Hello and welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli. You know, when it comes to real estate, ownership of real estate has many benefits from an investment and a tax perspective. But of course, there is downside risk. However, since the value of real estate holdings can be used to cover damages awarded in a lawsuit, should you be in a situation where you have a lawsuit, it’s important to consider asset protection and asset protection strategies relating to real estate holdings in order to minimize the risk of a lawsuit or the claim in a lawsuit. So asset protection planning is a way to reduce exposure to future lawsuit risk. It encompasses insurance and how real estate is titled to make it, and other assets that you own less vulnerable to claims of individuals who may sue you at any point in the future. Basically, it’s about preemptive planning.
So the first place to start is with the property itself. Since real estate investors are easy to identify, easy to sue, it appears that we have deep pockets. That means that being adequately insured is a necessity. You want to have the right amount of insurance and the right level of insurance across all your assets. Then the second step involves the proper structure in which you hold your real estate for investment properties. That is highly unusual for us to hold them as owners in our personal name. You just don’t want your name attached to the assets you should really own nothing, control everything, but own nothing. So, holding property in one’s personal name or jointly with a spouse places those personal assets and other investment properties at risk. If a lawsuit results in damages. So if there’s a lawsuit and there’s a claim that’s awarded, they’re gonna come after you.
But if you don’t own anything, if there’s nothing to go after, you essentially look broke, then there’s nothing to claim. You know, you’re basically trying to get blood from a stone. That’s why you want to control everything but not own anything. So using the right tools mitigates your exposure, your risk, and your liability. So on today’s episode, we’re gonna learn more about property and property protection and how to properly protect ourselves from potential claims in a lawsuit in the future.
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Well, it’s my honor to welcome Scott Smith back to the show. Scott is the owner of Royal Legal Solutions based in Austin, Texas. He’s one of the top asset protection companies in the country, especially for real estate investors. He provides niche advice for over 2000 clients representing all 50 states. He’s an entrepreneur himself and he has a real estate investments based all over the country. I don’t remember how many states that was. I know at one time was over 10, but he’s an avid real estate investor himself. Anyway, Scott, welcome back to the show.
Thanks for having me back, Marco. Great to be here.
It’s great to have you back on. It’s been a while since we had you on the show. I know we’ve been talking more recently catching up on things and how you’ve been expanding your firm. Some of the other services you’re now providing as part of the asset protection side of it, which involves some financial services and essentially what you’ve called a complete package. We can talk a little bit about that towards the end once people have got their mind wrapped around asset protection, what it is, why they need it, why it’s so important and whatnot. But before we dive into all that, let’s take a minute and talk about you. Tell us a little bit more about yourself and how you got involved in real estate investing as well as asset protection specifically.
Yeah, so I actually grew up in Houston, Texas. Like probably like many of the people out there, like, you know, didn’t everybody have like a little side business, a side hustle growing up? Like mine was, mine was pushing lawnmowers. I wasn’t really sure why I was making money, but I knew my making money was important and I also knew that saving money was important. And and I did that, you know, all the time growing up. And, and then it so happens that during my second year of law school there was a commercial building, an auto repair shop that I could buy for $10,000 in back taxes. So me and a partner bought this building. We said, well, we can sell it for 15 if we need to, but let’s go ahead and take a run at seeing if we can rehab this building and rehab this business.
So we did it and we, we flipped the building the business to graduate from law school without any debt. And went on to practice law. I soon insurance companies. Turns out insurance companies are great at collecting premiums and even better at denying coverage, especially when things get expensive. And so as an attorney, I’d sue ’em and then I’d whatever money I was making being an attorney, I just continued to push into real estate, just buying single family homes and probably similar to you, right? You know, doing a little wholesaling business, you know, keeping the tents for myself, selling the nines, eights and sevens. Mm-Hmm. Honestly would come through until I hit my financial freedom numbers doing that. And I said, great, I’ve, I’ve unlocked the keys to the kingdom now baby. I’m gonna go to Africa and climb mountain Kilimanjaro, which I did and travel around the world.
And that I found out though that like passive income like that in that way wasn’t really totally passive. It actually was a business in and of itself. And I had to think about what assets I was gonna buy when I ran outta depreciation and, and that okay, great, I had property managers, but who’s manager, the property managers to make sure they’re staying on top of stuff. And so I started learning that this passive game and this financial freedom game is more of a spectrum. And that’s when my life came about was, okay, how do I, how do I win the game to have the time and have the money to be able to go live the life that I want to go out? And Royal Legal Solutions, my company just became the natural extension of that, of helping other people do what I built for myself. ’cause All my team members, all the same people I use to manage all of my own wealth. And that’s what I help my clients clients do is get there. And that’s what I do now. I help guide the company and then try to spend as much time as I can grabbing new life experiences. ’cause I think that’s what’s important.
Yeah, that’s great. That’s a great story. You’ve accomplished a lot. And I didn’t know you climbed Mount Kilimanjaro. That’s, that’s incredible.
Yeah, man, I climb Kilimanjaro. I’ve, I’ve lived in the jungle on the Amazon with the YA awa people for, for months at a time and just totally off grid and and like living in huts and just really trying to seek out like what is really you know, how diverse can this life experience really be? How much cool stuff is there out there? ’cause Perhaps life is like a road trip and what we were supposed to do is enjoy the road trip, but maybe we got too caught up in thinking about how much gas can I acquire? You just need the amount of gas you need to be able to drive on the road trip if you end up dying and you got 10 billion gallons of gas, you, but did you go on the road trip?
Right. Yeah. It’s, it’s like saying, you know, the important thing is the journey, not the destination. Is that a similar way of saying it?
Yeah, that’s another way of saying it. You know, it’s I think there’s a lot that goes in, you know, it’s right, rightly so. Right? We need to take wealth very seriously, right? It’s a very serious game. It requires high levels of precision, especially if you want predictable wealth that’s durable. Mm-Hmm. <Affirmative>. And it grows over time. It’s not an easy thing to accomplish. Only a select percentage of people ever really get in to that level. But the other thing I think is really important to think about is maybe it’s not an all or nothing game. You know, like, is there a way in which that, like I can create balance in my life to say, well, here’s how wealth works in my life. And I’m also very intentional about thinking about how do I want to be living? And then if I can think about these at the same time, what I’ll do is I’ll develop a system that will allow me to optimize for both. A lot of people I’ve met that are billionaires still tell me they spend 20 to 30 hours a week managing their wealth. And I was like, holy smokes. If you can be a billionaire and still have a full-time job just managing your money, then it ain’t just money. There’s a broader scope that needs to be considered to do this thing called financial freedom and living life to its fullest.
I guess that differentiates financial freedom from time freedom. You can have one or you can have both, but not necessarily both at the same time. And really the goal, I think the goal for a lot of people, and certainly for me is to achieve time freedom, but to get there through financial freedom.
Mm-Hmm. <affirmative>. That’s right. And I think it, it, if you can be intentional about getting there, then you can, then you can get there. Like my, my experience with, you know, owning a bunch of single family homes in the very beginning was that I had financial freedom, I had mailbox money, but what I really had was golden handcuffs. I didn’t really have the time freedom to really go mm-hmm. <Affirmative> and really go, go forward as big as I could because I was still caught inside of all of this inefficiency. And so that’s when like royal legal solutions for me became the testing ground that says, well, let me spend a few years here just studying who are the best entrepreneurs, you know, attorneys, CPAs, MBAs, CFOs that I can find and grab a hold of to say, is there just like any other business I would build to say, well, is there a systems and processes, team members and meeting structures that allow me to take this from a chaotic mail storm of stuff that’s just happening to say, no, there’s compartmentalize, there’s compartmented parts of my life that I manage like each month and each quarter and that’s how much that part of my life needs.
And then without that kind of discipline and rigor that it takes to get to that kind of discipline, what really happened is that money was just a continuous every day or every other day having to solve another fire that was coming up. And I never was really free. It’s like the difference of saying, did I go on vacation for a day or was I on vacation for two weeks and didn’t have to check into the office? We all know that experience is totally different, right? Mm-Hmm, <affirmative>, that’s what became the curious question for me. And that what I built inside of World Legal Solutions was the systems that processes teams, the scalability, like everything that was needed to say, yep, this is how much time my company requires, how much time my wealth requires. Other than that, unless there’s something on fire, then it’s gonna wait until the next meeting. And that’s its own discipline, you know, in of itself to try to live like in that way. Yeah. But it’s a little different. Yeah. I think maybe than the average.
Yeah. That, that’s all very interesting stuff. Two things that popped out for me were, when I reduce your level of success comes down to two things, you know, knowledge and discipline and the different levels of success. Whether you’re a newbie just getting started getting to that first property or you’ve got 10 properties and you’re, you know, looking to scale and grow and optimize. It requires knowledge and it requires discipline. If you can apply those two things all the time, I think, you know, you can set your sights and your goals pretty high. Yeah. At least that’s been my experience.
If you can have the knowledge and the discipline that that’s really everything that has ever, you know, really required. Yeah, I think like in a lot of times the knowledge and discipline can be really difficult. Like take for example, if we, you know, circling into like the topic of like asset protection, when I was first starting out, I didn’t have any asset protection at all because the best people that I could find their knowledge level was just have an umbrella insurance policy. You don’t need LLCs, you don’t need other like corporate structure that’s there. And my discipline level was so low that what I did was that, well, that level of knowledge is good enough. Setting up LLCs sounds like it’s kind of a pain in the butt. I don’t really wanna do it, so I’m just gonna be, you know, fine with whatever this is.
Until the guy that I was listening to Smart Guy, he lost $3 million from a single lawsuit. He was very well insured and it was from a, you know, it was a, an issue that came up with like emails that got sent and then there was like a contract that got signed. But he said, well, they lied about something. And then I went back outta the deal. And so he went to his insurance company after the lawsuit and he said, the insurance company’s like, we don’t ever cover any, none of this stuff is covered only like simple accidents are covered by insurance. And we got a single LLC to be at least $3 million richer before it. And I, that’s, so I said, ah, okay, so there’s a lesson here, the grace of god, the universe, whatever you wanna call it, that’s coming in front of my, my face in front of my, my awareness right now that says, Hmm, you gotta do the hard things.
There’s not skipping steps. Just build it right from the ground up. Even if it costs you a little bit more money, even if it slows you down a little bit, even if it feels kind of like pain in the butt, even if it’s, oh, that’s not really making me money, that’s just costing me time and money. If you’re just, just following the path of success, <laugh> is itself a hard discipline. ’cause I’m the kind of guy that naturally I wanna just go where I want to go. What’s the fastest way there? I’m gonna cut, you know, I wanted to cut corners or whatever, and that’s young 20 Scott, and I was like a 38-year-old. I’m like, no, no, no. Where you wanna get to is the place that it’s predictable and that life is always getting better and it goes up into the right. And the way to do that is to follow very disciplined approaches that, yeah, they take some time, you know, but life doesn’t end up being this thing where it’s like this boom bust cycle that so many people experience.
Right. Well give us an overview of what real estate asset protection really entails then.
Yeah. So you gotta think about protecting your assets and protecting yourself. You know, a lot of people operate in their personal name, meaning like they’ll sign leases and with tenants inside of their personal name or contracts or send emails in their personal name. And my advice is, you should never do that. You should always have at least one LLC that doesn’t own anything, but it’s, you know, you’re Scott Royal Smith manager of X-Y-Z-L-L-C, and that’s at the bottom of all your emails and it’s how you sign any contracts that you’re doing with contractors or tenants or anything like that. And the reason why is because of a lawsuit pops up a lawsuit then goes against that LLC. We don’t want that lawsuit to go against us personally because we have a credit score. And typically for most of us, our credit score is important for us in the way that we’re buying assets or the way that we’re conducting our business.
Otherwise it’s our access to capital in many cases, especially in the very beginning stages of the game or the wealth building game. So the way you protect that is by using an operating company. And then secondarily, what you need is you need an asset holding company. And that asset holding company is the company that owns everything but doesn’t do anything. And there’s a lot of levels of sophistication in the asset holding company that when I’m happy to expound on. But at the highest level, the way I understand this is that the reason rich people don’t own things, rich people don’t own things. They have companies that control, that own those things and they control those companies. And then they always will have at least two companies, one company that protects ’em personally, that’s their operating company that does everything and doesn’t own anything. And their asset holding company, which is much more, much more complex and nuanced. That’s a company that owns everything but never does anything.
So, not to get too deep into the weeds too quick here, but I think a lot of real estate investors will have title holding entities, right? Asset holding entities. And they don’t do anything operationally. They hold the assets, but then they set themselves up as the managing member. They’re managing the asset holding entity as a separate entity, which is themselves. What I’m hearing you say is that that’s not the way to do it. You should have a separate entity separate from yourself that is also the managing entity for the holding company. Is that correct?
Yeah, you can do it that way. That would be like ultra belt and suspenders, right? If you’re the manager of the, the LLC, that’s your asset holding company you’re likely gonna be fine if you’re in a state that you’re using the company structures that have something called charging order protection. Mm-Hmm. <affirmative>. So charging order protection relates to like, if I sue you, can I get to your LLC that you own? Right now? States that don’t have it, if you sue the LLC, you can’t get to the person, but this is in the reverse. If I sue the person, can I get to the LLC? Right? So you get into a bad car accident and then now somebody can take all of your assets that are in your asset holding company. So if you’re a state like California, that’s the way it works.
So typically this is why you want LLCs that are formed in like Delaware, Texas, Nevada or Wyoming states that have charging order protection. And then you you know, and then you wanna be say, great, do you have an operating agreement? Are you keeping in kind of books? How are you signing for that LLC? There’s a number of things that have to be done, right? In some instances, if you’re in a high risk situation, would you want your operating company to be the managing member of your asset holding company? Right? Or given what you’re doing, do you not, not need to take those extra steps, but like one way or another, you as an individual shouldn’t know anything anymore. Your company shouldn’t be asset holding company shouldn’t directly be doing business with anybody. And then if anybody touches anything that’s going on in the world with you, it should always be through your operating company because that’s the one that doesn’t own anything.
And that’s like your firewall. As long as you can keep those like buckets straight and review it maybe once every three months, ideally with a professional team that’s asking you, Hey, you know what? Asking you all the questions about have to make sure that you’re covering off all your bases. That’s the way you’re able to make life run really, really easy. So that’s really simplistic that it’s repetitive, that you check in with somebody else who’s like professional on a regular basis, says, okay, what are all the things that you, what are the assets you’ve acquired that you haven’t put into your company? How have you been signing anything for things? Have you been updating your books, yada, yada, yada, keep things tidy as you go along. That’s the best I’ve been able to find about making life easy.
So if you just boil down the key risks, what are actually the key risks that real estate assets face in this litigious world?
<Laugh>? Yeah. Well, the issue is, is that anybody can get hurt on any one of your pieces of property, right? Yeah. At any given time. And anybody can lie about you at any given time, even if you’re honest, right? So I had a, a client of mine, for example, super honest, maybe like even too honest, I’d say in some, some instances. So, and she was a, she was a house flipper, right? So she was always trying to disclose everything and everything all the time. And she ended up replacing some of the plumbing that was underneath the house. And she was talking to the buyer about like what plumbing had been replaced in the property. And these are some emails back and forth from her operating company to the buyer. Buyer goes on vacation and there’s a plumbing leak and it causes $75,000 in damages.
So what do you think the buyer does? It’s like what everybody does, anybody that gets a hit with a major dinging, they never just take it on the chin. They always say, this must be somebody else’s fault, <laugh>. This is, this is just human nature, right? Right. and so what did you do is that, you know, the buyer ended up buyer’s attorney calls and says, Hey, you know, we’re gonna sue you for $75,000. And says, well great, I understand that, but let’s talk about this a little bit because the lawsuit they’re gonna file if you try to, to sue, you know, based upon the emails that got sent, those all came from an operating, all our operating company, operating company doesn’t have any assets. So there’s nothing to collect against there. She’s also using a series LLC with the anonymity trusts in place. So all of her assets were compartmentalized.
So that way when she sold that asset, there was nothing in the entity that even sold the asset and all the money what had already been taken out of the company before any of this issue was known about. So the nuts in bolts at the end of the day right, is that the lawsuit got dropped and it got dropped completely, even though it could have gone all the way to a jury and we would’ve had to like take our gamble at 12 random people off the street coming in saying, what do they think about these emails? Because the structure that set up, when you have something that protects you, you have something that compartmentalizes your assets and anonymizes the ownership of the assets. So people can’t find out how much you own takes the target off your back doing that is that the lawsuits stop because the business of the lawsuit is too risky.
Mm. It it’s too risky for them to spend the 30 to $50,000 and going through the lawsuit to be able to hope to be able to collect something. Now that’s totally different than the people that get sued and they have all the assets in their personal name ’cause now or one LLC that owns all of their assets. ’cause Now it’s just one giant bucket and that’s just ripe for saying, please come sue me. Right? You got the big target on your back. That’s the power, the power of really good protection is that the facts in some ways just don’t even matter because the business of the lawsuit doesn’t make any sense anymore. So you’re using using that as the real leverage.
I never heard it called the business of the lawsuit, but yeah, when you step back and think about it, it’s almost like yeah, there’s there’s a business surrounding that lawsuit to try and make a claim and generate fees for the attorneys, et cetera. So yeah, it’s, it’s, it is a business.
It’s like gonna Vegas baby, you know? Yeah. You’re gonna say, ah, I got a 60%, this is actually how settlements work. I don’t know if you know that, but what you can actually do is you can calculate what is your chance of winning this lawsuit. And there’s ways in which attorneys have figured that out. So let’s say, well, we think we have a a $500,000 claim and we have a a 50% chance of winning, so then we’ll settle for anything that’s above 250,000 dollars’. And that’s how they actually get to the, to their settlement numbers. Just like if you were playing poker and you would have like your different pod odds and you’d have your different implied odds, and it all works in the same game about like, as you brilliantly told me earlier today, which I love, which is like, there’s a lot of knowns that you have and then there’s like, you’re trying to make information and betts based upon your unknowns and this stuff that we do in asset protection just says, well, let’s just get rid of the game. Right? If we can just get rid of the game, does our life become more predictable, more stable? Does it make it where we’re less likely to get sued? That if we do get sued, we have this whole castle of protection that’s behind us, great. That’s actually what’s gonna make life better. That’s what’s worth investing in.
Yeah. Very interesting. Well, let’s take a minute and talk about legal structures and entities because you, you mentioned various things. You mentioned LLCs, you’ve mentioned series LLCs, you’ve kind of mentioned some various components, but let’s make sure people understand what you’re talking about. What legal structures or entities are commonly used for asset protection and, and even more specifically a real estate based asset protection.
Yeah. The most old school one is LLCs, right? That’s, you know, and typically like an old structure would be like, Hey, I’m messed set up one parent company maybe in like Wyoming, and then I’m gonna set up individual LLCs, you know, one in each state that has properties. Yeah. And then I’m gonna kind of push ’em together in that, right? But the problem with that is that it ends up running with like a bunch of different bank accounts, bunch of different sets of books. You have to maintain all of these entities like every single year, which has costs for registered agent and all the yearly state fees and yada, yada yada. So, I don’t know, it’s about 30 years ago that they passed a statute. Multiple states have that for a series LLC. So what a series LLC is, and that’s what, and this is ideal for real estate investors, is allows, allows you to create one parent company and then that parent company can create what’s called an individual child series, right?
So you’ll have child series a, child, series B, et cetera, can have as many children as at once, just like any other parent. The all the children are free to create infinitely scalable. And then what you can do is create anonymity both in the ownership of the company as well as the ownership of all the underlying assets by using different types of land trusts that are there. So they work as passed through entities. And, and it’s in this way with a series LLC that you can essentially pay for one company. You can have all your assets owned anonymously. You can own your company anonymously, and it’s infinitely scalable for free. And that gives you, if you’re in the one to four unit real estate space, that’s all you’ll ever need.
So is that set up in each state that you own property in? So if you own property in Texas, you’ll, you set up a series LLC in Texas, if you own property in Missouri, you set up a series LLC in Missouri.
Yeah. So the issue is, is like, you know, have you ever wondered about why can you form a Delaware LLC in Delaware and then use it other states? Like how are they able to do that? I mean, it’s a Delaware law, right? Why would Texas recognize a Delaware law? And it’s actually because they have to, it’s ’cause of the full faith and credit of the US Constitution says the states have to respect each other’s laws, right? So what you’re actually able to do, and what I, my favorite strategy is I use a a Texas series LLC because it has charging order protection. I’ll create it using a an an anonymity land trust. So people can’t find out who owns the LLC connect it to the law firm. So now everything is protected by the attorney-client privilege. And then it says, well, wherever my assets are inside of the United States, let’s say I got something that’s, you know, in, in Kentucky, you know, and I said, well I got a, you know, a duplex in Kentucky.
So great, well what I’m gonna do is I’m gonna buy that duplex in Kentucky. I’m gonna use my personal name on it to acquire it so I can get conforming loans so I can get the absolute cheapest loan rates on it. Then what I’m gonna do is I’m gonna transfer it into the Land Trust, let’s say, call it the one, two, three Main Street Trust as, let’s say this property’s located at 1 2 3 Main Street and my 1 2, 3 Main Street Trust is gonna be owned by my child Series A of my series LLC that I formed in Texas. So what just happened? Well, my Texas series LLC is anonymous. My ownership now of my asset is also anonymous ’cause it’s owned by the 1, 2, 3 Main Street Trust and anything connected to that as just some law firm. And that’s all protected by attorney-client privilege. I was able to transfer it into a trust leaving the existing and deadness in place because of the Saint Germain Act, which says that we can leave that there. And I didn’t have to foreign register my series LLC from Texas into Kentucky because the series LC is not technically doing business in Kentucky. It’s the Land trust that owns title to the asset. And so then that saves me from having to do any yearly maintenance of the LLCs that are there in Kentucky. So now not only is my series LLC infinitely expandable for free, I can also operate everywhere without having to pay all of these fees to all these different states.
So when you set up a series LLC, are you paying the state fees for each series or child that it spins off or just the parent?
It depends which state you set it up in. It’s one of the reasons why like Texas is, Texas has no registration requirements for each new child series and no new cost. Other states you actually have to pay to be able to create and you have to register the new series LLC. But literally my paralegals are creating new entities on the desktop digital signature with a client. And inside of 60 seconds we’ve just created a whole new entity that they can use for a closing.
And then you can name those, whatever you want to name them. It, there’s no restrictions.
Nobody’s ever gonna see ’em. So you, we typically just name ’em whatever. The only thing people ever see is the name of like the Land Trust. Yeah. They’ll say, well, it’s the name of a land trust. There’s no information of who that land trust gets tied to. They’ll be able to see that, oh, there’s this indebtedness that Marco had on the property, right? Yeah. They, there’s still a lien there, but it’s gonna look like an actual sale to the land trust. And let’s say they sue Marcos saying, well, we think Marco actually owns that piece of property because he, there’s a lien on it. Well, it turns out he doesn’t, it’s actually owned by the land trust in the child series of the series LLC. So if they guessed they guessed wrong and they just blew a bunch of money, which is actually what you want, you want ’em to go waste a bunch of money. ’cause That’s how you take the fight out of ’em.
Right? Exactly. So I’m still in the weeds here on this. If, so, if, if I had a, a series LLC and all my children LLCs own different properties in different states Mm-Hmm. <Affirmative> each being managed by a different property management company, therefore they’re collecting rents and sending me rents for each of these different properties held in different LLCs, child LLCs, I would have to set up a bank account for each of the child LLCs. Right? I mean, I can’t see how you get around that.
Well, it depends. So the issue comes into the issue of like a piercing the corporate veil or an alter ego theory if you get sued Yeah. Which is what attorneys will claim when they’re trying to say like, oh, these actually aren’t separate companies. Or like, oh, it’s really the person and the company are really the same, and then they try to collapse everything down together. So the issue is, is that bank accounts actually aren’t a dispositive on on that issue. Right? I if you look at in the, the, the case law on it, it’s actually a laundry list of factors that the court will look at. The one issue that is dispositive on this is sets of accounting books. If you can show me that the income and expenses are differentiated between each segment, we’re gonna treat that like different companies, right? So you can actually operate with one set, one bank account, and one set of accounting books as long as you’re keeping track of the income and expenses for each property or each quote unquote child series separately.
So let’s talk about this by analogy, because this, this gets a little bit into the weeds, right? Like, let’s say that I sued your property management company before they sent you out the checks for your rent, all the money for your, your property management company is taking in all of the checks into a single bank account. So why is it that if I sue your property management company, I don’t get Marco’s rental checks, it’s all in their name, right? Well, it’s because of their internal set of accounting books that says, yeah, yeah, we understand all the money is held inside of this one pot, but it actually actually belongs to these different people. How do we prove that it’s a set of accounting books? And so that’s just another analogy to show, you know, why is it appropriate and possible to be able to do it that way and streamline things a little bit.
So if, if you have everything separated in your books, you’re saying you don’t need separate bank accounts in order to manage it this way. Is that true? You, you’re basically keeping everything separated within your books, but it’s still one bank account, so all the checks are going to one account.
All the checks go to one account. Just the way your property manager’s collecting all the money from other clients in one account. And we’re saying, well, how, how does a court actually look at what’s really happening here? Yeah. Because otherwise they’d say, well, you’re entitled to all the money that’s in your property managed account when I sue your property manager. Right?
Right. But that’s not the way that works.
It’s because of the set of accounting books. And the way you do that, like in QuickBooks is classification, right? You can set, you set classes and each child series has its own class and you classify all the income and expenses there. There’s nothing wrong with having multiple bank accounts, having one bank account for each property and having all the money flow, you know, into those bank accounts. The issues that come up with it on a practical nature for most people is one of two things is that they’ll screw it up because they’ll have money deposited to wrong accounts and then they’re actually not keeping good sets of books to be able to catch where errors get made, or they’ll get so overwhelmed with the operational nature of having to manage so many different sets of books and so many different bank accounts that they just won’t do anything at all, which leaves them in this other place.
Right. Which is, I just, I won’t do anything because that sounds too difficult. So this is the the place that, that I found defending about a lawsuit a month that, you know, we come with a very strong stance. Nobody’s ever challenged or broken through anything, you know, having management done this way, although I will say it is, most attorneys out there will always say, you should have separate set of books and a separate EIN number and a separate bank account for every single entity that you own. But that’s because their job is to say, what’s the most conservative position? I view my job as saying what’s the most operationally effective thing that we can actually do as investors to grow wealth? And these are not the same things.
Yeah. I could see that it’s, it’s probably a little easier to manage in the grand scheme of things, but, you know, sadly or not, I do it the other way. You know, I have separate entities with separate EIN numbers and separate bank accounts, and they’re all just separated and then, you know, they flow up to a holding company where everything’s consolidated and, you know, it’s just e it’s just managed at that level. Mm-Hmm. <affirmative>. So, but yeah, I mean I could have done it the other way or down around.
And I think it’s great if, if you can do it that way and you can take on the extra, like we have to understand that all of these things are it’s all resource consumption, right? Mm-Hmm. <Affirmative>, if you can do the things in the more conservative way, right? And it’s all the same to you, like the way that you’ve set it up where it’s like, I have all the separate different sets of bank accounts and I manage it like in, in this way, then arguably that’s better, right? You have even more security around that one issue of how that’s gonna play out, right? Right. And the difference just comes with, with a lot of people that we work with that are there are already maxed out and how much they can handle. And so what we’re always trying to find is, okay, what are like the things that we can do to make things marginally easier to help with, with that piece of it? But I think everything you’re doing sounds great to me, man.
Okay, so stepping back out here, you know, talking about liability management, how, you know, how can liability be best managed when it comes to holding real estate and real estate investments? It’s essentially what you said, but is there anything else that needs to be looked at or taken care of when it comes to liability management?
No, I mean, I’d really say it’s having really strong asset protection in place is essential. I’m still a big proponent of insurance, like I carry a few million dollars of umbrella policies, but that’s just because I want the insurance company to try to get rid of anything first. And that’s what I pay for insurance for is that like somebody else will hopefully get rid of this thing for me before I have to go manage a whole nother thing in my life. And then after liability management, the next big risks are typically around how do I make sure that my wealth passes okay to my family, which is like all the estate planning pieces and using the living trust to avoid probate court so you don’t get caught up there. And then at the end of that, then it’s your investments to your next biggest liability, which is really looking at am I appropriately positioned for my cash flow and net worth and am I really maximizing all my depreciation to get my taxes into, you know, they really should be somewhere in the zero to 10% range if you’re really into real estate.
In our experience working with with clients, if it’s not there, then there’s a good amount of benefit to be looked at with appropriate tax strategy, but that’s the only other place that people really encounter. I think a lot of liability is just the unknowns of being, not having portfolios that are really managed well and not looking at that, you know, in detail and being overly consolidated in, in certain areas, right? Just because it was what was comfortable to them at one point in time and never really looked at, okay, how can we bulletproof this portfolio a little bit more or squeeze out some more tax benefits, you know, those kinds of things. When
You say their taxes should be between zero and 10%, are you looking at the taxes on the rental income in isolation? Are you saying their entire tax picture should be zero to 10% with a real estate portfolio?
So the way I look at tax savings is tax saving is the single best investment that you can make. That’s why all the wealthiest guys I know talk about is like, what they love to talk about is freaking tax. Yeah. You know, for sure it’s like horse racing F1 racing and tax. I don’t know why, but those are the things that seem to come up a lot, you know, and, and what I’m talking about is what we trying to target to is in first year, one to three years is the total effective tax rate. And the way that you get to a zero 10% total effective tax rate is you maximize the deductions Everybody’s talking about, okay, you gotta maximize deductions, your home office sheltering money through your kids home, your automobiles, whatever the case may be there. And then you wanna be looking at shelters.
So there’s all the reti, different retirement shelters of self-directed ira, solo 401k defined benefit plans. Those are great. My favorite shelter is actually using a private foundation to take 30% of total income and remove that from tax liability and then use that as like a super IRA that I can mm-Hmm. <Affirmative> take money out of without penalty. And then after you save all the money you can from deductions and shelters, then the last leg of the stool is what your investments are doing for you. And so if you’re a W2 earner, you’re typically looking at machinery based investments and oil and gas or green energy that’ll give you tax benefits and deductions to get drive down your taxes or if you can qualify as a real estate professional or your spouse can qualify as a real estate professional. Then looking at investments that pay like high bonus depreciation, you know, right now I think it, for this year, 2023, I think it’s 180% bonus depreciation is where it caps out at.
I think next year it drops to one 60 and this is where you start playing the game. You start playing the game of, well, how much taxes do I need to pay this year after I do the deductions of the shelters? Okay, so I need this kind of investment that’s gonna gimme all these tax benefits so I can drive down my total effective tax rate and how am I gonna balance that with my cash flow and the net worth that’s coming off of these investments? And that’s where like A-A-C-F-O kind of analysis or a portfolio analysis becomes really into play. And that’s why we have a CPA and CFO together is because we understand the game as every dollar spends the same. So we’re looking at what’s the, the net blended ROI of an investment between what does it do for me and cashflow net worth and how much is gonna kick off me for my tax benefits and how do I balance this optimally to know that I’m making the exact amount of money I need to place in this exact kind of deal to end up with the exact outcome that I’m looking for.
Right. Yeah, very interesting. One more question here. You mentioned regulations and, you know, changes on the landscape. Are there emerging trends or changes that you see coming in regulations that investors specifically real estate investors should be aware of?
Yeah, I’d say the biggest thing to be aware of right now is just gonna be the Corporate Transparency Act. And so this is where you need to start looking at, you know, how are you gonna keep your anonymity in place now that the Corporate Transparency Act is there? And so this is like a really important, so a lot of people are using anonymity structures because they wanna take the target off their back from lawsuits, and there’s gonna, there’s some necessary disclosures that are gonna be happening here at the federal level. You know, that the government doesn’t want you to be able to hide as easily now, you’ll still be able to keep all of the privacy there that is there to the public from like attorneys that are looking to sue you because you got into a car accident and injured somebody or whatever the case may be there, but there’s some pretty severe penalties if you don’t do the proper registrations and you’re using LLC structuring and not complying with the Corporate Transparency Act. So just go ahead and keep that on your radar and ask your attorney if there’s anything you need to do there.
So when does that start? When does that come into play?
It’s gonna be kicking off here really soon. You’re gonna start seeing like everybody’s pumping out. It’s, you know, it’s here in 2024. We’re not exactly sure on the exact start date yet. Mm-Hmm, <affirmative>, I would if everybody, anybody signed up for like our newsletter, our royal legal solutions.com newsletter we are always pumping out information about updates, about anything that’s tax related, different investments that are coming out that have come across our plate. Any type of legal updates that are there about where things that can bite you. ’cause Obviously we’re, we’re trying to educate you so that way we can say, look, you should be taking care of this and if you’re not taking care of it on your own time, then you can pay us and we’ll take care of it for you.
Interesting. Cool. Scott, tell our listeners how they can find you and get more information about you and your firm.
Yeah, best thing to do is just go to royal legal solutions.com. If you click on the the vault in the top right hand corner of that webpage, you’re gonna get taken to a page that has 11 eBooks, couple hundred hours of educational video. It’s the place that I train actually new staff, so it’s open to the kimono. You get to learn everything you could possibly wanna know. It’s all totally free. So if you wanna be the biggest nerd in the universe and then get in there, that’s awesome. You should definitely do that. You’re gonna learn a ton by going to royal legal solutions.com. Click on the vault and, and getting in that way. If you wanna learn more about some of the things I’ve talked about today, like the concepts and the teams and the processes and the strategy that all goes into building wealth, we, I have that video, it’s about 30 minutes long.
It’s right there on the homepage of the website. It’s gonna teach you everything you need to know about how to become the CEO of your own wealth building company and everything that goes into it. It’s also gonna show you like, how, how do my teams operate to be able to help you do that. And if you feel like you’re good to talk to the team and feeling ready for that, I wanna see if, if you’re somebody that’s a good fit for us to be able to help, or what things you have going on that you might have questions about there’s a scheduling link right underneath that video and that takes you directly to the paralegal team. So you’ll never talk to a salesperson talking to us, you’re gonna talk directly to actual professional legal staff. And what I like to tell everybody is that it’s never too early to take action, but there’s also no excuse not to learn. ’cause I give you thousands of dollars of free education through the vault. And you know, it’s either you should be learning about the, in the weeds through the vault, you should be learning about the high level structures from the, the video on the homepage, or you should be talking to my team about like, what do I need to execute next? And you do that right through scheduling with the paralegal team right there on the homepage at royallegalsolutions.com.
Great stuff. Well, I encourage everybody to take advantage of those videos and, and great content. There’s lots to learn and I don’t think it hurts to know as much as you can, but always hire a professional to help you do it. So Scott, appreciate you taking the time to come back on the show and this has been great. It’s been fun and educational and we should do this again in the new year.
Yeah, I hope so, man. It’s always great hanging out with you, Marco. Thanks for having the time.
You, you too, Scott. Well thank you so much and we’ll have you back on soon. Well, I hope you enjoyed today’s episode. Download the free report on our website, The Ultimate Guide to Passive Real Estate Investing. It’s a free download, it just takes 10 seconds not even to put your email address in the form and it’ll be sent right to your inbox. Don’t forget, we have a team of investment counselors to help you here for a free strategy session. We don’t charge for any of our services, so why wouldn’t you take advantage of that? Just contact my team, go to noradarealestate.com and fill out the form. And again, it’ll only take you a few seconds and we will get in touch with you within 24 hours. And if you have a question about real estate investing, go ahead and send that to me at askmarco@passiverealestateinvesting.com and I will gladly answer those questions on my next Ask Marco episode. Remember to subscribe. If you haven’t done so already, it takes you a few seconds. Just click the subscribe button wherever you may be listening to this and catch each weekly show once it is released. Help us spread the word. Visit us on iTunes, leave us a rating and review. We greatly appreciate it. I do read them all. Thank you for listening and we will see you all on our next episode.
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