Do You Need an LLC for Rental Property Investing?

0:00Brian T. Bradley:This might be the single most frequently asked question by beginner real estate investors. Do I need an LLC? Today we're answering it once and for all.

0:13Brian T. Bradley:Hey everyone, I'm Ashley Kerr, guest hosting the BiggerPockets Real Estate Podcast. I hear this question all the time from rookie investors. Do I need an LLC when I buy my first property. And I think what people are really asking is, how do I protect myself, my property, and the rest of my assets from legal liability? And this applies to both beginners and experienced investors. Things can always go wrong when you own a rental property. You need to take precautions so you're shielded from the worst possible outcomes before they happen. So today, I have Brian Bradley joining the show to explain the most effective strategies for asset protection.

0:53Brian T. Bradley:Brian is a lawyer based in Oregon who has been named one of the best attorneys in America and has worked with clients to protect more than$5 billion worth of assets. We're going to talk about what an LLC can and what it cannot do, who needs one, and how to set one up. We'll also get into even more advanced asset protection strategies like the many different types of trust. I know some of the legal strategy may not sound exciting, but understanding it can save you so much money in the long run. And Brian is great at explaining these concepts and why we need them. So let's bring him on. Brian, welcome to the show.

1:32Brian T. Bradley:I've gotten the pleasure of interviewing you on the Real Estate Rookie Podcast, but here today we are on the BiggerPockets Podcast. So thank you so much for joining me today. Yeah, thanks. No pressure. Right. The big show. I hope we can live up to Dave Meyers standards. So I always love talking to you and your audience, And we got a lot of important updates in the law. Some will be some review, and then there's going to be a lot of fun updates. And so I'm looking forward to this one. Yeah. So let's start off with maybe you're an investor that's just getting started, or maybe you have grown and scaled, but you really have no idea what asset protection means.

2:10Brian T. Bradley:Can you kind of explain that for us? So asset protection is simply placing a legal barrier between your assets and your potential creditor, like the person who's suing you and wants your stuff before it's needed. That's it. It's just a barrier. So think of like a safe that we put our gold or our guns or our valuables in. Anything of value you want to put behind that legal barrier and out of your personal name so that it's not easily attached, you know, with a lien or reached. Can you do an example for us? It may be tailored specifically to like a real estate investor as to, you know, what are some of the common pitfalls that a real estate investor could actually be sued for?

2:47Yeah. So a lot of like the pitfalls with real estate is, you know, an incident happening and then you not having anything in place and then saying, all right, I'm now getting sued, Brian. Like, I don't want to lose my property. What can you do for me now? There's literally nothing. Or it's going to be mold issues, deals falling apart. There's a lot of ways in real estate that we can get sued and beyond a million dollar judgments.

3:09Brian T. Bradley:I have heard people talk about that when you are creating and structuring an LLC, that it's setting you up to actually be kind of a target for being sued. Can you kind of talk about like, what are the benefits of actually doing it? And if that's actually true? So when it comes to asset protection, just people assume that by, you know, kind of like you're leading to setting these up or setting up a trust, that there's somehow the ones that are creating the situation and the legal threat. But that's not true. The peril already exists. The peril is coming from the lawsuit, not from your legal planning, like LLCs or limited partnerships or trust.

3:46If a lawsuit's filed against you, that's the actual threat, not the fact that you took, you know, steps ahead of time to protect yourself. And the courts are very clear on this. And an example here is like the Cook Islands Trust is the strongest trust in the world by far. Nobody even disputes that. And the U.S. courts have been frustrated at every turn when they're used. But not a single court has ever ruled that the creation of a trust in any way is illegal or immoral. It's actually the opposite. We already have federal exemptions on some assets, and then more and more states are starting to see that our legal system is a threat and creating their own protections.

4:22In fact, there's a well-known asset protection case, Rikers v. Rikers in 1998. And the court stated that the offshore Cook Island Trust that was created was created for the legitimate purpose of protecting the family assets. There's nothing wrong with that. That's just smart planning. So what some people were getting in trouble for is when they try to move assets after they've already been sued or to hide assets to avoid paying taxes or hiding assets from your spouse for a divorce or having a poorly drafted trust where you maintain too much control or not knowing your state's regulations and policies.

4:57But if the protection was pre-planned, meaning before any legal trouble, and it's set up properly, all you're doing is exercising your legal right to, you know, structure your wealth defensively, just like buying insurance before an accident. And so this is why cutting corners and like online templates, DIYing your planning just doesn't work. Yeah, it's cheaper, but it's just a false sense of security and a smokescreen. And it's really not cheaper if you lose. So we got to make sure we're going to the right doctor for the right injury. And that starts breaking down, you know, like one of the bigger topics.

5:30It's just like pros and cons of LLCs because it's like a janky cookie cutter LLC. It's just not going to work for you. Yeah.

5:36Brian T. Bradley:And there's also a ton of rules and regulations you have to follow when you actually set up the LLC. First of all, you have to know how to actually set it up. And then as time goes on every year, there's certain requirements to actually keep your LLC a legal entity. Brian, I want to ask where a newer investor should start when it comes to thinking about asset protection. But first, we have to take a quick break. Some listeners may wonder why their insurance quote only took 30 seconds. Some listeners may wonder why their insurance quote took 30 seconds. A better question is, how long will that policy actually hold up when you need it?

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10:54Brian T. Bradley:Thanks for sticking with us. we're back on the BiggerPockets podcast with Brian Bradley. So what would be the first step if you're an investor and you're thinking, I need to get this LLC in place? What are some of the first things you should be doing? So if you're just starting out and you're thinking about investing in properties and you don't know where to start, the tools are LLCs, Limited Partnerships, and Asset Protection Trust. And just to break down these layers, like I like to always think about winter, right? Like the first entry layer is your base layers, that thin shirt that's going to sit on your skin.

11:27This is an LLC. This is when we're just starting out investing like LLCs and insurance. And then as you grow, you're going to get more assets, you get more units, you might be investing in multiple states, so we need more LLCs. That's where our mid layer comes in. Like think of that sweatshirt or, you know, Carnegie for you ladies, you're going to have 500 ,000 probably of exposed net worth. This is a management company. You'll hear some people talk about Wyoming LLCs. we use limited partnerships. And then as you get to run that$1 million mark, you have a higher level of protection that you need.

12:00And that's going to be your outer shell waterproof layer. That's the asset protection trust. That's your doomsday layer. But by laying, we're going to be more flexible, right? We can adjust, make yourself more comfortable. And this is where LLCs come in, right? Like that foundational base layer. And there's just a lot of misconceptions surrounding LLCs. Like a lot of people think that they're just this magic pill, create an LLC that personally, you know, guarantees protection no matter what, and that's just not the case. But if we just want to like break down a couple of key issues on like, where do we even set these LLCs up?

12:33And like, we hear people getting confused, like, oh, run off to Delaware, Wyoming, Texas, Nevada. You know, what we're really talking about are charging order protections and corporate veil piercing, like big legal fancy words that sound intimidating. What we have to remember is that LLCs offer a limited veil of protection. That veil is better than nothing, right? Like having it all in your personal name, not good. But the veil is fragile. It can be easily pierced just by not following the formalities of setting up an LLC and maintaining it. And so that's kind of where this talk generally flows into next, like piercing the veil.

13:06A great example of this is like, let's say you're a California resident and you own California real estate and you go and create a Wyoming LLC and then you go and hold a key piece of California real estate in this Wyoming LLC and you're paying California franchise tax on this out-of-state Wyoming LLC, what you've done is just convert your Wyoming LLC to a California LLC because you're doing business in the state of California. So if you have a liability issue in California, meaning a lawsuit, the judge is going to follow California law, not Wyoming law. You have no legal nexus or like connection to Wyoming whatsoever.

13:45So this understanding then leads to a deeper questioning of like why it's crucial to differentiate between two very different areas of law. And that is what's the difference between like business law and court law, especially as it relates to real estate investments.

14:01Brian T. Bradley:Well, Brian, what if using that same example, but what if the person lives in California, gets the Wyoming LLC, but they invest say in Florida, what is the actual recommendation? If you live in one state, but invest in another state, where would you get your LLC in that scenario? Great question. Then if like just for that, so it's a Florida property, it would be a Florida LLC because that's where the damage is going to come from, right? It's not going to be from California, most likely. If that real estate, we're going to be using Florida law. Someone gets hurt on that property. It really segues into like, what's the difference between business law and tort law.

14:37When we're investing in real estate, we're getting sued through, you know, tort law, that's personal injuries and damage awards, that's all state specific. And so it's a very different area of law. And so that's why common rule is wherever the real estate asset is held at, like if it's Florida, it's a Florida LLC, if it's Tennessee, it's a Tennessee LLC. And then from there, we can start cherry picking states for the management company, like we can use an Arizona limited partnership, or some people use a Wyoming LLC. And so that's where it starts getting more nuanced at the second and third layer.

15:11But if you're a California resident and you're buying in Florida, Florida LLC.

15:16Brian T. Bradley:That is like one of the most asked questions of rookie investors. The first one is when I buy my first property, should I put it in an LLC or should I put it in my personal name? And then the second one is where should I get the LLC from? So what do you think about that first part, though, as far as like your first property? Yeah, the first property don't invest in your first property unless you can afford creating an LLC. Because you're new to investing, like you just buying a property is going to increase your amount of risk. Create an LLC, put the property in an LLC. If you cannot afford an LLC, push pause, start off smart.

15:53Don't risk it. That's too risky. It'd be like taking my money down to Vegas and gambling and saying like, I'm a good person. I don't do things wrong. I'm going to follow the law anyways. There's nothing about you being a good or bad person. It's about a negligent event happening and then you getting sued and liable for damages. And we need to cut the legs off of how much someone can get from you. And then the location, I think the confusion of it comes from everyone's falling in love with the word anonymity. The thought that you can just create an anonymous Wyoming LLC, no matter what state that you're in, you can just like stick your assets in it and disappear and ghost a lawsuit.

16:27Brian T. Bradley:I'm already picturing all the gurus that have the whiteboard drawing out their asset protection. No one will ever know my name. Yeah, you know. Yeah. So, you know, create a Wyoming LLC and a land trust and, you know, you're good to go. No one can ever find you. That's just completely false. So there's so much case law on this. But like our prior topic, right, it's completely misunderstood. When your LLC is sued, you know, you have a personal agent of service. they're required to have, especially for Wyoming and Delaware and Nevada LLCs. Their sole job is to serve you. Congratulations, you just got served.

17:05Now you got to get your butt to court. Also, the simple reality is that once a lawsuit's filed, the legal discovery process in court begins. And what's even worse is that if you want secrecy to even work, also known as lying under oath, let's be clear about this. Lying under oath is a one-way ticket to jail. The bottom line is that privacy is good. I like privacy. I'm all for it. But privacy does not equal protection. Privacy helps stop harassment, but it does not make you lawsuit proof. Once a legal action is filed, privacy does not prevent legal disclosures in court. And courts have repeatedly ruled that while LLCs like Wyoming can offer a degree of privacy, legal disclosure requirements still apply.

17:49So the ideal strategy involves forming LLCs in the state that the asset is located in, and then establishing a complete asset protection system that's layered. And then that leverages the strongest jurisdictions for actually the next two layers, the management company, and most importantly, the asset protection trust. And that's where the magic happens. When you add the next two layers, your sweatshirt and waterproof coat layer, like true protection does not come from LLCs. We can't hide ourselves and ghost ourselves from lawsuits just because we create a Wyoming LLC. So LLCs merely serve as your starting point, like to get the assets out of your personal name.

18:28The real strength comes from the teeth, which are the asset protection trusts.

18:33Brian T. Bradley:So to kind of summarize that, the advantage of privacy is maybe that if someone is looking to sue you. They can't find out who you are to find everything else that you own. But the real goal is to actually have the asset protection because it shouldn't matter if someone knows who you are because all of your assets are protected in this plan. Correct. I would much rather have the system be so strong that I can disclose all the assets in it and say, here's everything my clients own. You'll never see a penny from it. Yeah. So Brian, real quick, before we move on to trust, you had mentioned that you should be able to afford to create an LLC and to maintain an LLC.

19:16Brian T. Bradley:And I know it varies by state as to what those costs are, but maybe could you enlighten us as to where you can find those costs and maybe like bulk park of what some of those costs are, like including bookkeeping costs of an LLC, you know, tax preparation, things like that. Generally, I would say to maintain an LLC, you know, in any state ballpark, it's like a hundred dollar renewal fee, you know, on average. And then you're going to also in some states, you're going to have to do with the franchise tax. I'll go to the most extreme, which is California. That's$800, you know, per LLC. Ryan, I want to shift this conversation toward trust, but first we have to take a quick break.

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