I am meeting more and more clients who are in the business of acquiring, repairing and renting out single family homes. Usually these clients specialize in either inner city properties, midlevel or highend. They learn their markets well and do not invest outside their comfort zone. I have found them to be hardworking, knowledgeable about their business and street savvy in that they have figured out how to minimize the risk of tenant defaults. They are generally successful. Even in this harsh economic environment most are thriving. I attribute this to 3 primary factors: (1) they were not highly leveraged and the cash flow easily covers operating income and debt service, (2) intense management and (3) their tenant application review procedures weed out the weaker applicants. Typically they have not engaged in any asset protection planning.
These clients come to see me because they know that without the proper structure, one catastrophic fire resulting in severe personal injuries can wipe out their entire empire. But they also know that as they have accumulated wealth they have become more vulnerable to other creditors…ones not necessarily related to the operation of the business. So they want to protect their assets from internal disasters as well as external unrelated creditor claims.
One of the recommended approaches is to segregate groups of houses aggregating to a certain value and have each group owned by a limited liability company. Depending on the extent of the client’s holdings perhaps the client ends up with 5 limited liability companies each owning 5 or 6 properties. The 5 LLC’s are all owned 100% by a multimember LLC, often owned by husband and wife, which has the strongest possible language in its operating agreement to protect against creditors including a trustee in bankruptcy. The operating LLC’s are all single member LLC’s but the parent LLC must be multimember otherwise the creditor protection sought, i.e., creditors being limited to a charging order remedy, may not be available.
If the client’s assets are large enough, we suggest that the client consider a domestic asset protection trust to be the owner of the parent LLC. We believe these DAPT’s have enormous power as an asset protection vehicle while, at the same time, retain the flexibility to allow our clients to continue to manage their properties as they have in the past. It can also be structured in a way to give our clients the comfort that they will be able to access the assets contributed to the trust when needed.
Many of you bloggers are very entrepreneurial and will want to implement structures that appear advantageous for your business.. While the above structures may sound fairly straightforward, they can be quite complex from a legal documentation standpoint. You are strongly advised to retain an experienced asset protection/business lawyer to answer your questions and help you with the legal work involved.