Real Estate LLC – Does It Work For Real Estate Protection?
How do you use an LLC to invest in real estate? That’s the question that you’ve been asking and today, we’re bringing the answer. Kris Krohn here with Limitless TV, sharing everything you need to know about getting that LLC right now. So today we’re talking about how to use an LLC to rock out your real estate portfolio and some of you don’t know exactly what that is but obviously a lot of you do because you’ve been asking questions and a lot of you are in this position where you want to get into real estate, you know you need an LLC and you haven’t set one up. So Steven, let’s jump into this. What is an LLC? – Well, an LLC is a Limited Liability Company and the purpose of it is just that, it’s to limit your liability. What is your exposure and how do you lessen that exposure, in other words, if something goes wrong or something happens, if someone trips on your property and they sue you, are you protected, right? – Yeah and there’s a lot of entities to choose from. There’s s-corps and there c-corps and then there’s nonprofits and you’re always going to find that real estate is done with limited liability corporations and what the LLC does is, it’s they’re designed to create protection, help you manage your portfolio and so in this video, we’re going to talk about how you specifically use one and by the end of this video, I just hope that you understand that if you own real estate, you need to have one and it’s better to own one up front because you can actually build credit with it and it can help you with your future investing. So first of all, an LLC, Steven, let’s talk about really what is it what are the basics of this. – So first of all you need protection and legitimacy and I think that’s what really an LLC brings to the table. Especially when you’re talking about partnerships, right? When you get into partnering with other people, you want this, you want to be protected yourself but you also want to make sure that the person that you’re getting into the partnership with understands that you’re legit, I mean, that you are a real investor, it’s only the onesie twosie type of investors who go into this the wrong way, don’t get an LLC, don’t set it up, do it with a handshake and then when something goes wrong, they’re up the creek without a paddle. – Now I don’t know what LLC translates into in other countries around the world – *Speaks German* – Thank you, that’s what it is for German. *Speaks German* – Thank You Steven. – You’re welcome. – Steven is always going to bring you those little German moments but here in the United States, an LLC also creates legitimacy with the IRS. You could claim that you have business tax write-offs but the moment you’re incorporated then business, actually, the IRS actually looks at that and says, well I don’t have a red flag over that, you’re incorporated so of course, it makes sense yet business expenses so by the way, LLC allows you to not just create protection but allows you to write off your gas mileage, it allows you to write off your home office, it allows you to write off your cell phone, vehicle, some of your travel, a whole host of other things. You need to have a good tax person, you can just even Google that, there’s a lot of advice on how to do that because by the way, if you’re in a 10% tax bracket or a 40% tax bracket, you can save forty cents on every dollar you spend, so it makes sense to track some of that and that’s going to flow through your LLC and your LLC is going to flow to your personal and it’s a way to basically say, I’m putting a corporate veil between my personal life and my business life and that’s the protection because like Steven said, if anyone has a problem with you, are they going to go after you personally? Well they are but if the business that you did is inside of an LLC then they have to look to the LLC which means that you’ve created some really great separation between your personal life and your business life and that separates them from all of you and I can tell you from past experience, you know, having done hundreds and millions of dollars worth of real estate, owning right now probably over 40 LLC’s, it’s important to have that separation. Now in addition to protection and legitimacy, we want to talk about how you set up ownership. If you are the only owner then the document is essentially going to say you own 100% of the company and that’s one of the first things to look at but if you have a partnership for example, Steven and I own an LLC that we might own, we might decide we’re 50/50 partners and an LLC essentially has two documents, there’s the Articles of Incorporation that you file with your local state and that’s a really simple short document but then you have an operating agreement and this is not a formal published document because this is a privately held company, it’s a document that you have for you to understand, what is my ownership interes, what roles am i playing, what roles are my partners playing and then what happens in worst case scenario. So Steven, talk a little bit about partnership and roles. – Absolutely. So first of all, you’ve got your manager and then you’ve got your member, right? Managers and members are your typical roles in an LLC. The managers are obviously the person who is doing the day-to-day, they’re making the decisions, they’ve got the voting rights. Often times, you’ll have multiple managers, for example, if we were to do an LLC, we may both be managers on that property at a 50-50 partnership but sometimes, you don’t want both people to have say in a specific, you know, decision-making process so maybe if I’m bringing all the expertise to the table and Kris is just bringing in maybe the money and credit, I may say, you know, on this one, I’m going to make the decisions, you’re bringing the money in credit but we can set it up in a way or he’s still going to be protected. Although, I’m making the majority of the day-to-day decisions as the managing partner, he’s maybe just a member partner, we’re going to set it up in a way where he’s still protected. – Now the cool thing is that, when you do an LLC, a lot of it is already the LLC that we used, we’ve already put the money in and we already have all of the different pieces we need in there so there’s only a couple of things to customize, one of them is who owns what percentage of what, the next one is who are the active and passive managers and then who are the members and so in that, you know, Steven’s using these terms of manager and member but also, you’re going to have a chance to put in the definition of, well what does the manager do, oh they’re actively doing this, they’re the day-to-day decision makings and then you also have someone that’s maybe a passive member, this could be the person that’s bringing money to a real estate deal, for example, or money to the operation and depending on whether they want voting rights or not will determine whether they’re the actual member or whether they’re one of the managers, some can be more active, some can be more passive, this is easy stuff, I know for some, it might be like, “Well Kris, there’s some new turns here on, swimming in this.” But it’s actually really simple if you have competent help, this is actually something that we provide and we actually help people set up their LLC’s because we’re setting them up all the time, we’re doing so much real estate, you need to know how to set them up correctly so.. – I don’t know if you’re going on on something else there but I wanted to, I want to move on for just a second, I want to talk about worst case scenarios because I think this is one of the reasons, we talked about protection in the beginning but really that it’s protection from what and it’s protection sometimes from those worst-case scenarios that could arise. One worst case scenario could be that one of the members of that LLC or one of the managers of that LLC dies or passes away. – And then you have their spouse jumping in saying, “What do I own? Do I get to start making active decisions in the business?” and you’re thinking, whoa whoa whoa whoa that wasn’t actually the original intent but everything might head south because you haven’t thought through what happens if someone dies or what happens if the two of you have a disagreement or what happens if you have a different understanding of the contract and all of that gets pre-decided upfront so at the end of the day, it’s like, alright, well let’s look to the agreement, let’s make sure we understand what we do in this situation and we use a particular LLC that has been vetted by our legal team over the years where we’ve been able to add to it. Just about every scenario, a good operating agreement, our operating are in mint has between 30 and 40 pages after it’s been put together which, you know, most of that you’re not going to care about, you’re never going to need to worry about but should something go wrong, you’re going to be grateful that it is in that document and that it’s already been designed and defined. – Yes, at the end of the day, when it comes to LLC’s, when it comes to protecting yourself appropriately and being legitimate in the marketplace as you’re going out and finding partners or buying real estate and protecting yourself, the biggest thing that we could say is, make sure you get one, make sure you put something in place that you know what you’re doing there that you hire someone who’s competent to help you out and like Kris said, we do have, we do help people, we’ve been helping people for years and years and years, put together these type of agreements to make sure that they’re not just protected, not just legitimate but that they’re moving forward in the most powerful way. – You know, when you’re dealing with people, weird strange random things can happen and what you’re trying to do is have an agreement that says, “Listen, we don’t know financially what’s going to happen over the years, we’re working together.” and you’re going to have people where things happen in their life, you’re going to work with people where things change and if you don’t have the right kind of agreement, it can create drama. Look how random this can be.. I could say, “Steven, check out that curtain right there, isn’t that amazing?” and I come in here, I’m like, actually putting on the choker holdin, I’m going to take him out and I’m going to do something mean like that and afterwards, he’s dead. No, he’s not. He’s just passed out then he wakes up and he says, “Kris, I hate you. I never want to work with you again, yeah, and at the end of the day, what do you do when weird stuff in front of the camera happens like that. I tell you, that over the years, I’ve seen some pretty bizarre things happen. Steven and I, even though we’ve been friends for nearly 20 years, we’ve had our moments where we didn’t see eye to eye. In fact, we went through several years where we didn’t really agree with each other’s philosophy or business operation systems and we always worked it out, it never needed to get legal, nowhere near but what do you do when things get weird or strange or those things.. – Those things do happen, that’s like, that’s the reality of it, those things do happen. I know, for example, that I can never control Kris. – Yeah, exactly. Who can? – I know that I can never control hulk. No, I can never control Kris, right. In other words, he has his choice to do whatever he wants in whatever the circumstance may be, I can only control myself so the only reason why we’re putting these operating agreements in place while we’re putting this LLC in place and defining those roles and defining those exit strategies and defining those worst case scenarios is because I know that I can’t control him, he knows that he can’t control me and if that disagreement ever comes to a head where it’s end of the road for one of us or the both of us, we already have it in place and we don’t have to get crazy like, this doesn’t have to take some long like 18-month legal process and it’s called an exit strategy. – So at the end of the day, when you take a look at what we’re talking about here, we’re talking about what an LLC is, you’re defining ownership, you’re defining rules, you know what to do in worst case scenarios and you have an exit strategy. Friends, use your LLC’s wisely, make sure that you have them even before you start buying real estate, if you’re not currently incorporated, it’s a great idea so that you’re fully ready, prepared and set up to dive into the world of a successful real estate investing. If you own real estate but you don’t have an LLC or if you’re planning on buying real estate, now is the time to get an LLC. Click the link and my team will get you your LLC set up and streamlined with all of the language that you need from the lawyers to help yourself safe guarded and protected right now.