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Real Estate Investing => Rehabbing, Fix and Flip, Rental Properties => Topic started by: unit on September 13, 2006, 02:38:57 pm

Title: LLC or TRUSTS
Post by: unit on September 13, 2006, 02:38:57 pm
Whats the difference between an LLC and  a Trust? Is one better than the other?
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 14, 2006, 03:39:47 pm
an LLC is an entity seperate from the individual.  it can do most everything a real person can do, including own property.  you do not own the property; you own the LLC and the LLC owns the property.

A trust is a different arrangement.  The property owner places the property in trust; the trustee owns it.  the beneficiary of the trust receives all benefits of ownership, although the beneficiary does not own the property.  The grantor can remove the property from the trust at any time (in a revocable land trust, anyway).  since the beneficiary does not have to be disclosed, this provides a measure of privacy and protection for the beneficiary.

In both cases, since you don't own the property, certain liabilities that arise will not be able to look past the property to you personally.

I have my personal residence in a trust and operate my businesses inside LLCs.
Title: Re:LLC or TRUSTS
Post by: unit on September 15, 2006, 03:03:07 pm
so wagner, I can buy and sell properties through my llc? Also, can I receive loans through my LLC? IF i can receive loans through my LLC, whose credit would they check, the owner of the LLC or does the LLC's have its own credit line?

with trusts, can I put more than one asset in a trust, for example, can I put my car, homes, etc all in one trust or is it better to put them into separate trust, that way if someone should come after one of my trust, I'm only liable for what's in that trust only and the rest of my valuables will be protected?

How do I go about setting up trust and a LLC?
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 15, 2006, 04:12:30 pm
the answer to all of your first questions is "yes".  The LLC can, and should, have its own credit. However, in the beginning you may be required to personally guarantee the loan. Note that this is NOT a personal loan, but a loan to the LLC with a personal guarantee.  Lenders WILL do this, just probably not a "bank".

you can put more than one property in a trust, but to remove a property, you have to remove all the properties (close the trust) and then put the ones you are keeping back into trust.  easier just to do one per.

If done correctly, either a trust or a LLC will protect your personal assets from liabilities arising within a property.

trust = hire an atty.  usually around $750 for the first trust.  after that it's just a form.  I recommend having an atty do the first one so that you make sure it complies with all state laws.

LLC = do it yourself, hire someone to do it.  To compare, I can usually set up one for $200 plus whatever your state fees are.  for this you receive:

the LLC
certificate of formation
articles or organization
management agreement
tax elections as needed
free advice.

you may want a registered agent, also.  some companies can sell you an LLC plus all these bells and whistles if that's what you want.
I've seen fees into the thousands, though.
Title: Re:LLC or TRUSTS
Post by: unit on September 18, 2006, 01:59:27 pm
personally guarantee the loan, what do you mean by personally guarantee the loan? also what or who is a registered agent?
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 18, 2006, 04:46:17 pm
the LLC has no credit.  no one will loan "it" anything.  however, you can agree to guarantee the loan.  think of it as "cosigning."  the lender will check your creditworthiness and ability to pay, but the loan will be in the name of the LLC.  You are only the guarantor.  BTW, this should not appear on your credit.

All states require a registered agent in the state of formation.  this must be a real person at a real address where the state can send the process server with a subpoena or other legal document.

if you are incorporating in another state, you will need a registered agent service in that state.  if in your home state, you may still want one, as this prevents your personal or business address from being public info.
Title: Re:LLC or TRUSTS
Post by: SpaceAce on September 19, 2006, 08:17:16 pm
Mcwagner- great advice.  I enjoy reading your stuff. Thanks alot. Perhaps you could help me with this.
I bought a rental a few years ago in my and my wifes name. We own it outright.
It sits there waiting to be attacked in our litigious society.
Other than a homeowners policy with 300K liability and the tenants policy for liability and personal property it is unprotected. Last month I formed an LLC and am not sure about what I should do next. Do I change the deed and put it into the LLC? Do I need to do any other paper work regrading the transfer into the LLC. I guess what I'm saying is "HELP, I OPENED AN LLC AND DON'T KNOW WHAT TO DO NEXT!!!"
Thanks a bunch  
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 20, 2006, 09:26:06 am
you can:

1)  put the property in trust with LLC as beneficiary.  pros:  doesn't violate DOSC.  cons: costly and hassle.
2) transfer the property to the LLC with general warranty deed (not quitclaim).  pros: easy, quick. cons: technically violates DOSC. however I have never heard of a bank calling due a performing loan.
Title: Re:LLC or TRUSTS
Post by: unit on September 20, 2006, 10:01:47 am
wagner,

thanks for the info. I appreciate it.
Title: Re:LLC or TRUSTS
Post by: SpaceAce on September 21, 2006, 10:48:22 am
Thanks Wagner. I own the property with no mortgage so it won't violate DOSC. By the way what it is DOSC?
Title: Re:LLC or TRUSTS
Post by: SpaceAce on September 21, 2006, 10:53:34 am
You can disgregard that last question. So there really is no downside because I have no mortgage. This is the main reason I want to protect the property. What else to I need to do with this LLC. Open a bank account in its name and do not comingle, I know. Do I need books and if so where do I get them and is there a way I can be shown how to keep them.
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 21, 2006, 10:59:58 am
have a management agreement between you and the LLC.

if you don't comingle and do your taxes, you'll be ok.  run it like a business.
Title: Re:LLC or TRUSTS
Post by: SpaceAce on September 21, 2006, 11:31:32 am
I guess I'll call my accountant and he'll set me up then. Thanks alot, now I know where to start.
Title: Re:LLC or TRUSTS
Post by: unit on September 27, 2006, 03:47:44 pm
mcwagner,

question. I own a rental property. first i want to know once I receive their security payments I put them into a separate account with their names on it. true?

can i use the same account that I made for each tenant to put their monthly rent money into or should I open a separate accout and put both of their rents into that 3rd account and pay the mortgage out of that?

secondly, I have a tenant that scheduled to have here cable and phone hooked up. the cable and phone people came out to do the job but needed to drill a hole into the house to connect the wires in order for them to complete the job. she declined and called me asking if it was ok. i said yes, but I want to put it in writing so we both can have a copy. do I need a formal form stating that it's ok to go ahead with the job or can i just type something out on word saying its ok?  Does it need to be notorized?
Title: Re:LLC or TRUSTS
Post by: mcwagner on September 27, 2006, 09:29:01 pm
security deposit?  why do you even need a seperate account?  it's just a bookkeeping entry.  there is no requirement that you segregate the money or otherwise "hold" it.  It's just a liability that you owe to others on the books.  when time comes to return it, you just write a check and pay the liability.  if it makes you feel better to have the cash seperate (so you don't spend it?), then feel free to put them all in a seperate interest-bearing account (at least you'll make *something*).  but there is no requirement for you to do so.

just write her a letter granting permission to have the work done.  it's to cover her ass, not yours.
Title: Re:LLC or TRUSTS
Post by: unit on October 03, 2006, 08:34:58 am
mcwagner,

so i don't need a separtate account to put the tenants money in? i can have one account open and put all their money into it? I just have to keep record of all debts and credits?

also i was wondering if you knew of any private or hard money lenders. I have come across some properties that i would like to Flip but don't have the funds. I have just about everything else in place as far as a team of people that i am working with except for the financing. do you know of anyone or company?
Title: Re:LLC or TRUSTS
Post by: mcwagner on October 03, 2006, 08:50:32 am
correct.  unless you physically need to seperate the money to keep from spending it, it's just a bookkeeping entry.
Title: Re:LLC or TRUSTS
Post by: kdhastedt on October 03, 2006, 08:56:04 am

Mark,

In Louisiana, I was not allowed to co-mingle security deposits with rents/operating funds.  I kept the operating funds in a checking account and the deposits in the savings account.

Keith
Title: Re:LLC or TRUSTS
Post by: mcwagner on October 03, 2006, 09:11:59 am
curious.  not allowed by who?
Title: Re:LLC or TRUSTS
Post by: kdhastedt on October 03, 2006, 09:46:59 am

The State of Louisiana...this according to my Realtor (20+ years, property mananger, and owned income properties) and the real estate attorney that I used.  It seemed easy enough and was no hassle, so I never actually researched the state law regarding...but Louisiana Law is absolutely bizzare -- it's based on French Napoleanic laws.  It is archaic and very different from anything I've ever seen.

Keith
Title: Re:LLC or TRUSTS
Post by: mcwagner on October 03, 2006, 02:19:13 pm
3251.  Lessee's deposit to secure lease; retention by lessor; conveyance of leased premises; itemized statement by lessor

A.  Any advance or deposit of money furnished by a tenant or lessee to a landlord or lessor to secure the performance of any part of a written or oral lease or rental agreement shall be returned to the tenant or lessee of residential or dwelling premises within one month after the lease shall terminate, except that the landlord or lessor may retain all or any portion of the advance or deposit which is reasonably necessary to remedy a default of the tenant or to remedy unreasonable wear to the premises.  If any portion of an advance or deposit is retained by a landlord or lessor, he shall forward to the tenant or lessee, within one month after the date the tenancy terminates, an itemized statement accounting for the proceeds which are retained and giving the reasons therefor.  The tenant shall furnish the lessor a forwarding address at the termination of the lease, to which such statements may be sent.  

B.  In the event of a transfer of the lessor's interest in the leased premises during the term of a lease, the transferor shall also transfer to his successor in interest the sum deposited as security for performance of the lease and the transferor shall then be relieved of further liability with respect to the security deposit.  The transferee shall be responsible for the return of the lessee's deposit at the termination of the lease, as set forth in Subsection A of this Section.  

C.  Paragraph A of this Section shall not apply when the tenant abandons the premises, either without giving notice as required or prior to the termination of the lease.  

Added by Acts 1972, No. 696, 1.  Amended by Acts 1974, No. 697, 1; Acts 1981, No. 499 1; Acts 1985, No. 578, 1.  

I don't find anything about "segregating" security deposits in LA.
Title: LLC or TRUSTS/Security Deposits
Post by: Cate on October 03, 2006, 09:52:32 pm
Hi All,

Here in the State of Washington, where I operate my own property management and maintenance company for which a real estate broker's license is required, we also are required to maintain a separate security deposit 'trust' account for the 'tenants' funds.  These are not the owner's funds . . . they belong to the tenants.

As a management company, we are audited about every two years by the Department of Licensing . . . they walk in and want to see books now . . . no scheduled appointments.  That is one of the first things they check . . . how are the security deposits handled.

However, owners are not audited as we, licensed real estate brokers/agents, are.  So they fly under the radar more often than not.  The only time they may get a 'visit' is if a tenant files a complaint.

Even without the overly burdensome governmental regulations, it is just a good idea to keep that money separate and never consider it to be yours until the move out inspection is done and you know if they're giving it up.

Good discussion and information on the LLC's v. Trust.  There are also many tax advantages to trusts depending on which type you select.

Good luck.

Cate

Title: Re:LLC or TRUSTS
Post by: mcwagner on October 04, 2006, 06:51:49 am
good to know.  lots of weird little laws out there.

also interesting to note:  

I found that some states limit how much security deposit you can charge.  (limited to 30 day's rent, etc).

Texas has no such limit, BTW.
Title: Re:LLC or TRUSTS
Post by: SpaceAce on October 04, 2006, 07:20:18 am
It's unfortunate that the gov't can regulate how much some one puts down as a deposit. I have a tenant with "less than perfect credit". She gladly put down a very sizeable security deposit in order to get the rental. I don't see a problem with it.
Title: Security Deposits
Post by: Cate on October 04, 2006, 08:31:02 pm
Hi SpaceAce,

In WA, we are not regulated as to how much we can charge for a deposit . . . only with regard to the way it is held and accounted for from beginning to end.  Our company charges anywhere from a minimum of $300 to $2000 on a high end house.  

What state are you in?

Cate
Title: Re:LLC or TRUSTS
Post by: SpaceAce on October 05, 2006, 09:41:10 am
Where I am we have no law regarding deposits. As far as I know.
We have rules regarding comingling though.
Title: Re:LLC or TRUSTS
Post by: NYCATLHOLDINGS on February 09, 2007, 02:21:46 pm
you can:

1)  put the property in trust with LLC as beneficiary.  pros:  doesn't violate DOSC.  cons: costly and hassle.
2) transfer the property to the LLC with general warranty deed (not quitclaim).  pros: easy, quick. cons: technically violates DOSC. however I have never heard of a bank calling due a performing loan.

Quick question. I formed an LLC last year in March. My intention is to refinance my principal residence - transfer ownership to the LLC/Trust - and then rent the property.

- Wy would you use a general warranty deed and not a quitclaim?

- Once I refi my property and transfer title to the LLC - the property is still on my credit - right?

- If so, and I want to by another home to occupy personally, will the bank allow it - seeing as I have 1 mortgage on my credit?

Thanks!  :smile