in your life cycle of being a an investor it becomes more valuable because you run into more situations if you're managing your own assets you need a a good like agree you know good lease agreement obviously if they're long-term rentals if they're short-term rentals you need to be aware of certain things I'll give you some free tips here

14:34On the short-term rental game you need to have a very strong waiver and hold harmless a very strong one if you're going to buy properties for short-term rentals you need to be aware of what the local ordinances are what the local city or county allows and doesn't allow you need to be aware if it's an HOA in an HOA which are very prevalent here in Florida which are getting a lot of push back right now finally people are waking up to how awful these HOAs can be but if if you're buying a property in an HOA this is just my personal opinion it's probably not a good investment property but it can be potentially in any event if you're doing a short-term rental make sure the bylaws allow for you to rent for

15:23A day or a week or a month right A lot of times they have minimum requirements right so it could be 30 days 60 days a year whatever I'm just telling you all this to say there's a lot of things that go into it that you may not ever even know think about and an attorney can help you set yourself up for success with those things I would never let a client of mine have a short-term rental property without having an extremely strong waiver and indemnification and hold harmless and make everybody sign it and oh my God I had a c who had a pool and they didn't have one and everyone went there and partied and got drunk and someone you know busted their head open in the pool and guess who got sued and you know he wasn't my client before then and he didn't have a a

16:11Waiver and so you know that was not a good situation for him but you know any of my clients if you're renting a bike on the airb at the airbn if you if you let them rent bikes at your Airbnb or if you have a swing at your Airbnb those are all really serious risks people go there and and they're drinking and they're partying and they're car Carefree yeah I'm I'm diving a little deep into it but to step back and and answer your question it's always a good idea to have an attorney but understanding there's a balance between when you're starting maybe get a maybe try to get a couple deals under your belt if you don't want to pay an attorney up front but absolutely as you progress through you know the cycle of being an investor I mean if you can afford to do it up front I highly recommend it if you you know if you don't feel like you are I would just do it early on in the process as possible