How To Set Up LLC For Rental Property

hey everybody welcome back to another episode of rent prep for landlords Steve and I are really excited for today's episode because we got a great guest with us his name is Mark Kohler and mark we want to welcome you to the show thanks for being here thanks for having me it's an honor yeah so the way we got connected with mark is we have our Facebook group and we get questions all the time about LLC's for landlords what should we be doing sometimes there's good advice in there sometimes there's bad advice and somebody in a thread said you know what this is the guy you got to follow you got to check them out and research them so I ended up doing a little Google search I landed on a video that Mark had about LLC's I think it was on entrepreneurs over us with it that I reached out so it's kind of cool the circle back and have you on the podcast oh it's an honor thank you again and I you know for your listeners all you know full disclosure we were excited to be connected with you we've got a podcast going live this week with you guys of course as a guest and because our clients need to hear about you so it's a match made in heaven yeah it's a very cool podcast I've been listening to it refresh your wealth I like what you guys said it's kind of the yin yang where you guys are the yang I think you described it as where most of the content out there is like here's how you make money here's how you make money and you guys are about protecting it and saving money through what tax consultations and tips and all sorts of stuff yeah yeah thank you well I'm all yours and I am just a huge advocate for real estate investment and also letting real estate owners know they are business owners and they're really business owners first and then real estate investors second and so we want to make sure that they've got the right tax strategy the right asset protection strategy and not getting sucked into so many of the scams someone in a cubicle in Nevada Sona Nevada entity and they're in freaking Nebraska investing in Tennessee you know sure you know we do I know we're gonna talk about that on the show today so we're just a huge kind of almost a consumer advocate for real estate investors yeah the what that must be the West Coast version of setting up a Delaware entity that's what the hot thing is here right yeah and yeah the big four kind of Delaware in New Mexico Nevada at Wyoming they kind of get their good and I use them I'm sending why open in any for a client today but not everybody needs them and so I think you you make a really good point and it really ties in with so much of what Eric and I I guess say try to preach here on our podcast which is for landlords to treat what they're doing as a business right and so it makes sense to treat it as a business legally and for tax purposes as well but we're constantly really pushing saying you know be more professional not only in how you're handling tenants or the tenant screening process or just the day-to-day landlording which can make their life so much easier so it just makes sense to tie it all together wrap it up say hey you should be treating this as a business from all aspects legally tax purpose why is everything right yeah yeah and I think you guys said today you wanted to focus on the legal side hopefully we'll have another conversation about the tax into things the real estate professional classification and the write offs that come with rental property because it's not considered a hobby whoo I don't even don't even start off but I know another day for taxes but on this legal side as you guys know we're a legitimate law firm I'm a senior partner we've been out there for 15 years setting up entities in all 50 states registered agent mail forwarding for privacy we love the privacy stuff as strategy we don't want our landlords public information out there so some deadbeat tenants tracking them down whole other cool topic but um so this is this is huge and and maybe you guys drill me what were some of the questions that your followers were getting what would you like to hit well I think what we could do is we could start off you're talking about the top 5 mistakes that landlords make and what you can do is I can actually pull up some of the questions from our Facebook group towards the end and I look through some of those as well so what you want to start with what's the the first mistake that a landlord makes when they're setting up an LLC okay well you bet probably and I will see if these go in any order of priority but we'll just throw them out there I'm gonna make notes too cuz I probably have 10 I'll choose my top five but number one is probably let's let's talk about setting up the LLC and the wrong venue the wrong place I'm not even talking about how you're setting it up yet let's just talk about where you set it up maybe the best way to frame this is here's the scam and I literally call it a scam there are people out there that say you need to set up in Delaware you need to set up in Nevada even though you don't live in those states and your rentals not in those states it's a bunch of crap it is a sales pitch and I want to warn all of you here that you just get a second opinion if someone's really driving that sales pitch and I'll tell you 90% of the time they're not even a lawyer they're just some guru this is this is how you do it for maximum asset protection don't trust your lawyer we know better and I've heard that trap and I've got four books out there where I put my money where my mouth is now here's that's the scam now here's the truth setting up in Nevada or Wyoming or Delaware in the long run for some sort of larger asset protection plan can work I'm not opposed to that but again the the far majority of brand-new real estate investors and landlords we want to set up the entity in the state where the rental property is and I'll start up here in one second let me just say this sir if you live in Arizona but your rentals in Tennessee we're gonna set up a Tennessee LLC it's going to be the most affordable is going to give you the best protection from the tenant and it's going to be simple and you're gonna run that Tennessee LLC for your Tennessee property that's gonna be your first line of defense and a basic structure okay what is the main advantage to doing that as opposed to going to Delaware or Wyoming when somebody's setting up why do you recommend doing that well two points first you have to be registered in Tennessee sticking with this example because that's where the tenant is that's where the property is that's where the lawsuit will happen if there's a problem so even if you set up a Delaware entity you've got a register it to do business in Tennessee so now you're paying for two states it's gonna cost you a registered agent fee in two states and for the brand-new investor and for most investors they don't need that extra cost they don't need that extra expense now if you've got 15 rentals a 1.5 million dollar portfolio I might set up a holding company in Delaware Wyoming and have it owned your other LLC's but don't want to set up right out of the gate in Delaware or Nevada where you're gonna be spending a lot more in filing fees and annual maintenance that's just not necessary you need protection in the state where the property is not where you live or some other Timbuktu State okay so taking that a step further and we'll stick with the Tennessee example this would be great if one of our listeners is from Tennessee they're like this episodes for me this is huge app I'm guessing his name but let's say that person has two rentals or 17 Reynolds like how do you how does somebody start figuring that out if they're looking at that because we've heard information from everyone like no don't do it or you need it one for every LLC or for each rental property what do you suggest with that you bet I'm writing down that is number two tip okay that's number one is to set up the entity in the right state where your rental property is now the second issue is how many LLC's no on one extreme I've got a client with 42 rentals in one LLC then I've got another client who comes through the door that has an LLC for every freaking rental all right too bad examples right we want to find a balance and so here's what I say guys and you're gonna love it it's not the quantity of properties it's the quality that matters for example you might put five single-family home you know low-income housing rentals in one LLC and in Illinois in Chicago five rentals one LLC I'm cool with that but then you've got a four-plex out in Nebraska it's in your but you know the university it's a college rental you've got a couple hundred grand of equity it probably deserves its own LLC so when I'm in a consult with clients I want to make sure I'm assessing how much equity is in these rentals and are they high-risk rentals and then which state let's find a balance I think the average is we're gonna see most clients put three to four rentals in each LLC and then we set up another LLC you know that's not over do it yeah so you're really looking at what type of rental property it is and what the liability ramifications are and then kind of making decisions from it after that yeah okay which brings me to let me bring up third point and I know we're gonna bounce around between these because they're all in but the third point is this is where clients then say well oh my gosh I can't afford an attorney and my attorneys you know from Pluto and I can't understand him and he's inexpensive you know and and and so you get frustrated and where do you go click click click on to Legal Zoom you know then you take your best shot at it and you screw it up and so the third principle I want to make is same set up your entity at least for those new investors or if you're expanding into another state set up a consult with the law firm you trust now it doesn't have to be expensive we're eight hundred bucks for any entity in any state in the country and that includes an hour in a consult with an attorney tailoring the situation to you and then we set up second and third entities for half-off so that way you're getting your second or third LLC in another state for 400 bucks but you get that initial $800 we're all actually build a diagram with bubble charts all my attorneys do it we got 5 attorneys here so we're not huge but we can do it in any state and then it's affordable and you get the right structure you know you guys that laughs Eric you'd laugh at this is I've got literally two paralegal it used to be one we have two paralegals full-time all they do is our service called fix my legal Zumanity because they're jacked up and I and I know some of you listening here like oh I probably need to get a console you know we have a fee literally a price schedule of how to fix legal amenities one of the one of the things too that I found really impressive on your site we were just cruising around on it before we jumped on the call to your maintenance fee which i think is super important and really overlooked that a lot of people don't maintain their LLC there is a maintenance structure there and a lot of times they set it up whether it be legal zoom or even with their attorneys either the maintenance fees are crazy expensive or the attorneys not doing anything to help you maintain it they're not helping you maintain the minutes or any of that stuff Legal Zoom certainly not helping you maintain it so talk a little bit about that and the importance of that too well Eric I'm gonna give you credit for strategy number four here or mistake number four and like as Steve credit on that one I don't want to take everything or is we want to set up the entity properly now I talked about let's review here where do we set it up how many LLC's do I have number three I don't want to set it up myself and I need a consult to make sure I get the right structure in place and it can be affordable where I meet with a lot of clients just once or twice a year we dial it in but number four is maintaining the entity and making sure you have all the pieces and parts once she I know your folks you're out there you're listening you've got one sheet of paper from an LLC in your drawer and you think you're good well good luck in court and I've been there and interrogatories and depositions they want to see your minutes they want to see your operating agreement they want to see that you've been doing separate checking they want to know that you've been keeping that LLC tight and you go well I don't have to do that with an LLC yeah that's what the Guru's say and good luck in court and so you want to maintain it and our maintenance fee is like on 50 bucks a year my paralegals call you every year we send you a little quiz and this is where your tax write-offs come in I want you to take a trip somewhere have your annual meeting you should have a board of directors involved your spouse your kids oh don't even get me started on the tax strategies here so there's a lot of options there to have a good quality strong LLC and maintain it affordably yeah I think that's really interesting because we produce a lot of content with the property manager here locally and we talk about when you're going here to Vixen court like how do you present yourself in a fiction Court and you got to make sure you're coming in with a binder with all your information clean and neat so that you're not making that judge work to go through the information and you're kind of making it sound like it's very similar if you're gonna go to a court and you have an LLC you just don't want to show up and be like here's my piece of paper that says I have one so it's interesting that let me quote the infamous Jerry Maguire help me help you so if you're a landlord out there and you're gonna get into a freakin lawsuit you gotta give me something to work with no I would say I gotta send you something from our Facebook group somebody posted this is kind of terrible but it was a picture that their tenant sent them and it was the tenants son who was on the ground and these stairs had all busted and it I mean to be honest if you looked at it it would look too fake because I'm like very very staged what mom is like oh my gosh my son fell through the stairs let me go run and get my camera you know but when I was looking at I was just like I don't know anything about LLC's and how this person should be set up but I hope they're set up right because they're definitely at least gonna have some stuff coming their way soon yeah yeah which and that story brings me to number five which I'm gonna say the asset protection piece here and this is why we're doing it let's get down to brass tacks here number five I want us to talk about using the LLC if you're gonna set up this LLC freaking use it use your LLC should be on title your lease agreement should be in the name of the LLC and you should have your annual maintenance you should have a separate checkbook your tenant should be paying the rent to the LLC now I know some of you have property managers out there that are on the lease and collecting rent for you but where do they send the cheque it should go to the LLC then when you want to pay yourself take any money you want anytime it's called a draw you just take it right out of the LLC bank account but you've got to follow this procedure and that's what creates the asset protection the LLC in the long run is so affordable if you just treat it like an LLC and not just have that sheet in the drawer and think if there's a problem you're gonna be covered you're not you've got to maintain it very nice very nice so mark when it comes to setting up an LLC like I'm listen to this and it might sound like a little bit like overwhelming so what would you say to somebody that they're like alright you know you're looking at separate checks and like having to run this LLC and you're talking about holdings and all this what would you say to somebody if they're kind of feeling overwhelmed about the idea of setting up an LLC you bet and this is where getting educated takes away away fear and frustration and you guys do a fantastic job of this on your website and so I want everybody to know that on rent prep you're gonna get over there and see in the legal section resources for landlords I'm gonna help you guys out send you three or four videos that are not just a flashy you know one-minute on YouTube thing I'll get some content on there so that your folks listening now can go back to the website and watch some of those videos in detail because this you know this is a lot to absorb in just an odd cast um now here's the the easy answer though I usually say there's five things I know we had kind of our list of five mistakes when doing LLC's but I have a little blog here they're on kind of five ways to maintain your LLC and and those are gonna be using it on the making sure it's on title so once you buy a property and let's let's address it right now something you're like we'll mark I did a Fannie Mae Freddie Mac loan I had to close in my name now what do I do am I gonna have a due on sale Clause if I deed to my LLC no you're fine do not stress about it in 15 years of over 10,000 LLC's for clients around the country in all 50 states well maybe I haven't set one up in Rhode Island but anyway the point is we have never had a bank call on a due on sale clause you might get a nasty letter that says what are you doing well I still own it back off or you want me to refine no you're fine the banks already sold your mortgage four times in Chicago on the bond market so don't stress about it as soon as you close deed the property to the LLC number two make sure you have that checkbook the LLC should have its own tax ID number should have its own checkbook number three you want the tenant to pay rent to this checkbook use it for the expenses for the HOA fees the mortgage payment the property taxes whatever and then number four make sure the lease agreement is reflective of the LLC pretty easy to do let your property manager know your tenant and then number five do the annual maintenance and our service takes that headache away we remind you we have a little list and of course there's a lot more to this and you know the little things but those are the big five and if you can do those things your LLC BAM rock-solid in court you'll be tight I love it that's such great a great help great copper great content for people listening and I'm gonna actually be posting this video to to our rent prep for landlords Facebook group to help people out and mark if you don't mind what I'd like to do is just bring up a few questions that people have asked in the group and I could see if I can find it here I think it his name was roan and the point that he made is it depends on where you're setting up in what state because the annual filing fees are different from state to state so he was kind of discouraging people from setting up an LLC because it might get really expensive if you're in certain states but I'm thinking you know if that's like the other somebody not to have car insurance because it's expensive you know was your what you reply to that well my first reply is be careful of someone that's saying don't do an LLC get umbrella insurance okay um and they think umbrella insurance is your Savior guys umbrella insurance is an excess claim policy that's why it's so cheap once your regular policy taps out umbrella steps in that's when umbrella steps in it's not there is an initial defense for you and good luck calling your insurance company and when you've got a mold issue or an asbestos issue or a latent meth-lab issue or a negligent claim that you know the tenant says I complained about these stairs they collapsed and now my kids sitting here on the floor look at the picture you know your insurance agent may not rush to your side so be careful relying on insurance for everything number two you've got to realize that the entity is going to be set up in the state where the property is and sometimes we'll set up one LLC and register it in Indiana Missouri in Kansas and then we'll put our four or five rentals in those three states in that one LLC so you can have one LLC but have it registered at foreign in two or three states so that way we're being efficient we're being affordable we're trying and this is where as a lawyer when we do this with clients every day we can help guide you to keep your fees down we want you to succeed we don't want you to have a ton in fees and then the third point is for those of you in California that we got to address this you've got your eight hundred dollar minimum franchise tax it sucks I know in California Franchise Tax Board they're very aggressive but you get in an out burger you get the Seabreeze you know you get the Laker throw so but anyway the point is you pay for that living in California so the general rule is certain states you live in California you're gonna have to register there and then register foreign and other states we've got some techniques to play games with that get you around it give us a call but definitely I don't want any of you to just avoid the LLC altogether because of a fee it's a cost of insurance it's a cost of doing business owner all right here's a great question and this comes from Robert and he says is now I'll see the best way to go with time ahead I don't know if it would be beneficial to form an LLC before end of the year or does it not matter so does it great question so good sorry I get excited now there go ahead I just get hot and bothered bothered I think I'm flustered right now okay now because I'm a CPA as well as an attorney which we love to bring this together all my attorneys are trained as tax lawyers and you're getting them for the same cost of just an eviction attorney I mean this is really affordable okay so let me say this now this is so important I want everybody put down your diet coke pay attention LLC's do not save taxes LLC's you don't need to have one to save taxes you still get the write-off for an insurance you still get the write-off for your mortgage interest and your depreciation why do we do LLC's guys you tell me why do we do LLC's protection protection that's protection so dude now in some states I want to pull the trigger and get your LLC set up right now it's cool you don't you're getting you got a rental you might as well step up to the plate get your LLC done um but in other states where the annual fee is calendar year like California I might wait till December 15th and then pull the trigger on the LLC so it's effective January 1st that way I'm paying that annual fee for the whole calendar year in January now there's only a handful of states where the the filing fee is calendar oriented the rest of the time is fiscal so if you set it up in October your LLC's good till next October so pull the trigger get it done in most states the filing fee is really cheap somewhere between 50 to 200 bucks it's those three or four states where it's out of control and you just got it live with it yeah very nice mark so you've kind of alluded to the fact that you're a CPA and an attorney and I don't want to go down the tax route in this particular podcast I don't want to you know throw too much at our listeners but if you had one tax tip because I'd love to have you back on the show what's a tax tip that you might throw out there to a landlord or something that kind of comes up frequently when you're talking to landlords will you give me - can you give me jail yeah I appreciate it again I get excited number one and this is by far the biggest tip you have to understand real estate professional classification there's the active classification the passive classification and real estate Pro and you don't have to be a realtor you don't have to be a contractor and if your spouse qualifies you both qualify now by just saying that the reason why I care about it is all of that depreciation and the write-offs that come with rentals they pass right through against your other income w2 ordinary income K one's from s corpse I want those rental properties to come through and wipe out your income from the ordinary side and if you can check the Box legitimately that you're a real estate pro it's like magic skews I say huge sorry I was Donald Trump yeah you wish don't drop it I've listened to your show I know I know your trumpet I don't wanna ruin it yeah number two number two point and I've just got to get this out here the S corporation the S corporation is an important real estate entity but we use the S corporation for fix and flips and rehabs whole sales short term type deals where you hold a property for less than 12 months and you turn it we're going to need an S corporation in the mix so a lot of times I have a brother/sister for a lot of my real estate investors they have the S Corp for their rehabs their flips they have the LLC for their rentals so don't commingle the two folks if you have one LLC and you've got a very robust flipping strategy we're gonna use a different entity for that there's a different tax scheme we've got to be aware of well what's the advantage of doing that why do you recommend that oh it's to save taxes C S corporations S isn't Sam small corporation S corporations save taxes okay LLC's don't now when do I need an S corp when I'm rehabbing and flippin because you're subject to self-employment tax Obamacare Medicare FICA woo you're not somebody for that when it comes to rent us but you are subject to it when you're flipping so anybody out there that just fell off your chair you've got to make sure your accountant understands the difference because I don't want to see this on a Schedule C I want to see it on a Schedule II funneled through an escort and this is where to bring up Donald Trump in the GOP and Paul Ryan and those guys can pull their head out and get us a tax plan before the end of the year they're already talking about the S corporation providing more benefits for small business owners which I've been preaching for 15 years so yes Corp is gonna work right into my maniacal plan to help you live your American dream but this is important this is why the bottom line let me just finish it at this point folks you've got to take this stuff serious I know it's hard to find a good accountant or a lawyer out there you don't have to use our firm for every little thing but at least follow me for my daily weekly tips our podcast our newsletter our youtube videos and if your accountant isn't speaking this language upgrade because an accounting strategy can save you thousands of dollars it makes your real estate far more productive yeah I was just gonna make the point that listening to listen to you hear speak listening to your videos at the very least it's gonna give you the pieces that you need to have that conversation because I think for me a lot of times it's going in and and not knowing what the hell to even ask my accountant or my attorneys right so a lot of times just this a little bit of Education is enough to get them and get that conversation going maybe maybe you don't have the right attorney maybe you don't have the right accountant but if you don't know the right questions to ask you're not gonna know that either way yeah and it's sad because I know many of you listening you go into your accountant and what do they do they treat you like a child they beat you down and say oh you can't do that and you think it's gospel yeah guys how many of you know that contractors can do a kitchen different how many know plumbers that might do a plumbing job different well accountants have the same tools but may do a different job for you so don't take it as gospel when your accountant beat you down like a child with a wet noodle you got to ask for better right yeah yeah if anybody's listening you can go to mark Jay Kohler com I'll put it in the show notes as well and if you're watching the video I'm sure it'll be on screen too but that's a great place to start I mean it'd be overwhelming if I tried to share all the resources mark has you said you've got four books you've got your podcast you've got websites got so much stuff going on it's like it's almost overwhelming but Mark J Kohler com is a great place to start to get a bunch of free resources mark I can't thank you enough for being on the so much information education so quickly and you got a personality which is awesome I love it Oh marks marks a unicorn way I was saying before we jumped on live mark is a unicorn in this industry an attorney accountant that you can listen to consume the content knows what he's talking about can speak directly to the real estate industry I think this is huge for for our audience I know that that has questions on this stuff marks your guy check it out check out the videos that we're going to post on our website and definitely check out mark's website as well well I'm going to take the day off you made my day so you know it that's it you know closed doors no you guys are so kind thanks for those compliments and again I love what you guys are doing it's an honor to be a part of your audience so we got to have more conversations like this and definitely will hopefully talk taxes soon you guys all love it yeah I'm sure absolutely thanks mark thank you so anybody still watching right now in the Facebook group as well mark has agreed to answer questions just on this thread so if you do have questions at some point mark I know you're a busy guy so we won't hold you a certain time but where did I agree to this but at one point we'll hopefully have a bunch of questions that people can ask and Mark if you could just go in we'll have a link to your website as well where people can find you I just answer a few questions because the problem with that we can have sometimes in our group is none of us are experts when it comes to you know being in a tax accountant or an attorney so we appreciate you kind of just stopping in and pop it in there to answer a few questions and again for anybody watching check out his website we got a link for you that you can directly go to their website if you're looking for questions on LLC's and also on rent prep com are going to be having your content on there as well under the landlord resources well thank you so much folks sign up for the weekly newsletter it's free and you get a little a bug ten strategies every small business owner should know so check that out very cool and I'm gonna make an extra pitch for the for your newsletter because Eric and I were just talking about this with our own newsletter it's so hard for people to keep up with the con nowadays right and the newsletter is such a great if your for people who are doing the newsletters right and you're doing it right I know that we're doing it right enough in the sense that if you're if you're subscribed to it and following along it makes sense you're getting that content in a specific way so newsletters are huge the good ones are huge it's not a constant pitch like every two seconds yeah yeah it's so I really I feel like the newsletter yeah anyone that's listening and you want a good place to start with the education process of just getting to know this stuff better sign up for that newsletter well thanks again guys you're awesome you know I guess I got my night planned out for me no no world series tonight so I guess these books oh no Netflix all right thanks mark thank you

Channel: RentPrep

Views: 8,357

Keywords: should i create an LLC, Mark J Kohler, Stephen White, RentPrep.com, how to create llc for rental property

Id: M03PygLr3P8

Length: 29min 51sec (1791 seconds)

Published: Thu Nov 09 2017