LLC’s: One of The Best Asset Protection Strategies for Real Estate Investments

Headshot of RealWealth Co-founder Kathy Fettke. smiling.

Kathy Fettke


LLC’s: One of The Best Asset Protection Strategies for Real Estate Investments – Video

Video Transcript

Speaker 1: Look at this. What a coincidence. He asked about contracts. I said I was going to talk about nonentity asset protection, and here we are. The tendency among real estate investors is to spend about 90% of their asset protection thinking time on entities. Entities are important. They matter.

I sell a course on real estate entities–  How to use them, how to set them up, which ones you need. I’ll give you a hint– Nevada is evil. Why do I not like Nevada entities? By the way, if you’re from California and, especially, the Bay Area, you’re their number one prey. They cost too much, they’re shysters, and the entities don’t act as advertised, specifically. Is Nevada law better than– By the way, if anyone wants power points, I’ll email them to you. If you shoot me an email, I’ll send you the slides. You can take pictures too. That’s okay.

Is Nevada law better than California law? Yes, everywhere is better than California.

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This is the most anti-freedom. I should say anti-economic freedom, anti-capitalist state in the Union. By definition, every other state has better law. Nobody charges 800 bucks a year for LLCs the way they do in California. They even charge you for out of state LLCs, right? I have an LLC in Ohio, it owns an Ohio rental, guess what? That’s doing business in California. You know what their question is on the audit? Did you ever call management from California to discuss an issue ever? Yes, you’re doing business in California.

Now we know the real reason they’re taking that approach. Socialism is expensive, they got to pay for it, right? Look, those of you who support it shouldn’t be upset, it comes with it. Just nod and smile and say, “Yes, I’m happy to pay that. I voted for it.” Why are Nevada entities not a good deal for you? Because the law doesn’t change based on the entity in most cases.

In 99.9% of cases, 999 out of 1000 for non-engineers, the law will be the jurisdiction where the property’s at. If somebody trips and falls on a property in Ohio and you have a Nevada LLC, is that going to make a difference in terms of the judge or the law that’s applied? No, they’re going to apply tenant landlord law, negligence rules, et cetera, based on Ohio. There are certain laws that follow the home jurisdiction of the entity, but you, based on the nature of your business, are very unlikely to run into that. Give you an example– derivative lawsuit.

If you have a derivative lawsuit, the Nevada LLC, the law will apply in Nevada, even though you’re in Ohio. What’s a derivative lawsuit? Essentially, it’s when the ownership of a company sues the management. Now, for most of you, that’s the same people, “You’re going to sue yourself? I should be one of the lawyers to represent you, and I guarantee you’ll win. You will beat yourself.”

The vast majority of law that is different in Nevada and would apply outside of Nevada is something that you’re so unlikely to run into, the probability and percentage is so low, I would not allocate resources to cover it. Now, if you have a lot of property, let’s make up a number. Let’s say you’ve got a million bucks in equity. Which granted, in the Bay Area, that means a normal middle class home that you bought some time ago. But anyway, let’s say you have a million bucks in equity spread out among three LLCs.

Would I then have the One Ring, I mean, the one LLC to rule and control them all, a Nevada holding company to own the other entities? I wouldn’t even think about it with less than a million equity, and probably I’d need more, why? What are the odds? Because the reason you do that structure, the reason you have one LLC, say in Nevada, own the baby LLCs, the reason you do that is if so the baby LLC is pierced, in other words, the court disregards its existence, then they have to go to Nevada to sue that entity.

In 20 years, as a practicing lawyer, how many times have I seen that happen? Well, okay. How many times did Hillary tell the truth?

Oh don’t worry, I make fun of Republicans too. It’s easy, especially now.

The odds of you needing that mothership are so low that only when you have a massive amount of equity are the annual costs worth dealing with, because those entities are more expensive. If you have a Nevada entity and you have California property, you still have to register in California to do business. What happens if you don’t? If you don’t register for an entity in California, you lose access to the court system. Could that be relevant during, say, an eviction? That’s why I don’t like Nevada.

Those people make a living off of suckering you, and they target Californians in particular, because you got money and you like to invest out of state and you’re in-state laws are not so great. Stay away from Nevada, Utah, they’re evil. I have fixed so many problems created by tax promoters or entity promoters from those states. I just have a very bad feel for those people, I don’t like them. I don’t think they’re ethical by and large. Are there exceptions? Yes, I’m sure there are two or three ethical people in Vegas, doubtless in no position of power. Looking at non entity asset protection. Sir.

Speaker 2: If you only own one property and you’re currently just a sole proprietorship, do you recommend going to an S corp in that-

Speaker 1: Okay I’m not going to go– I’m going to answer– I’m going to repeat the question then I’m going to answer it, but guys, I do not want to get into entity discussions today, it’s not on the line. I’ll answer as a courtesy, but I don’t want to go into entity discussions. In fact, what I’m telling you is you spend too much time on it. His question was, if you only own one property should you put it in an S corp. You don’t put rental properties and corporations S or C. Tax wise it’s a disaster, it’s an absolute disaster.

You put rental properties into LLCs, unless you are a non resident alien. Certain countries penalize LLCs, for example, because there’s a lot of money coming into the United States. Why is that by the way? Why is a lot of money coming to the US? Because we don’t– the properties have gone back up, it’s not like it’s 2009 anymore. There are still decent priced properties, but the bargain bargains are harder to find than they were before they were common place.

Why are investors still pouring money into here? Well, first of all, their vision of the United States is about 40 years out of date. Second, as dumb as we are, and by God, we are dumb, the rest of the world’s even dumber. If you look at what’s going on in Europe and China, they’re going to make our splat look minor in comparison. Guy named John Mauldin who puts out a great free newsletter, if you’re into economics and investing, John Mauldin puts out a wonderful newsletter, and he has a great saying, “Japan is a fly in search of a windshield.”

If you look at their economic policies, I can’t help but agree. Why is money coming here? We’re less dumb. The perception of– Now here’s the thing, we are less dumb, I think we’re about this much less dumb, they think we’re about this much less dumb. They’re a little behind, they believe the press.

All right, coming back to the non-entity asset protection, I’d like you to spend a lot more time on this. Now, again, if you have really good managers, some of this is moot. In other words, you’re not directly engaged in it.

You might talk to the managers or understand their philosophy and see where they’re at on this, because you’re delegating a lot of it, but you need to know what to question. If you’re doing it yourself, this is enormously relevant. Enormously relevant. First of all, when the LLCs help you, when you’ve been sued for a lot of money– all right, if you’re sued for five grand, is an LLC going to matter? Not at all. Not at all. You’re sued for real money, you lose– now, I should prefer you not lose. Your insurance doesn’t cover it, we’ll talk about that, you fail to settle then the LLC becomes relevant.

That’s fairly rare, I want you to have the LLC. When I say that’s fairly rare, some people say, “Oh, so you’re saying we don’t need entities?” No, I just want you to have them but understand that the perspective, they’re like term life insurance. They guard you against something that’s very unlikely. I’m 46 years old in good health. As long as I don’t upset the chilena, odds are I’m going to wake up tomorrow alive with everything attached.

Term Life Insurance for, me, it’s just very unlikely I’m going to need it. Therefore, it’s really cheap for me. It’s very cheaply priced. That’s how LLC should be for you. Understand that unless there’s a direct tax benefit, which with rentals there isn’t, unless there’s a direct tax benefit, you’re paying for essentially Term Life. Keep the price, including the price of your time, your brain power, low. Keep that price low. How do you do that? What do you focus on?

A, a lot of people sue because they’re angry. Malcolm Gladwell had that book, Blink, out a few years ago and he mentioned in there that it’s very frustrating to plaintiffs’ lawyers, that when people have a good lawsuit against the doctor, oftentimes they won’t sue because they like the doctor. When the doctor makes them angry, they want to sue, even though they have a lousy case. In both instances, that’s upsetting to the plaintiff’s lawyer. That’s human nature. Some people, you can’t help but make them angry, right? Especially in this modern culture, a lot of people want to be offended. Desperately, desperately wish to be offended, and they usually succeed in their quest.

You can’t really do much about that, but by and large, how you talk to people and how you deal with tenants, assuming it’s something you do, or you want to know how your management company does it, being pleasant about unpleasant things just is great odds playing, probably it could be your karma too, but it’s great odds playing. The British are really good at this, Southerners and the Brits. The southerners, what does it mean when a southerner tells you, “Bless your heart”? That means F you in southern.

What does a Brit mean when they say in such an understated manner, I love British understatement and humor, “We shall not be friends”? What does that mean? I’m going to rape your fields, pillage your sheep, vice versa, whatever, it’s war. The Brits have gotten in trouble over that. True story, there was a battalion of Brits during the Korean war utterly engulfed and surrounded by Chinese. The Americans didn’t come to their aid and the Brits couldn’t understand why, until they reviewed the communications. Because I think Churchill’s the one that said, “We’re two great nations separated by a common language.” The Brits are understated.

The Brit actually said, the American asks him, “How are things?” He was like, “Oh, it’s rather the sticky wicket”

Okay, let me translate that into American, “We’re getting overrun, bomb somebody.” The Brits are polite. Churchill did say, “Always be polite. Even if you must shoot a man, be polite.” That sounds British. Bang, sorry.

Same lesson, say hard things in a pleasant manner. “I’m just– First of all, I’m just the manager, I have to evict you. I don’t want to, I know times are tough, I feel the burn. I don’t think you should have to pay, but if I don’t evict you I’m going to get fired. Can we make this as friendly and painless as possible? I’ll tell you what, I’ll give you an extra week, but I really need the house left nice, right? If there are holes in the walls, somebody did Taekwondo on the walls, we’re going to have a problem. Can we do that? I’ll give you a little extra time, and I’ll tell you what, we won’t even file then. If you just go, we’re not going to go for a judgment. By the way, with my tenants, you’re giving them nothing. You can’t collect on my tenants. There’s nothing to take.” Just be pleasant.

Two, know what causes liability. Know the rules, here are some suggestions, Nolo puts out some great stuff. Every Landlord’s Legal Guide, Every Landlord’s Protection Guide, excellent. They’re like 50 bucks a pop, great reading just to know, in general, what people get sued for, landlords in particular.

Here’s the real gem. If you’ve got a local plaintiff’s lawyer, and they don’t usually come out and say, I should say a local pro-tenant lawyer who wrote a lawyer’s study book. Because lawyers and law school use these terms, these hornbooks, we study an area of the law, usually there’s a specialist or two or three, in a state like California, i’ll bet there’s more than one because it’s so big, and then out of state, you just got to see where you’re at. Usually, a lawyer wrote a book on tenant landlord law and one of the lawyers will have a reputation for being pro-tenant.

You want that book, that’s the other side’s playlist. West Publishing, it’s a legal publisher, West Publishing will often have those books. For example, the guy in Ohio who does it, he’s from Cleveland, which the odds of him being some sort of pro-tenant Marxist are therefore high, and he was, you read his book, he put out a piece on tenant landlord law, and it’s pretty much a guide on how to stick it to your landlord. It’s the other side’s playbook, it’s wonderful. I’ll give an example.

In Ohio, you are not under a requirement to shovel snow or clear ice for your tenant. Because in Ohio we have snow, and it’s known you have snow and it’s known you should watch where you’re going. Now, here’s the interesting quirk, if you shovel the drive once, your tenant now has an expectation that you shall continue to do so. Once you do it once, you’ve got to keep doing it. Lesson, no good deed goes unpunished. Is it helpful to know that before you get out and shovel? Yes, so you know the full consequence of your decision. Those are invaluable. Let’s see here.

Oh, you’ve got to talk to an experienced litigator, this is key. This group, because of the membership, has some weight and pull. People want to be in front of you to get business. That’s why I’m here, I’m a filthy running dog capitalist pig. I came here for the money. I don’t know you enough to like you or dislike you, it’s about the money.

Here is the person who knows more than anybody about landlord liability. You see the case that winds through the court system and makes it to a judgment to the point where it’s written down and put in a law book, a published opinion is abnormal, by definition. I’d be shocked if it’s 1 in 1000. It’s abnormal.

What happens? Everything settles. Is that published anywhere? No. Who knows what happened at the settlement table? The lawyers. The lawyers who represented both sides know, why did this settle here instead of here? Or why did it settle here instead of here? They’re going to know why, and it’s not written anywhere. Those are brains worth picking. Get them in front of this group, or pull your money, get 5 to 10 of you, everybody puts up a hundred bucks or so, and buy a couple hours of the guy’s time. Let him know ahead of time what you want, and then pick his or her brain.

Because they’re going to see stuff that’s not written down anywhere. They, more than anybody, can tell you what causes liability and how to reduce it. Utterly, utterly invaluable. I’ve never seen a book out there written on it. In fact, if you ever do see one, please let me know, I’ll be the first to read it.

Insurance policy. I do like to pay– I tend to use the same company in the same policy efficiency, I do like to pay a lawyer just for an hour, maybe two hours to go over the policy. There are things in there that will be subtle and hidden from you. They will, if they’re any good, make them clear. Understand what’s excluded directly and indirectly.

For example, I do mobile home parks. My mobile home park, I know that if a bad dog, and there’s a list, I have a mobile home park in Indiana, every state has a different definition of what is a bad dog. Now, pit bulls are bad dogs everywhere, whether or not they are in fact. I always get a pit bull lover saying, “You know, they’re trained that way by hu–” Yes, I understand. It’s humans fault they’re evil or they’re viewed as evil, but understand something, if a pit bull bites a kid, it’s going to be different than if a poodle does in the eyes of the court.

Because of that, insurance companies will not cover bites by “bad dogs.” You can normally buy an extra rider, which is a business decision. Is it worth doing?

It happens for us to be a coincidental. We don’t want tenants with pit bulls. My mobile home parks are such that we bought them with white trash and most everyone’s a redneck now. So it’s sort of a promotion and we’re happy about it. The people who owned pit bulls in those parks when we bought them, those pit bulls were not pets. Those pit bulls were a statement of ego and what a tough, bad person they thought they were. Do we need that kind of tenant? No.

So I would tell the tenant, I read their policy, I know they’re not covered, and it was my excuse. This is back when I self-managed. I don’t do that anymore. I told the tenant, “Sorry, but we can’t have the pit bull in the park. It’s against company policy. We can’t get it insured.” Don’t get me wrong, I love dogs. I got a Collie. They’re a lot like pit bulls.

He actually got so mad, by the way, that he chest bumped me. I never get that from the female tenants. [laughter] We got rid of him. So you got to know what the policy covers and doesn’t cover. Some of it’s subtle. For example, most liability policies do not cover intentional acts. Now, what’s an intentional act? I think it’s a lot of things you might not think about and you want to be reminded of. For example, he’s my contractor. Sorry, just right up front, sorry. He’s my contractor, and let’s say he grabs a tenant’s chest, female. Is that intentional? Yes. He didn’t trip and needed to catch himself. That’s intentional.

If I get brought into that lawsuit, and typically lawsuits are shotgunned, everybody gets brought in, that’s not covered. They won’t defend that. They’re not going to pay for that. It’s important to know what the policy does and does not cover, whether or not a rider is available and whether or not the rider makes economic sense. We don’t allow pit bulls and we search diligently for them. We look for scat in the yard. We look for visiting dogs, right. There are always temporary visitors. Because we think it’s just good management policy, so be aware of that.

Oh yes. This is one you guys always forget about, and your managers won’t do this for you. I used to suggest buying a politician, but they’ve gotten so honest they don’t stay bought, so rent one. Landlords are notoriously frugal. What does the little bird that flies over the landlord’s house say? “Cheap, cheap, cheap.” 10 minutes to break, and I’m going to pretend that it wasn’t an accent. Therefore, it carries the order of diktat. God, you guys are so short sighted and cheap, landlords get nailed hard. You got to fight. At this point, politicians are for rent. If you don’t get your interest represented, they’re going to nail you every time. That means you have to open your wallet and cough up some money, and give money to someone who will represent you.

Now, do I like it? No, but it is a fact of life. If you’re not willing to make that investment, when a law gets passed that landlords have to pay this fee or they have to pay that tax et cetera, et cetera, you’ll have only yourself to blame because you wouldn’t fight. Say what you will about Trump. He does fight. Now, we don’t know for what.

I’m sure he’ll get around to letting us know.

Headshot of RealWealth Co-founder Kathy Fettke. smiling.
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