Mistakes to Avoid When Protecting your Real Estate Property

About the Video

Throughout the episode, they delve into various strategies that homeowners and investors often overlook, emphasizing the importance of proper legal protections, insurance coverage, and risk management techniques. 

Prefer to read? A full transcript is provided below.

Cort:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie, CEO and founder of NCH. Today we’re going to be talking about protecting your real estate investments. And I have an expert with us today, Mr. David Vanlandingham is here. He is our top consultant at NCH. He works with our largest affiliate partners. He is involved in communicating with very wealthy real estate investors.

David, welcome to the program.

David:

Always a pleasure to be here.

Cort:

And it’s great to have you in town in Las Vegas, I know we don’t get to see you all the time. So wonderful to have you back in the studio with us.

David:

Absolutely. I love the 105-degree weather.

Cort:

Not for long. All right. So what we’re going to talk about today are the pitfalls, and the mistakes that people make in not protecting their real estate investments properly. And we have many horror stories. You don’t want to hear all our horror stories, but I do want to make sure that each and every one of you who owns any real estate does it right.

So, David, let’s talk about the mistakes that you most commonly see.

David:

Yeah. And a lot of these come to us after the fact. Right. So people will come to us with their stories. So we’re kind of building off of that and trying to show them the right way. But we have a lot of clients that obviously get into it at first, and a lot of it, it happens by accident.

They buy a house; they live in it. They grow out of it or downsize and move somewhere else and make that one a rental. And they often just don’t create an LLC. They’re like, oh, that’s just one property, it’s okay. But it only takes one lawsuit to bring it down.

Cort:

So, we’ve seen so many.

David:

So many.

Cort:

From real estate investors especially. And they think, well, it’s just I’ve got a good tenant, you know, what’s the likelihood of anything happen

David: 

They’re family.

So yes get an LLC. But that’s one of the major things people just don’t do it. They feel comfortable. And they’re backed by all of these things out there. So they have that certain comfort level. And hopefully today we’ll open some eyes up to maybe that’s probably not the best idea.

Cort:

Now, we do hear a lot of, people who do exactly what you’re saying they’ve got their primary residence, right? They decide to upgrade. Yeah, but they have a great primary residence, the original one, and they decide, why don’t I just rent it? If I can afford to pay two mortgages, why not? What is the process for them to now take that rental property and put it into an LLC?

Because it’s already been in their names, maybe a husband and wife. What do they need to do? How do they get it into an LLC?

David:

Well, great question. So we can go directly into the LLC if we want to. And a quick claim. And we have to be wise about what states we choose. Not all states are created equal. If there is a mortgage in place, then we definitely want to utilize a form of a real estate privacy trust to convey that beneficial interest to the LLC.

So there are ways to do it. The biggest thing is people know that there are ways to do it, and we’re going to talk about some of these things today that I call good intentions, but not actionable. They don’t follow through. Because that’s the biggest thing. But people do know that they need to have protection. They just don’t know the steps.

Cort:

Got it. Got it. Well, what else do we have as the most common mistakes you come up?

David:

So when they do set up an LLC, sometimes they don’t know the difference between a manager and a member. As a manager, they’re just, you know, they’re listed by name. They have no ownership exposed. But a member is actually the owner of the LLC. And so we see a lot when somebody says, oh, I’ve already got my LLC set up. 

And so we pull it up on the Secretary of State site. Sure enough, MBR member, so we got to be careful with how we list ourselves always on public record. We want to be a manager and that’s it.

Cort:

Not expose your ownership interest, not put it out there. You know, it reminds me of the old story, a guy named Jack Miller that I learned a lot from who happened to be from Florida as well. He used to teach everybody when he showed up at a property to check on it, or to make any changes or to even talk to, a tenant. He was always just the maintenance guy.

David:

Oh, yeah.

Cort:

And he drove the car that looked like a maintenance guy’s car. This guy had hundreds of properties. He was incredibly wealthy, but he loved his privacy because he knew what came with that is also asset protection. 

David:

That’s correct. 

Cort:

Lowering your profile. So that’s very important. List yourself as a manager. Yes.

David:

That’s correct. And then you know the argument with where to incorporate, right? So you can incorporate anywhere you want to. That’s the beautiful thing about how we can structure you is that you don’t have to be structured in the state that you live in, because all states are not created equal when it comes to asset protection.

Various different ways and methods to pierce the corporate veil. So we always want to look to either Nevada or Wyoming, as is the best place to structure because of charging order protection, indemnification, and some privacy there as well. And then of course, the business courts, right? These all make a big difference when a lawsuit hits.

Cort:

Yeah. And, you know, people don’t think about it. Like if you take a state like California, the most litigious state in the nation. I don’t know why people still live there, but it’s a beautiful place, I get it. However, for business purposes and the issues that go along with that, you know, you really want to think about where you might set up your LLC and how to take advantage of states with these unique laws.

And as you mentioned, the court systems that come along with it that look out for business owners interests, not the people that might be suing the business or the business owner. And that’s where states like Nevada, and Wyoming come into play.

David:

Absolutely. And those are the states that we look to as a go-to. I mean, you can incorporate, you know, in your home state as well. And then there are ways to have a Wyoming or Nevada LLC on it. But a lot of people, they get bad advice and they just kind of go out there and wing it and they don’t follow through with it, and they don’t understand the process.

And then from there, we get into the mechanics of multiple properties. What do we do? How do we handle that? Do I need an LLC for every property? What happens if I have multiple LLCs in the same property and those you know, are where it gets bad. You know, you’ve got good intentions to do something right. You have a couple of properties. You lump them into the same LLC, Lawsuit hits one, what happens is that other property.

Cort:

So that’s a big problem. And you could just see it. You know you’ve got five properties. You know you talk to an attorney oftentimes and say well it’s okay. We can put multiple assets into one vehicle like LLC. And then you’re going to regret it at some point in time. But what if there you know, what if we’re buying properties in, maybe a part of the country where homes are $100,000 and you’ve got a mortgage on it, you know, maybe a $70,000.

Is there a point where you say, you know, yes, this much equity per LLC? How do you how do you guide someone?

David:

Well, you look at the equity. That’s one of the things you do because, most real estate investors are in some sort of an educational program, hopefully, where somebody is guiding them on these points. Because what happens is a lot of people are like wanting to have more cash flow. So they want to pay it off. And now, you know, that’s a ripe target that’s low-hanging fruit for an attorney.

So we always want to make sure that wherever they’re at in their journey, that they want to, you know, if they’re paying down the mortgage fine. Let’s re-leverage it, pull out a heel lock, and make it less attractive.

Cort:

Especially if somebody is, concerned. Sometimes you might have a situation that would come along and you might have a sense that there could be a lawsuit going on then. And you know, for instance, this is commercial property situation, but I’m an investor in a commercial property. It’s in Reno, Nevada, and, it’s a shopping center, essentially.

And we have two current outstanding slip-and-fall lawsuits for the snow and the ice that accumulated, not this winter but two winters ago, it was a lot. And the plowing company that was in charge of coming out and making sure everything was clean couldn’t keep up with the amount of snowfall. But people still need to go to the store. They need to get out there and you just don’t know where it’s going to come.

A slip-and-fall could happen at any residential property very easily. And so, you know, I think as once you’re thinking about when do I separate these, if you can deal with the complexity and it’s not incredibly complex to have a couple of different business entities for each property or for each property that you have, if you have five properties, have five LLC, because as you mentioned, what is the goal?

The goal is to pay them off, right? Even if they’re leveraged, right now. But if you know that a situation is coming, you might just go and put some additional debt on a particular property where if they did end up with that property or ended up winning the litigation, they get the property and there’s only a bunch of debt on it.

David:

Yeah. And that’s not good. And for commercial property, I’m glad you brought that up. We pretty much have a rule: one deed, one commercial property per LLC, because if you’re buying it, you know, and financing it with a commercial loan. Most of those lenders want to make sure there’s no other potential lawsuit in another property in that same LLC.

So commercial. I’ll go all day long, five units and up. 1 deed per LLC. Residential, for now, I’ll utilize the land trust and the Real Estate Privacy Trust to spread that risk out.

Cort:

Okay. Makes sense. Interesting. Yeah. What other, common mistakes do you run into?

David:

Well, I have a client right now. We get this from time to time where they get misinformation and they put their rental property into an S Corp. And that brings about a couple different properties. If you’re the type of, investor that wants to pull that out, leverage it, and put it back in right? Now that could be a transfer tax that could be taxed as a sale.

Right. That brings complications. And then what’s even worse is most of our real estate investors are trying to build generational wealth. And if you have that rental property in an S corporation, you’re given up the step up in cost basis. So basically you pass on normally with a step up in cost basis. When you pass away that new basis, the value of that property the day that you die passes to your loved ones.

And if they sell it for that amount, they pay no capital gains. But in an LLC tax as an s-corp or an S Corp. Now that property is in there, it’s treated differently because it’s in a corporation, not in a disregarded LLC.

Cort:

Interesting. So that’s a big mistake.

David:

Huge.

Cort:

And and we know cases just like that. Yeah. And I know one in particular that I’ve been recently dealing with and, I don’t know how they ended up being an S Elected entity. I think it was a tax person outside of here that was consulting them because it wasn’t any of our people. But, they’re trying to figure out how to unwind it now.

David:

Yeah. It’s tough. It’s difficult. I mean, as corporations, you know, treat the flow of assets in and out of entities much, much differently. So, that’s one of the things that we, you know, specialize in, in helping people to avoid these problems and educating them, you know, the right ways to do it. But sometimes, you know, people just do what they do.

Cort:

So what else do you run in to?

David:

Oh, man. I think probably one of the ones that pops up a lot is when people, you know, get a couple of properties and they start working with property management companies, they feel, I don’t need an LLC. I’ve got a buffer between there. That’s really not what the property manager’s job is, right

So if they set up an LLC, they should have a lease in the LLC name or excuse me, not a lease, but they should have an agreement between the LLC and the property management company, number one.  If they’re managing the property on their own, then yeah, definitely have an LLC. Definitely be in a state like Wyoming or in Nevada. And by all means, use the LLC. 

This is where we get into, you know, people having contracts in their own names and stuff like this. Use the LLC. You’ve got it. They’re good intentions. Again, they set the LLC up, but at the same time, they’re not using it effectively.

Cort:

And I think when you do have a property management company, a lot of people that have multiple properties are there in other states and they can’t really, pay attention. I will say this from personal experience as well. Just as a caveat. Manage your property manager, even though they’re there to take the pressure of managing the property off of you, manage them, follow up with them, get a monthly report about what they actually did.

You know, was there a water line break outside? Was there a toilet that somebody had to come in and fix? And hopefully, you’re getting good reporting, not just a bill that summarizes it, but actually some, narrative that goes along with it, like, what are they doing to earn their keep? Right? And I think they’re only as good as how well you manage them at the end of the day.

David:

Yeah. And look, they’re a necessity, number one. But, they should be working for you. I can tell my parents multiple houses that they’ve owned over the years. Still owned. And they get pictures. You know, they say, you know, how’s the paint? It’s okay. Well, that’s not an answer. We want to see it. So let’s let’s take some because people forget paint is protection. Right? So, you know, have a very active involved role playing. You know, a property manager that’s willing to get out, look at things and do an inspection.

Cort:

Absolutely. 

David:

And that’s certainly within your rights as well to have a scheduled inspection with enough advance notice to go in and, you know, check out the property, all of our property managers, they’ll go in there on a regular basis to change out air filters.

Right. And then during that time they’re looking around for other things, looking for watermarks or anything else. It could be, you know, a telltale sign that something’s going wrong. That could be a little expense now, but a lot bigger expense later.

Cort:

And, you know, it’s interesting as we talk about all these potential pitfalls, not doing things right. I’m not consulting an expert like David with your real estate assets. There’s just so many caveats that you just don’t know. You think, well, I just sold a property. What could possibly happen? I had one the other day that came into my lap.

I won’t say, who it was or where it came from. But it was a situation. Single-family home. And there was a husband and wife, and the husband and wife are splitting up, and they’ve only been in this property for nine months. Turns out, one of the reasons are splitting up is because the husband, who has a mental health issues, has put on a tremendous amount of weight to the point that they just stay in one room upstairs and can’t actually get down the stairs. They’re that large. 

And so this owner of the property is confronted with, what do I do? I lost my primary. The wife in this case was the primary because she had the job. This individual was a vet and on disability as well. And so now the owner is having to make a decision. And we were talking about it and I just said I would be very careful.

This is a month a month lease. So they can they can extract themselves. But you know, as you’re thinking about this and you own real estate, who would ever think that potentially you could have a 600 pound person that can’t get down a staircase living in an upstairs bedroom? Now, you think of what kind of liabilities could come from that.

What about the day that they decide to walk down the staircase? What’s gonna happen? Can the house support that kind of weight? You know, if it’s an older home. So it’s just it’s interesting with the number of clients that we have, the situations that are shocking.

David:

We could write a book.

Cort:

And how those that are listening to this program are thinking, well, slip-and-fall. I have a single family home and I’m in Florida. What, are they going to slip on a banana, you know? No. There’s so many things 

David

Humidity, you can swim in humidity in Florida. I live there.

Cort:

Well, what other types of situations. Do you ran into?

David:

And you’re going back to people that you know are on the right path but don’t execute right. You know, good intentions but bad execution is is again, you know, setting up an LLC, never placing the property into the LLC or connecting it and having rent checks written to them because in the lawsuit they’re opposing the council or opposing counsel is going to look at and go, who’d you write a checks to?

You know, and that’s one of the biggest things. And of course, not having the lease made out, in the name of the LLC. So these are all things that are there, but people are scared because they don’t know how to execute. And that’s what we do such a great job is breaking it down to them, saying, here it is. We’re problem solvers. And here’s how you do it.

Cort:

I could just see it. They put the property in the LLC. They never get a bank account set up. 

David:

Correct. 

Cort:

So they think, well, what’s the big deal? Just write the check to me. And then you just put it in your personal bank account and you’re thinking, well, what’s the big deal?

David:

Sometimes this happens because their CPA says don’t worry about it because it still flows to your schedule E, it’s going to the same place, right? But CPAs don’t think about it from the legal side. Just like attorneys don’t think about the tax side in most cases. So you know, sometimes they’re ill-advised or just not advised properly.

Cort:

What else do you have those mistakes people make?

David:

So the big one is due on sale. We run into this a lot with clients, clients that have a property that has a mortgage on it. And then they place it directly into the LLC. A couple different things could prevent that due on sale from happening. 

Due on sale basically is, you’ve been a bad boy. We vetted you for the lease or the mortgage for the property, and you’ve done an unauthorized transfer into an LLC. Now, they’ll see that in a couple different ways. If the mortgage company sells your mortgage, which we know, that’s one of the things they do. They do an internal audit and they look at and they go, wait a minute. This isn’t Cort Christie’s name. Who’s this LLC? And they have the right to call the loan. 

And that’s a scary thing. And a lot of people do not know about that. And that’s what paralyzes them. They get the LLC set up. Somebody goes, hey man, don’t don’t put that in there. You’re going to get a due on sale. And so now they’re paralyzed. So these are things that we talk people off the ledge and structure it the right way for them.

Cort:

And for those people that do have mortgages that due on sale clauses, certainly talking to one of our experts is one way to get through it. One way that somebody like David can step in and really show you how you can set this up without triggering that response. And so I think that’s huge. And it just goes to say everyone that’s involved in owning real estate needs to talk to experts, whether they’re legal experts or tax experts. And the nice part about working with NCH is we have all of that under one roof.

David:

Yes.

Cort:

And someone like David, who’s an expert in working with real estate investors, has access to CPAs and attorneys. If there’s something that’s different or unique than just the vanilla approach to things that sometimes we run into as well.

David:

And that’s so rare, right? You hardly ever get a CPA, an attorney in the same room working on behalf of a client. And that’s that congruency, is one of the things that our clients love about us, because we can get both sides of that conversation.

Cort:

Absolutely. Well, David, thanks for being on the program today.

David:

Absolutely. Love it. 

Cort:

Really enlightening. Thinking about the different pitfalls and mistakes that you can make in owning any kind of real estate. So don’t leave your property’s safety to chance. Schedule an appointment with NCH and let us build the right strategy for your real estate success. Also, please be sure to like and subscribe. It helps us spread the word and keeps people learning more about everything they should do to protect themselves.

So once again, thank you for tuning in to another edition of Wealthy and Wise. I’m your host, Cort Christie.

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.