Asset Protection for Real Estate investors

For the past few months, most of the calls I receive are from real estate investors. I suppose this is just an enevitable situation, but I thought it would be good to mention some things on this forum. This is not really intended to go into depth or create a formal gameplan for RE asset protection, but many of you on here are RE investors and likely some of you are unfamiliar with many potential strategies.

I just got off the phone with a new client who owns several properties with a net asset value of about $8m. And he owns all the properties in his name!!! It is amazing to me that people do this, but it happens.

First of all, owning real estate in your personal name is just nuts. There are just too many risks out there you are exposing yourself too. Who knows when your next tenant is going to start a meth lab in the basement. For some, establishing an LLC as the owner, will suffice. Having the LLC owned by a trust, even better. It is also important to establish the LLC in the right state. There are only 13 states that offer charging order protection for LLC's. Generally for RE ownership, I recommend NV, WY, or DE. All three of these states offer the best protection, best privacy, and the lowest fees. The most important aspect of the LLC is the operating agreement. Essentially an operating agreement is the contract between you and your business. In absence of the operating agreement, you are at risk of the court determining your fate. With one, they must abide by the contract. A 10 page boilerplate operating agreement will not suffice for any significant asset.

A series LLC is an option for some of you that own multiple properties. It essentially segregates the risk between assets, but allows you to own only one LLC, thereby simplifying your life. Depending on your assets and your goals, a Limited Partnership may also be a good option. Just remember that the general partner bears 100% of the risk of the business. We always use an LLC, C-corp, or S-corp as the general partner to eliminate the risk to the owners.

Another tool we frequently use is liens. It gets a bit complicated, but essentially we form an LLC that the investor owns 100%, and that LLC holds liens against the investors other properties. This allows you to strip all equity from the property leaving it unattractive to creditors.

The most important things with structuring your assets, is to do it properly, and do it early. Once the sheriff serves you papers, it is too late. I get these calls from clients on a daily basis; "I own 6 properties, 2 of which have significant equity, 2 are zero equity, and 2 are severely upside down." If this person owned all properties in his name personally, then all of his properties are at risk if the last 2 go into foreclosure. I am not saying you need to bail out on your debts, but without a proper structure, you will be out of options. With a proper structure you get some leverage with your lenders to renegotiate terms or settlements. If you protect assets with significant equity, you can then use that equity to satisfy other notes, instead of having them taken in court.

Please note, this is in no way a sales pitch. I just keep getting calls daily about investors who have run out of options. I hope all of you RE investors out there put some thought into your plan. I would also like to hear from any of you RE investors about some strategies you have employed to protect your assets.

Excellent information. I am not up to speed on this subject but I do have it in my sights as something that will be addressed.

My friend is a attorney and he is making a killing helping his clients put there real estate assets in trusts and blind double LLC. They then let there upside down properties go into foreclosure and they don't lose there assets.

I'm not saying this is right ,but he is real busy and can't keep up with the demand.

One problem that you can run into is that an LLC can trigger the bank's change in ownership clause - making the note due and payable !

Most banks won't come after you for that anyway. But if you do get a due on sale, you have some time to correct it. I believe you can just transfer the property back into your name and it would stop the DOS.

I am not advocating walking away, but with the proper structure in place, you have options. Without the structure, you are at risk. If you have one property upside down and vacant and another with equity and rented, you can negotiate a payment plan with the lender if it is foreclosed, and when the other property goes up in value use the additional equity to repay the other note. But if you lose both properties, you will be out of luck.

I frequently set up an LLC for each property (or group of properties) and have those LLC's owned by a "master" LLC. Some clients also want to have the master LLC owned by a trust.

While this is a possibility, I have never seen it happen. If it did happen, you could always transfer it back into your name. the banks don't really care who owns the property as long as you pay for it. I did run across an issue when selling a property in MD once where we had to transfer the property back into the owners name before closing. This was just a simple deed transfer and only took a couple of days.

True - But if it happens before you sell - You have lost the protection. !

You would certainly lose the protection at that point, but I have done this many times and have never had a bank call a loan. I have also done this personally on many of my investment properties with no issue.

Even if you transfer a property into a double blind LLC, you can't simply walk away from it... How are you going to get around that the loan has your name and personal guarentee on it?

- Hakrjak

Not sure on this, just thinking out loud; but in regards to the personal guarantee, if the properties were purchased with commercial loans, would they necessarily require a personal guarantee?

You cannot get away from your personal liability. I have never seen a bank that would offer a residential or commercial loan without someone's personal guarantee. But if all of your assets are held in LLC's, LP's, and/or Trust's, then your creditors have nothing to attach to satisfy the judgment. This is where you can gain the leverage. If your lenders have no assets to attach, they will be more open to negotiation for repayment terms. In the case you mention, you will have bad credit, but you won't loss assets.

Gotta chime in here.....Why mess with an LLC at all? It is very easy to transfer property into a Trust. Nobody knows who the beneficiary is because that is not public record. The loan stays in your name but the courts cannot attach anything other than the equity in each property held in the trust.
The beauty of a trust is held in the tenant mentality. For example....
A tenant falls going up the stairs in your property. She/he decides they are going to sue you. As a holder of the title you are liable.

If you put it into a trust the trust is liable. Now, the trustee is pulled into court? lets say they live out of state and are hard to get in touch with. Now the attorney who was hired on a contingency fee wants cash down to pull the Trustee into court. The tenant drops the case because they don't have a retainer fee to chase the owner otherwise they wouldn't be renting.

Even if they get the Trustee to court, the Trustee cannot by contract divulge the Beneficiary of the Trust. Now the tenant needs to add more money to find the beneficiary of the Trust.

Case dropped!

On a side note my Dad is refinancing 2 of his properties and the bank wanted to know who the beneficiary is. Much easier to file the 20.00 title transfer and get it back in his name than to give up the illusion of owning nothing.

Food for thought

rcardin, so how easy is it to setup such trusts?

I know you asked rcardin, but I will answer here. this is definitely not a DIY situation. a trust needs to be set up by a professional. I personally don't do them, my partner does. I will say our preference is still to put the RE in an LLC and have the LLC owned by a trust. This accomplishes asset protection, privacy and estate planning.

I got my forms through Louis Brown Asset protection. My dad was part of one of his mastermind groups for a year or so. It is an auto fill document so we just fill in the blanks and the whole package prints out. You file your warranty deed transferring your property to a trust and send in the other forms to your mortgage holder informing them of the transaction. Of the 15 or so we have done we have never triggered the DOS clause. The mortgage stays in our name or if buying subject to it stays in the previous owners name. No paperwork is ever filed showing who the beneficiary is. The last one I did personally cost me about a 20.00 filing fee and a drive to the county courthouse. This one was bought subject to and no problems with Wells Fargo. They even offered an assumption plan if the property was to be taken over by someone other than the original owner. Wells Fargo has now way of knowing who the beneficiary is so they have no clue who is really making the payments on the property.

What exactly is a double blind LLC? After all, you have to have a human resident agent, who can be served with a subpoena and brought to court to testify about the owners.
I have to admit, all the discussion of ripping off mortgage lenders is a little unsettling. There's a reason why lenders are stricter nowadays, with so many people reneging on their debts. If everyone stopped paying their mortgage, suddenly we wouldn't be able to borrow money against real estate anymore, and values would subsequently collapse.
I do sympathize with trying to keep opportunistic tenants' paws off your property and money however, and am intrigued by the discussion of owning LLCs in a trust.
What kind of trust do you mean? There are many.
Cheers,
___________________
Brian
Rental Lease

Basically a double blind LLC is just where one LLC owns the asset and another LLC is the 100% member of the first LLC. This just creates a bit more privacy. In some states, only the manager is listed in the filing so the members aren't even known. You do not need a human resident agent, you can use a company. We provide resident agent service to all clients who need this. In case of a lawsuit, the resident agent company would be served the papers and then would forward them to you, as directed.

I do not advocate defaulting on your mortgage. You are personally still guaranteeing your note with the bank. By having the proper asset structure, you get leverage and the ability to work out payment terms with the lender vs just having it foreclosed and other assets attached.

There are many trusts as stated, but usually my clients chose an integrated asset protection trust (IAPT) and elect to have their living trust as the beneficiary. This gives you asset protection and estate planning.

Thanks for the continued explanations, GlobalWealth. I'd rep+ you again, but the system says I need to spread the speed around before I can do so again. So let's just say I owe you one.

No problem. I would like to hear from some other experienced RE investors what they do to protect their wealth as well.