I understand the concept of limiting liability by creating a seperate entity for each asset. On paper and legally it would make sense to have an LLC for each asset and for a management entity as well. There are compliance costs that go along with that move in both accounting and insuring the properties. There is also the fact that it sometimes doesn’t work.
My mentor at one time held about 55 properties. He’s incorporated, has LLCs, and other legal firewalls. Last year a young lady died from carbon monoxide poising in one of his properties. The door to the furnace room in her home had vents at the top and bottom for ventilation. On her own, she covered these vents with plastic because she felt a draft when the furnace was running. These vents supplied what HVAC techs call “combustion air” for the furnace. That is air to properly burn the natural gas. Without proper air supply the furnace began generating CO gases. One person escaped and unfortunately the young lady died.
My mentor tells me that because he is an “active” manager of the properties, he is still being sued, both personally and as a business entity. It is anecdotal I know, but still it flies in the face of all we are told about limiting liability through legal entities. Attorneys follow the money.
Add to that the cost of the accounting and Schedule Ks for each member for each property, and following the cash from a management entity through the pipeline of LLCs, then rolling them up on a 1040 of some kind, and the insurance companies look at that as commercial rather than individual. Looking at all these factors I decided to buy 2 liability umbrellas, 1 commercial and one personal. My choice, people can debate both sides, but in the end that was my decision. It may be changed later, it’s only a decision.
On estate planning:
at this time my holdings are far below the Federal exemption for estate tax. As we know these laws change, and at that time new decisions may be made or old ones affirmed. Inflation could prompt a review as well. More likely some combination.
At my age, if I held the properties until death, my wife would gain them through joint tenancy deeds. At her death the estate would have them appraised. The State of Ohio would get some estate taxes, presently Federal is exempt. The estate (executor) could sell the properties and distribute the proceeds to our children. Or, Our 2 daughters, hers and mine, could split the holdings and continue operating them as income properties. They would also inherit a new basis for depriciation based on the new appraisal. They may have no inclination to do that and a cash amount may be more appropriate. Capital gain tax is avoided as it becomes an estate tax matter. Either way by size, insurance, and wills, I think I’m, at the very least, OK. If I lived in a state with no estate tax that would be better, but the market I’m in is here.
When you get big, several million dollars big, then there is no doubt more than I am aware of.
On rental @ 80
Maintaining a property isn’t that hard if you budget for it. I have several shell accounts that I fund through the business checking each month. I have a “spending plan” for the entire year that I check off each target as the year transpires. When the proceeds come in I set aside cash for county taxes and insurance, repairs, phone and office, and short term interest. I pay the mortgages, pay the member draws, and set aside retained earnings. Actually, retained earnings comes first, I may make something wait that is less important than RE. On the spending plan all of the properties are conolidated, meaning there is one entry for taxes, insurance, etc. That one entry is the cash need for all properties that month. Each time I check off an entry I’ve reached another small goal. If we add a property, I re-figure the targets from that point forward, print a new sheet, and move on.
And, It’s all on one page.
One of the things about adult condos I have never understood is why people leave a home they lived and loved in, sell half of their things to avoid maintaining a house, when all they need to do is hire someone to cut the grass and shovel snow. And, pay a handy man for a few other things. The HOA fees at a condo do essentially that and the retirees agree to pay the HOA fee in perpetuity. I don’t get that. It’s probably just my poor vision.
When I reach a point where fixing a bad switch or painting a place is more than I want to do, I have a repair budget to get that done. If the budget is too lean it can be adjusted, that’s what business people do. The compare plans to actuals and adjust. If it needs far more cash, then maybe add another unit to provide more cash. Or maybe sell and move to a sand state with no estate taxes. There are a lot of ideas on how to handle things. My wife and I have an agreement. She will let me know when we have too much cash! So far she has not mentioned that as a problem!
In my first business a good friend gave me some advice. I was struggling and we both knew it. He said in his experience it was a better solution to find the ways to increase income than to focus on cost cutting. You can cut until you have macaroni one night and rice the next, but in the end you still have to buy macaroni and rice. There is no limit to how much income you can make.
It took a while for that thought to sink in. In the rental real estate business more cash flow simply means adding units. While that is a sometimes large undertaking, once that productive unit is in place it sends a check each month until you decide to sell that asset.
People get confused about rich v wealthy. “Rich” is the guy with the 6 or 7 digit salary. If his industry has a downsize or a merger he can be unemployed just like the guy at the factory, only his job pool is a lot smaller. Wealth, it comes in every month, whether you’re sick or well, whether you spend your time riding motorcycles or painting pictures. A string of rental units with positive cash flow is a small personal form of wealth.
In the encyclopedia it describes the origins of wealth as: Land, Improvement to Land, Natural Resources, and Value added through manufacturing. In the 20th century, Intellectual Property was added to that list. Most of us will not own a gold or even coal mine. It is unlikely we will create the next Apple or Microsoft. We like hit songs, but most of us can’t write them or screen plays or books. That leaves Real Estate. Land and improvements are available to those that wish to start.