On today’s episode we respond to some listen questions about asset protection and how I like to structure my asset protection plan. As well as how to hold title and use a client as an example scenario. And a quick look at closing dates and what to expect in practice.
If you missed last week’s episode, be sure to listen to the Listener Questions / Jacksonville Update.
Enjoy the show!
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Ask Marco: Asset Protection, Holding Title, Closing Dates
I want to apologize for missing last week. I was very, very busy. In fact, we’ve all been very busy around here lately. This has just been an unbelievable year in terms of investor interest and sales. We recently hired a new transaction coordinator. I think she’s been with us for three or four months. Lately, we’ve been in the process of finding a new investment counselor and we are now in the process of onboarding her and doing some training. It just never ceases to end, how busy things are around this country in terms of real estate and how busy we’ve been. A lot of that is thanks to you guys. For all you, past, current and future clients, we want to thank you very much. We appreciate your business. We love working with you and we love helping you and we love educating you. Keep up the good work. Don’t lose the momentum. There are still lots of great deals to be found and we have a lot of those on our website. Even though inventory is tight and it moves quickly, we see a very big velocity in the number of properties being turned over, but they are there.
A question for you, in your opinion, do you think the stock market is hugely overvalued? Obviously, there’s a little bias in that question. I do. I think the stock market is irrationally high. I think that’s the reason why we are so busy. I think there’s a lot of investors who are coming to the realization that the stock market is overvalued and has had a long, long bull run. Some people I think are smart enough to start pulling some of those chips off the table and taking that cash and redeploying it into other areas, other assets. Some people might be sitting on the sidelines in cash, other people are investing those funds into hard assets. One of the best hard assets out there you can invest in is obviously income producing rental properties. What do you think? I’d like to know. I personally think the stock market is heavily overvalued.
One of the metrics or indicators that people look at is the PE ratio, the price to earnings ratio. This is a valuation indicator that is probably the most quoted in the financial media. Nevertheless, according to that data, which by the way, I believe is compiled by Yale-Shiller. It is the index that was put together by Robert Shiller of the famous Case-Shiller index. Based on the standard estimates for the second quarter of this year, that ratio currently stands at 25.2 to 1. If that doesn’t mean anything to you, let’s look at it this way. A “normal” range is often in the 12-15 to 1 ratio. At least historically, that’s what we’ve seen is being “normal.” Realize this, that number is higher than 89% of the past bull market peaks. Where we stand today in the stock market, we are above where we have been at our peak in 89% of the past bull market peaks.
You decide. I always tell people to not be heavily vested in the market. That’s not financial advice, that’s just me and my opinion and how I feel about it. At the end of the day, these valuation indicators are only so helpful. You need to use some common sense and rationality here and look around at other things. Overvalued markets, they can stay overvalued for a long, long time and even become more overvalued. Eventually, guess who wins? Value. Value always will trump everything else. You could be irrational for only so long. Think about that. If you are one of those people that has your life savings or hundreds of thousands of dollars in the market, you might want to start thinking about where to redeploy that. I personally think we’re long overdue for a big correction.
I’ve gotten some interesting questions recently through the Passive Real Estate Investing website. These are the Ask Marco questions. Today, I wanted to just talk about some stuff like asset protection, how to hold title, some commentary about closing dates. These are just submissions from some of our clients.
I’m going to start off with an asset protection question because this seems to be a reoccurring topic of interest and an ongoing question. Adam sends in an email saying, “Hi, Marco. You may have already touched on this subject in a previous podcast, but we’d love to hear your advice on how you personally go about structuring, how you hold title to your properties and provide best liability protection for yourself.” His question is, “Do you recommend holding state specific LLCs, Limited Liability Companies, in each state, just one overall LLC, setting up a series LLC, recommendation on using umbrella insurance, different types of insurance specifically beneficial to rental property investing, or any other methods or strategies that can be implemented to provide liability protection, or overall most ideal ways to structure a portfolio?” Adam, great question. He says, “Thanks. I love the podcast!” This is a great question. In fact, you have a lot of great questions in there.
First and foremost, we went into a fair amount of detail in episode ten, when I had Clint Coons on the show. We went into a lot of detail about this. If you haven’t listened to that episode, I strongly recommend checking that one out. That aside, I’m going to give you a quick overview of what I like and how I prefer to do it, which is pretty much in lockstep with what a lot of attorneys do that specialize in real estate investing, whether it’s Rich Dad advisors or others that are in the area of doing asset protection. Basically, what I do is I always start off with property insurance. You should have and you almost always must have property insurance on your property if you have financing on it. Always have property insurance. You want that hazard insurance on your property in case something happens, such as fire, in some states, earthquake, flood, etc. You want to protect the property.
The liability piece of it is optional, but I always have liability insurance on my properties. That could be $250,000, $500,000. You could even do a million or more. The deductibles, that could range anywhere from a low of maybe $1000 to as much $10,000 on a deductible. For me, the sweet spot is $2500. I just find that’s the best bang for the buck. Because if something is seriously wrong, then it’s going to be a lot more than that. But $2500 is easy to deal with. If it’s lower than that, then I’ll make a decision as to whether to use the insurance or not. Often, I’ll just pay of it cash. Often, stuff doesn’t happen, but you have the insurance there if and when you need it.
One more thing about the property insurance, I do like to opt for the actual cash value instead of the replacement cost. It is a little cheaper. With a newly renovated property like the turnkey properties we sell, there is not going to be a lot of difference between a brand new property and a newly refurbished property. The actual cash value is actually a better deal because the depreciation is not going to affect what the payout is on a policy should the property completely burn down to the ground. Again, I’m not giving tax, legal or insurance advice here, so check with your insurance agent. Have that discussion with them. In fact, you can listen to the podcast episode I did with Joshua Dupree. He talked about this in great detail.
Property insurance is the starting point. It’s that first layer of defense. Following that is umbrella insurance. An umbrella insurance is just an overarching policy that back stops your other policies. Should there be some lawsuit or incident and you are tapped out on what your existing policy pays out, the umbrella policy kicks in and it’ll back stop that. You can get $1 million, $2 million, $5 million umbrella policy. It’s relatively inexpensive. For example, through my insurance company, I can get a $2 million policy and the premium is $422,000 per year. For less than $40 a month, I basically have a back stop insurance policy that overrides all my other policies. It’s just worth having. It’s just a little extra cost for a lot more insurance and more peace of mind. Who doesn’t want that? You could sleep better at night.
From an entity perspective, the LLC is the vehicle of choice. The way I like to see it done, the way I prefer having it done is I always have title held in a title holding LLC, which is nothing more than a simple LLC setup in the state where you actually have your properties. What you do is you transfer title from you, your name, into that LLC in the state where the property resides. How many properties you put within that LLC is a matter of comfort. It’s a discretionary item, it’s subjective. It’s up to you. Some investors take it to the extreme and they only put one property in with each LLC. Others will say, “I’m fine with putting three, five, ten into one LLC,” or their entire portfolio, which is not something I think is a good idea. I certainly don’t recommend that.
If you measure it in terms of how much equity is in that LLC, that’s probably a better way to go. Whether you have one or three or five properties in an LLC, the aggregate total of the equity you have across those LLCs is where you should draw your line in the sand to determine how many properties you want in that LLC and when it’s time to get another LLC. Some people might have a comfort level of $200,000 equity per LLC, whether it’s in one property or ten properties. Once you get passed the certain amount of equity in that LLC, now you start putting properties into a new LLC and/or you start moving properties out of that first LLC, and move them into a second LLC where you are holding title.
The point is you want to have your properties in an entity separate from you personally. You don’t want them in your name from an asset protection perspective. You’ll put those into an LLC. Those LLCs that you have in different states around the country, each of them holding your properties, those are not owned by you, in my scenario. They are actually owned by one master, top level LLC. Let me paint a picture for you. You may have an LLC in the state of Wyoming or Nevada. You and your spouse or whoever are the owning members of that particular LLC. At the end of the day, if someone ever asked you, like a judge or an attorney, “How many LLCs do you own?” The answer is one. You only have one. You deal with only one LLC. That master top level LLC is the owner of those other LLCs that you have in the different states. Each of those LLCs in each state are the title holding LLCs, in other words, those are the ones that actually hold the property. You actually have two layers, not including yourself. You have yourself at the top, you have an LLC under you, one LLC under you. That one LLC holds ownership in the multitude of other title holding LLCs you have across the various states.
I hope that doesn’t sound confusing, it really isn’t. It shouldn’t sound confusing, but really it’s just a simple three level tree. I guess that’s a good way to look at it. That is the basic scenario on how I like to structure my asset protection plan. Of course, you can have a big square box around everything I just described and you can call that your estate. That’s a matter of having your will in place and whatever documents that need to be put in place from a legal perspective. Work with your estate attorney on how to set that up so when it comes time to transfer your assets to your heirs, it’s all within your will and your estate plan. That’s a subject for another day.
Related to all that, another email that came in from Kai was asking about how to hold title. This is related to the asset protection question and discussion that I just went over here a minute ago. Kai says, “Hi, Marco. I moved to California from Canada last year. I forgot exactly how, but one day, I came across your podcast and started listening to it during my drive to/from work, which has now become my daily routine. I’m learning a great deal from your podcast. It has led me to find a new passion, that being passive real estate investing, of course. I’m in the process of purchasing two properties in Indiana and I am starting to do research in the Dallas area. I look forward to meeting you one day. My question is, I have employment income and my wife is a stay-home mom. As I start acquiring properties and building out my portfolio, do you recommend that we buy properties under both of our names or should we put some under just my name and others under her name? I’m not sure what the implications are from a tax, asset protection and estate perspective. Sorry, I know this can be a complicated question, but I’d much appreciate it if you can cover it in a general sense. Thank you, Marco.”
A couple of things here, first of all, if your wife is a stay-home mom and she is not employed or running a business where she can actually show income on her tax returns, then from a financial perspective, she does not qualify for financing. If she doesn’t qualify for financing, then there really isn’t any benefit or reason to put her on the purchase agreement, the purchase contract or have her show up on title. The reality is that you’re probably going to close escrow, take title and then immediately or shortly thereafter, transfer title to your trust or your LLC or those can be a combination of the two. You’re not going to be holding title in your name anyway. The assumption here is that, your wife is probably going to be part of your entire estate plan and your asset protection plan. If that is true, then she will be part of the estate, she will be in your will or part of your will and she will be a member of your LLC that, as I described before, holds ownership of the property or title holding LLCs that you’re actually holding your properties in.
The point is there is really no benefit for you putting your wife on anything because at the end of the day, you’re going to qualify for the financing and then you’re going to transfer title into an LLC. That LLC will ultimately, up the chain, be owned by you and your wife, assuming that’s how you’re structuring things. You don’t need to put her on your applications or your contracts. It’s just probably best to keep things simple and keep her off of that entirely, unless she has the ability to qualify. At the end of the day, she will be part of your overall real estate business and she will directly or indirectly have ownership and a vested interest in the entities that you form and of course, your overall life estate, she’s going to be part of that too.
I think that’s really the short answer to your question. Everything from an asset protection point of view that I covered a few minutes ago applies here. Then talk to your estate attorney to make sure that you have everything in order for both of you and your wife. I can’t answer the question from a tax perspective because the implications there really have to do with your own personal tax situation. At the end of the day, you would both benefit from those tax benefits. She has no income, probably has nothing to write off, so any passive losses or deductions would apply to you specifically or both of you if you’re filing your taxes jointly. I guess the topic was how to hold title. I would just hold title as I laid it out regarding the asset protection plan that I like to do. I think that’s pretty clear by now.
Last but not the least, we get questions or concerns about closing dates. This is a funny thing because anytime you fill out a purchase agreement, there’s obviously a closing date. There’s a specific date set in that purchase contract that you are to close escrow on or before. The reality is this rarely happens and the process will probably take longer than either you or the seller thinks it will.
My suggestion and recommendation to all of you is this, just relax. It’s not a Devcon One emergency. Things get worked out and there’s always something or someone that delays the process. Often, somebody screws up along the way. Delays can happen because of the inspections, the home inspections. Sometimes, they can’t get into the property because it’s tenant occupied and there’s a delay there. Often, we find the buyers the cause for delays. Getting the paperwork together for your lender or your mortgage broker, that can take some time. If you don’t jump on it or have it put together or prepared in advance, you’re going to delay things by days, sometimes even a week or more. Sometimes, it’s in the broker’s hands. They get busy, they drop the ball or lose track of things so you lose some time there.
Underwriting, this is a big one. Once your lender, loan officer, mortgage broker submits your file to underwriting, there’s going to be a period of time there where it has to go through a process. It goes through a review and sometimes questions or concerns get brought up and that gets sent to the broker and the broker sends it to you. You have to get back to the underwriter with some information. That could take days and sometimes that could take a week or more.
The appraiser, sometimes the appraiser can’t get into your property that you’re looking to purchase because the property manager doesn’t have the time right away. There’s days that go by or they can’t coordinate with a tenant in the property, if there’s a tenant in the property. You have to understand that there are a lot of pieces, a lot of links in this chain that can cause delays. Sometimes, what we see are last minute issues that come up at eleventh hour, fifty-ninth minute. Something comes up, a red flag is discovered in the underwriting process. Often, that’s easily resolved. But if it comes up, you have to deal with it so that could cause another few days.
Closing dates are often missed, not hit. Think of it as a steak in the ground, it’s a target to shoot for. Everybody is
trying to get there. The reality is you should probably budget for a 45 day close, even though we at least like to put 30 days from the day of the contract for a closing date. Even though it says 30 days, we’d try for 30 days. Everybody is shooting for that target. But it could take 35, it could take 40, it could take 45. Sellers expect this. It’s not like this is a retail sale where you’re dealing with a home buyer and a home seller and someone’s moving out of one property and they have to move into the property, so you have to be out by a certain day in order to let that new buyer move in. It’s not that stressful. Just keep that in mind. It’s not a Devcon One emergency. Relax, take it easy. We’re going to keep the wheels greased to move things along.
That is my commentary about closing dates because I want to help set proper expectations with people who do go out and purchase property, whether through us or through anyone else. Anyway, that’s it for today. I hope this has been helpful. We will be back next week with a new episode. Download our Ultimate Guide to Passive Real Estate Investing. Feel free to ask us any questions about anything in there or anything else at all. In fact, just go to our website at PassiveRealEstateInvesting.com, click the Ask Marco button at the top and submit any question. No question is dumb. In fact we always encourage you to ask questions about anything because if you have a question, odds are someone else has the same question. I encourage you to send in your questions. With that, we will see you on our next episode.
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