LLC’s To Manage Your Risk Tolerance

Last week I wrote an article “When Do S-Corps Make Sense.” I have a client we started working with in 2010, Kiesha. She started out using wholesaling and rehabbing to generate chunks of cash. Kiesha would sell some of the rehabs and use the BRRR method to build her long-term rental portfolio (buy, rehab, rent, and refinance).

Over time, her persistence paid off and in 2021 she had 12 rental properties in her long-term portfolio. She used her LLC taxed as an S-Corp to buy the houses and fix them up. When the property was finished, she would move the property into her passive LLC with each property going into its own land trust, get a tenant in place and then she would refinance the property. The structure was in fact Manageable, Scalable, and Financially Efficient. However, in January of 2021, she found herself with a lot of equity and decided to sell some properties and 1031 exchange into some commercial syndications. The rules of the 1031 meant the properties had to be sold out of her passive LLC, and the passive LLC invested in the commercial syndications.

She kept 4 rental properties that were performing well and was left with over $1.5M in commercial syndications, which have been returning over 20 percent. Not too shabby.

One problem: commercial syndications are considered to be a “safe investment” whereas the rental properties are considered “dangerous assets.” We would hate for an accident to happen with a rental and cause problems with the cash flow from the commercial syndications.

Our solution was to form a third Wyoming LLC, that only holds the safe commercial syndications. This simple move doesn’t violate any of the 1031 rules and puts her in a position of power. If there’s an accident with one of the single-family homes, her commercial investments will be completely safe. As you grow your portfolio, be sure to evaluate your risk. Be wise and always keep yourself in a position of power.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.