Robert Leonard  03:24

As Real Estate Investors, I think we often hear the idea of asset protection thrown around a lot in various different ways, whether it’s insurance products, or just LLCs, in general. But what exactly does asset protection mean in the context of Real Estate Investing?

Scott Smith  03:40

Well, it means a few different things, right? Just as you pointed out there. So at the very beginning, that the cheapest protection you can buy is always insurance. It’s gonna protect you from the most amount of risk, or the cheapest amount of money. Problem with insurance though, is it’s only partial protection. Insurance only protects you against one type of claim, and it’s just for a simple accident. So that’s called negligence. But if there’s any type of allegation of miscommunication from an email, somebody says that you didn’t comply with a contract, which happens all the time in Real Estate Investing.

Scott Smith  04:07

Now you’re faced with a lawsuit that insurance doesn’t protect you from and if you own properties in your personal name which is the absolute worst way to hold properties, then you’re potentially your entire life savings, your entire net worth is exposed. And I actually had a friend of mine who was sued and lost over $3 million in real estate because he was extremely well insured, had the umbrella policy in place that had everything in his personal name. And he made that critical mistake of thinking that his insurance was sufficient to protect them.

Robert Leonard  04:34

We’re gonna dive into that a little bit more in the conversation. I’m excited for that, because I think it’s a topic that I get asked about a lot about LLCs or should I just use an umbrella policy, but a lot of people listening to the show today are new Investors who haven’t done any deals or who have only done just a few deals. So as they continue through their real estate journey, and even for me, I’m not super far along on my real estate journey, so I’m here learning with the audience. When do we need to start considering assets protection?

Scott Smith  05:01

Well, it’s a tricky question, right? So typically what I look at is saying asset protection is always going to be something that it’s only worth doing, if you have net worth to protect. So question is, what’s your total net worth? What are you got exposed here? If it’s over $50,000, in terms of total net worth, then the very basics of asset protection start to make a lot of sense to put in place.

Scott Smith  05:21

Then the question turns on saying, “Well, what do I need to put in place first?”, then the best thing to put in place first, at the very, very beginning, is just a simple, anonymous LLC. So, one thing you have to realize that the rich people, they don’t own things, they don’t pay taxes. So my advocate for people is that we should all act like rich people, because it’s not that expensive to do it.

Scott Smith  05:41

And what you can do is you can create an anonymous LLC, that’s created through a law firm, so all of the anonymity of the ownership of that LLC is protected by the attorney client privilege, and your name doesn’t appear anywhere on it in terms of public record, you can take all your assets and move it into that LLC ‘s that way, if you’re ever sued, you don’t lose anything. You don’t have to care about lawsuits become what’s called judgment proof. You can bulletproof the judgments.

Scott Smith  06:03

So this becomes exceptionally important for you, and while you’re growing, because the hardest thing to do is to come back from a major setback financially. And so that’s what we advocate a lot around, is your interest in real estate, which you’re probably interested in as what are guaranteed  ways or predictable ways, to be able to create financial freedom or increase your net worth.

Scott Smith  06:26

And best way to increase your net worth over time is to follow Warren Buffett rules, and the first rule that is don’t lose money means don’t lose money in the investment that you’re making, and also protect yourself from risks. So have great insurance in place, use some of these tools at the appropriate level to be able to share the risks that you have, right? And that’s where it comes into place of working with experts to do this live, as because good experts will be able to show you what is it that you need to put in place now and what do you actually need to put in place in the future and what are the trigger points of when you would need to put in the next, next piece of the puzzles?

Robert Leonard  06:58

Are there certain situations where insurance can be enough? Insurance usually doesn’t cover you enough? But is there cases where that couldn’t be enough for someone? And if so, how can those insurance products be structured so that it is sufficient?

Scott Smith  07:12

Well, oftentimes insurance is enough. Insurance protects you against most of the cases. Most of the claims that you’ll ever get filed against you. The issue, though, is that whenever claims are getting expensive, or if there’s any other time that a claim gets filed because of an email that you sent, that somebody misunderstood, and they say, “Hey, you, you deceived me in some way in that email.” Well, those are always just misunderstandings, typically, but somebody’s got to pay for it because something bad happened, and they’re gonna blame you for that or they’re gonna say, “Hey, you didn’t you didn’t fulfill this part of the contract.”

Scott Smith  07:42

Insurance never protects you against either those two things, because those are deemed intentional acts. Insurance only protects you against accidents, and only some types of accidents, by the way. They don’t protect you against really bad accidents. Anytime it’s a really bad accident, the insurance company can just say, “Hey, well, that was actually gross negligence.” And now our policy doesn’t cover gross negligence, and to it, and then you’re left having to sue your own insurance company.

Scott Smith  08:03

And that’s actually what I did as a litigator, was suing insurance companies when they would deny claims based on principles that we thought they were doing for business reasons as a profit seeking Corporation, instead of actually what their true contractual obligations were their client. Now, you, as an individual, are not able to sue an insurance company. Your pockets are not deep enough. So you actually have to take further steps to ensure that if the insurance company decides that they want to screw you, then you’re not like sitting there having to spend 50 to $70,000 in attorneys fees.

Scott Smith  08:32

You’ve actually taken the proactive steps to say, “Sue me all you want, you’re not getting any of my stuff.” And I’m not going to pay $50,000 or $10,000, or even $5,000 out to an attorney, because actually, I’m just going to say “I don’t care about your lawsuit.” And that’s what I advocate is that kind of power position.

Robert Leonard  08:48

So when we talk about these potentially deceptive emails, whether they’re intentional or unintentional, what if the owner of the property isn’t actually communicating with the tenants? So what if you have a property manager? So literally all you’re doing as the owner is managing the manager? And so you’re not actually working with the tenant? Are you still responsible for the property managers actions given that you own the property? And if not, do we still need to worry about these types of scenarios that you mentioned?

Scott Smith  09:15

So this is why we actually always advocated to company structure. So you have one anonymous entity that’s going to own all of your assets, and typically is going to own that through Land Trust that avoid due on sale clause issues with mortgages, and all that kind of good stuff. But it’s a way to be able to create anonymity in the ownership of the asset while being able to transfer underneath the umbrella of an LLC structure, so it’s protected from lawsuits while creating all the internet vehicles.

Scott Smith  09:37

You can still acquire all the properties in your personal name, and then transfer them after the fact. So you can take advantage of like great financing all that with that, right? So that’s on the left hand, so to speak. If you had to answer this, your left hand would be asset protection. Your right hand would be operations. And operations looks like is an entity that intentionally doesn’t own anything. If you want to use a bad word to describe what that would be.

Scott Smith  09:55

It would actually be called a shell company, but people actually use all the time and there’s nothing evil about them. The laws are created intentionally for you to be able to leverage into doing this, I think the legislature’s like government wants you to do this stuff because they want you to go out there and be protected while you’re building your business. And so what you do is you take that operating company, and that operating company is the one that interacts with everybody else.

Scott Smith  10:16

It’s the one that’s gonna interact with the the tenants, it’s gonna interact with property managers, our contractor is going to do everything. That way, if anything blows back, something goes wrong, somewhere out there on the world, one, they can’t get to your assets, because that’s an anonymous LLC that had no connection to them to begin with. And two, they can’t get to you because you always acted through an operating company.

Scott Smith  10:36

And the most they can do if they sue the property manager or something goes wrong with that is it gets stopped by the operating company, and they can’t get to you personally. And even if you don’t own anything, you have to protect yourself personally. Because a lawsuit against you personally means that your credit score got damaged, which inhibits your ability to do business.

Scott Smith  10:53

So it’s worth investing the $650 to $900, depending upon where you live, to form up the entity to ensure that your, that your longevity in this game doesn’t get delayed by years because of just something random that happened that you can’t control because you can’t control when people sue you, Right? I mean, doesn’t matter how honest you are, it’s in their hands, whether they decide they want to do that.

Robert Leonard  11:15

And so at what point does this really become realistic for an investor? And the reason I asked this was because I had read a lot of things very similar to what you’re talking about here. I thought I understood it well, and I bought my first out of state property. And it was a single family relatively cheap, it was generating good returns in terms of what we had to put into the property. So cash on cash return was great but the absolute value of the return was relatively small as a couple $1,000 a year.

Robert Leonard  11:44

When we looked at it, we could form an LLC in our home state for $100. So that was super cheap. We weren’t worried about that. But then when tax time came, we realized we had to form an LLC also in the state in which we were operating. And that was 700, or $800. So we were all in for about $1,000.

Scott Smith  12:01

Now you made a big mistake, you didn’t have to do that.

Robert Leonard  12:04

Why? So we ended up not doing that. So let’s talk about why.

Scott Smith  12:08

So what you could have done what you should have done, and what everybody should do, is if you think you’re going to be acquiring multiple properties, the first thing that you should do is actually invest with the end in mind. Think about like all your investments that you’re making right now with your assets, and think about that in terms of saying like, what’s a structure that can grow with me, the best structure you can use for that is going to be some type of a series structure.

Scott Smith  12:28

So the series structure is very unique. What you can do is you can file one entity, and then what that entity can do is for free create sub entities. So you get an infinitely scalable company and no additional cost, and you can compartmentalize each one of your assets underneath that parent entity. So it’s like the parent the child than the asset underneath it, that comes into it. That’s great for liability protection, because then if there’s a lawsuit against one asset, they can’t go after any other assets.

Scott Smith  12:53

And by the way, you got to have all the extra protection for free. And it doesn’t even cost you any more operational, you can still conduct everything at one big out of one EIN number and one tax return. Now, the question really becomes when you create one of these series entities, whether it’s going to be a series LLC, or a Delaware statutory trust by Georgia, the two preferred entities that we use are across the country, you don’t have to register that entity in the foreign state, if you move the property into a land trust.

Scott Smith  13:20

So you would always take your entity, your your property, Robert, you buy it, say like in Kentucky, you have your Kentucky property, you move it into a land trust. Now, because it’s moved into a land trust, you create anonymity around the property ownership, you’ve also avoided the due on sale clause for the St. Germain act. So the mortgage company can’t say anything to you. So you say great, now I have an anemia property.

Scott Smith  13:40

Now what you do is you take that land trust, and you make the owner of the land trust, the child series that we just talked about, of your series entity that’s going to be a series LLC or a DST. So now we’ve compartmentalize the asset and to a child series of the parent, we’ve also own the property indirectly through a land trust, to be able to create anonymity and also avoid the due on sale clause.

Scott Smith  14:00

And the best part about this is that because the property is being owned in a land trust and that foreign state, that means that the LLC or the DST is not operating that foreign say it’s actually the land trust, and therefore no foreign entity registration requirement is there. And if there’s ever a lawsuit, the protections from the home state where the LLC is formed, has to be applied per the Full Faith and Credit Clause of the United States Constitution and wherever the state where the lawsuit occurred.

Scott Smith  14:26

So we get all the protections of the LLC from the home state without ever having to register it in the foreign state.

Robert Leonard  14:32

So, when you the biggest thing that you mentioned there that interests me is that whole due on sale clause. People ask me this all the time. I can’t get a loan in an LLC. If it’s less than four units. It’s almost impossible. You know, you it can be done in some cases, but it’s very, very, very difficult. So, a lot of times what people will do is they’ll buy the property in their personal name they’ll quitclaim deed it to an LLC or something along those lines.

Robert Leonard  14:54

Of course that could technically trigger the due on sale clause. It doesn’t necessarily always but they have the right to. How does this differ? You mentioned the St. Germain act, I’m not personally familiar with that. I’m sure the audience probably isn’t either. Walk us through that a little bit, and give us some more details on that ’cause I know it’s really important for a lot of people listening to the show.

Scott Smith  15:13

So, most of the time, people are just running naked out there, because what they’ll do is they’ll take the property, and then like, they acquired their personal name, and they just transferred directly into the name of the LLC. Not only is that like more costly to do it that way, because they have to pay the foreign entity registrations and all that kind of good stuff.

Scott Smith  15:28

Or they say, “Well, I’m just gonna run that risk”, right? Maybe the bank is gonna call it do and say, “Hey, well, probably banks won’t call it do as long as the mortgage note continues to get paid,” right, which is kind of like the the real effect. I mean, that really, at the end of the day, it’s kind of business, right? But you don’t have to float that risk, especially if we look at like, if interest rates really change, well, where are banks gonna make more money?

Scott Smith  15:48

Well, they might try to do that by forcing refinances, where people at one point was fine, another point wasn’t. So that’s where I like to use the land trust. So the St. Germain Act protects people from transferring assets into trust is originally designed for the purposes for estate planning. And so that’s why that we craft our land trust to be able to fall inside of the same caveat are created for that piece of it.

Scott Smith  16:11

It’s just a little bit of legal knowledge that allows you to be able to know that and a little bit of research, we actually have a ton of articles about this on the blog post up on Bigger Pockets.com, where I’m a regular contributor, we usually post about two articles a week there, and on the Royal Legal Solutions.com website. If you really want to dig into the nitty gritty of the legal nerdy on why does this all work the way it does, that’d be the best place to check it out.

Scott Smith  16:32

But this is the way that you can actually do it. You can get up to your first 10 properties, you know, all in so you’re conforming loans transferred into the land trust.

Robert Leonard  16:39

Yeah, you brought up the point that I mentioned very frequently and I’ve even thought it myself and kind of in my rationale for some of the deals that I’ve done, and that is as long as you’re making the mortgage payment, then you’re fine, and the bank won’t have an issue with a quitclaim deed.

Scott Smith  16:53

I heard you mentioned this twice and I just want to make sure that I’m that you and everybody else knows about this. Because when you transfer the the asset, I’d recommend not using a quitclaim deed, I recommend using a warranty deed instead. And the reason why actually has to do with your title insurance is that when you’re looking at your title insurance policies, if you transfer it with warranties in place, that the title insurance is actually effective to the subsequent owner of the property and it carries through down.

Scott Smith  17:15

When you use a quitclaim deed, what you’re actually doing is transferring it with no warranties. And so when you transfer a property with no warranties, it actually voids the title insurance. So, if you, we have some articles about that as well, too but how do you make sure that your deed that you’re using has the appropriate language side of it on the website? But I just wanted to point that out too, because that’s just like a, it’s a little thing, right?

Scott Smith  17:35

How often do any of us actually use our title insurance policies anyway? A lot of times, we just have to get in because the bank fires up into it. But if anybody is out there, that’s as big as nerd as me that they would, they’d be saying, “Hey, why isn’t Scott talking about that?”

Robert Leonard  17:49

That’s a really good point. I, I did know about the difference between the warranty deed, the quitclaim deed, and I knew that you were more or less foregoing your warranty when you did that, but I didn’t think about the title insurance side of it, I just assumed they did the title check when we bought the property, so quick, claiming it to the new entity isn’t gonna be an issue, because I know nothing has changed since the purchase, but I mean, you raise a very very good point about the title insurance.

Scott Smith  18:12

Policy actually gets voided if you use the right claim gain. So if you found about the title defect later, and then your neighbor was like, “Hey, this is actually that’s wrong thing is wrong.” He went back like, “Hey, my title insurance company,” and they’re gonna be like, “Well, you guys checked it. You guys said it was good.” And like, yeah, but we don’t got to pay you. Because the contracts void now, because of the subsequent transfer.

Scott Smith  18:29

And that’s where you got to be careful. But this is what’s going to happen, right? Because they’re in the business of making money. And they get denied a claim, that’s what insurance companies do, is they make money on collecting premiums and buying coverage. That’s business model.

Robert Leonard  18:39

Yeah, that’s a very, very, very good point that I, I hadn’t considered. And I really haven’t. I mean, I’ve read quite a bit on this. I’m, I’m not as much of a nerd in the legal side of things as, as maybe you are but I’m pretty passionate about this kind of stuff business in general. So I’ve read up on it and I’ve never come across anything about that so that’s a really good point. I’m glad we, we talked about that. Now, why don’t more people know about this?

Scott Smith  19:01

Well, I think what happens is, is that is is pretty niche. I’m also an investor. So I had to build all this stuff from the ground up for myself, and who the heck else is out there like doing that? There’s a lot easier money to be made as an attorney, just kind of doing stuff. This is built for me at a something that I was had to figure out for myself, and then able to talk to other people about it.

Scott Smith  19:20

And then, and then solely focusing on these issues of like, how do you actually build wealth, how to actually create financial freedom, actually how to use real estate as an, as a tool to be able to help get you, you know, from zero to 5 million net worth, how to create passive income to be able to equal your expenses, and what are the best tried and true ways of getting that?

Scott Smith  19:38

I just don’t know many people out there that are like me, they’re like, that’s all they do and think about and meet people about and network about is how to do that. So that’s probably trying to guess that’s probably why.

Robert Leonard  19:48

Yeah, it’s just interesting because I think the most common thing I hear is about how do I get capital to buy real estate but after that, probably the second most important thing, the second most common thing I hear is, “Do I need an LLC?”, and so I’m just surprised that when that conversation comes up as much as it does, I’m surprised there aren’t more people that say, “Hey, you know, quitclaim deed isn’t necessarily the right way.” which is seems what most people say is the right thing to do, and are just talking about these types of strategies.

Robert Leonard  20:12

So I’m, I’m really glad that we’re having this conversation and that the audience has a lot to learn this, and I’m, I’m learning from it as well. Now, what about if there’s partners in the business, given that it’s going to a legal entity that can probably have partners? I’m guessing it’s probably not a huge deal but does that change anything with the land trust?

Scott Smith  20:28

No, not at all. So you do it, you just structure your partnership agreement inside of your operating agreements. Every LLC is required to have an operating agreement to be enforceable. So what you do is you put the terms of your partnership, and that agreement for the LLC. The land trust owns title, the property, the land trust, technically owns the property, right? But who owns the land trust all that’s the partners that are the owners of the LLC.

Scott Smith  20:48

So all of these things are completely appropriate for partners. Now, when you have a partner into the business, right now, the entity is no longer going to be a pass through or disregarded ethnicity for your taxes, where you just record all the income on your schedule E, and with the partners, now you have to file K ones and issue and do a partnership return. And so that’s just a key differentiation to make sure that you know, whenever you’re looking to take on partners, that you’re also going to have some extra operational costs for your tax returns.

Robert Leonard  21:13

Yes, so that’s going to impact how you file your taxes but does that change anything in terms of what we talked about for the foreign entity?

Scott Smith  21:19

No, that’s going to be all the same.

Robert Leonard  21:22

Interesting, that’s good to know. Now, how about someone who has heard the more common advice about quitclaim deed already? Maybe they’ve done that with their property? Is it possible to go back and quitclaim it back to them personal selves, and then actually do the warranty deed to, you know, everything we’ve talked about so far? Or are they more or less voided? Now, given that they’ve already done that?

Scott Smith  21:43

I think you could, actually. Because you could actually say that you filed the deed by mistake, and say I was actually like an invalid transfer, because I didn’t actually mean to file it as a in that way, I meant to file it as a different way. To be able to go through that process that was probably going to cost you around $1,000 or so, to be able to effectuate the different transfers file the appropriate paperwork into that. So you just have to weigh that.

Scott Smith  22:03

And in terms of like, okay, well, how risky do I think it was that I’ve voided my title insurance or about the due on sale clause? You know, like, how risky do I think that is? So my personal estimation on it would be like, it really depends on what’s going on with that property, and how much it bugs you. Honestly, this is where it actually shakes out. If these types of topics that we’re talking about with like, do I need an LLC?

Scott Smith  22:24

Am I worried about like, what’s going on with like my anonymity, like my property ownership or like, what can my neighbors actually find out about my net worth and like what is I’m doing, but those things bug you, like they’re hitting you in your head multiple times a day is worthwhile getting rid of those by just executing the right strategy. And the reason why is because you got to think about like, how are you actually making money, the only way you really make money is because you have brain power, that’s chugging through problems that you’re then executing on.

Scott Smith  22:52

And if you have latent, latent stuff that’s bothering you, that’s actually like a mental vampire that’s costing you money every day that you just don’t even know about, right? And it’s causing extra stress and all kinds of other stuff. So my one of my goals, and the biggest thing that changed my life and be able to increase my net worth a lot faster, was just getting rid of the stuff that bothered me on a daily basis.

Scott Smith  23:11

Like whatever the cost would be, I was like, I gotta get rid of it. Because I gotta get my mind focused on like, what are the essential things that I need to be doing that are actually driving my life or in the ways that are most impactful. And that’s probably not too revolutionary. Like we do that in business every day around getting KPIs, KPIs, doing process improvements, over time getting more efficient, but we ourselves are a machine.

Scott Smith  23:32

So these types of mental vampires that we have are inefficiencies in the machine. And we need to get rid of those, and one way or another, and these types of issues, if they’re things that are bothering you around like estate planning, or tax or whatever, that’s where it can make sense at any level, to start forming a relationship with somebody who’s smarter than you that’s done it before, and I can show you like, here’s the right ways to be doing it that are appropriate for you because once you get rid of all that stuff, the mental clarity you have impacts your life in ways that you don’t even know.

Robert Leonard  23:59

Yeah, that’s very well said. I completely agree. I actually talked about a specific example on my other show called Millennial Investing about this one time I bought Bitcoin couple years ago, I sold it a couple days later. I just I couldn’t sleep good at night, knowing that I own that asset. I didn’t understand it enough. So it was messing with me mentally.

Robert Leonard  24:16

I wasn’t clear in my head. I couldn’t focus on other things. It was, I just really didn’t feel comfortable with it. And it’s just like you said, it could mean it could be estate planning, it could be taxes, it could be your legal ownership of your real estate, it could be anything, but it’s one of those things that I don’t think it’s talked about a lot. But getting rid of those things that take away your mental energy is so important. So I’m really glad that you brought that up.

Robert Leonard  24:35

Now, you mentioned about $1,000 to get back from that quick claim that you originally filed. Just out of curiosity, where does that number come from? And I asked that because I’ve done a quick claim before and it cost me about 50 to $100. I just sent a check to the local county records office I guess it’s called and they were able to record the deed and that I mean, that was pretty much it.

Scott Smith  24:56

There’s a couple of things in here too, right? I’m talking about that. That’d be like higher firm to do it for you. Anything that you want to do, and law, or tax, or any of these things, totally able to do it yourself for a lot cheaper than you can hire somebody else that’s done it. The question become is like, what are you trying to accomplish? And how competent are you and how much time do you actually have to be able to go do that? And how confident are you that you’re going to be doing it right and is that really the best use of your time?

Scott Smith  25:19

That’s a ton of factors then of weighing into it, right? And what we were discussing before was like, well, it’s not actually just a simple fee, there’s actually like, you need to actually file separately to be able to like, okay, why do I actually allege This is legally a mistake? What does that actually mean? What are the terms and I wish that I can actually legally claim that committing some type of fraud and to it, and that’s why I was like, Okay, well, there’s gonna be some nuance into this.

Scott Smith  25:40

But yeah, any, any of those. Anytime you can do something like on your own, that you feel like as well inside your wheelhouse to be able to go do and you feel confident with it, it’s always gonna be cheaper to to have yourself do it, then to hire an attorney to do it for you, right? So like, if you’re making under like, $50,000 a year, a lot of times, I’d say like, don’t even worry about asset protection, don’t even worry about this, the thing you need to focus on is how do you make more money.

Scott Smith  26:01

You don’t have a problem with tax, problem with asset protection and problem of that have an LLC problem, you haven’t figured how to make money yet, what you really need to do is figure out how to make more money. And then you’re like, “Holy smokes, I am so buried,” How to do with the money making thing. I need other people to go take care of all this other stuff, because it’s actually cheaper for me to even pay an attorney or pay some professional to just go do that thing.

Scott Smith  26:23

So I can focus on making more money. And that’s really where we need to be. Like as an entrepreneur or something that’s getting into the game, the key metric that you would have is called “What’s your effective dollar per hour?” If you don’t know what your effective dollar per hour is, you are, you don’t have a clue about what are the things that you need to be putting your time into? That’d be like, you need to know that number.

Robert Leonard  26:44

So is there a general threshold? I mean you throughout 50,000 but is there, I mean, I’m sure it varies drastically, but is there generally $1 amount that you’re making per year that you’d say, alright, we need to start looking at asset protection, it might be worthwhile now?

Scott Smith  26:57

I typically look at as anywhere between 50 to 100,000 plus and total net worth, makes sense for the very basic pieces that we’re doing in terms of asset protection. The $50,000 per year number of like active income that you’re bringing in each year, has to do with actually where your tax savings comes in. ‘Cuase after you make over $50,000 a year, you need an LLC that then you use an, as an S corp election to be able to save on self employment taxes which saves you about 10% off your tax each year by splitting your income between employee wages and dividends.

Scott Smith  27:25

Sounds really like it’s a lot. It’s not a ton, but it’s something you need to know about. So anywhere between 50 to 130 a year, that’s your strategy. Once you go above that, then we start using C corporations and other things to be able to shelter money from taxes. Maybe shelter is not the right word. Maybe that’s like quasi legal, but that’s the one that came to mind.

Scott Smith  27:42

Really just doing the legal tax saving strategies around C corporations, right with that, so but when you’re below $50,000, net worth, when you’re below making $50,000 a year, there’s not a lot you can do. There’s not really many levers to pull at that point besides like, hey, come to my coaching class, and let’s talk about your entrepreneurship and what you suck at being an entrepreneur and how you can be better at it.

Robert Leonard  28:01

And so, we were talking about that $1,000 cost of hiring someone to do the quitclaim deed if you’ve already done it to get back to even if you will. And you mentioned that it may or may not be worth it depending on you know, how much you own, how much money you’re making,

Scott Smith  28:15

But the other risks too, right? Like, ifwe’re talking about carrying a title issue, do you really think that there’s gonna be a title claim. Okay, well, if you don’t, then don’t spend the money on it, you know, if you do, then holy smokes was due right now.

Robert Leonard  28:26

Yeah, that makes sense. And how about long term thinking, right? Maybe this person owns one, one property, maybe they make a decent salary, but they’re expecting to acquire three, four, five more properties over the next year to three, four years, is that a time where it might be worthwhile to start looking into this, even though they’re not there yet, just so that, ’cause we’re talking about those series entities where they have the children, entities under them.

Robert Leonard  28:50

And so maybe they don’t need them all at this time. But you know, maybe having that structure set up already set many bylaws and properties, it’s already in place?

Scott Smith  28:57

Typically, what, what we do is our our initial intake for every client that comes in is that that’s one of the essential questions we have is like, if everything goes right, how many properties you have in five years. Like realistically, like how many properties are going to acquire? If you’re like, “Hey, I got two properties, or I got one property, I’m only ever planning to run one property.”

Scott Smith  29:12

Like, oh, great, you need just a traditional, you know, an anonymous LLC, we can do everything inside of there, we don’t actually need this scalable structure. There’s like, well, I got two now, but I’m actually going to 10 within the next five years. Well great. Well, let’s plan on that. So that way we can build with the end in mind.

Robert Leonard  29:28

Now, when we talk about this in specifically about scaling, is it the total number of properties that matters? Or is it the total number of units? Because there could be a big discrepancy there, right? I mean, if you own two properties, you could have two units, or you could have two properties at 100 units each. So is it really the number of properties or units?

Scott Smith  29:46

It’s actually the number of properties because the properties are the smallest division that you can actually chop up an entity structures and has to do with deeds, right? I can only deed a property, I can’t deed a unit. End too. So that’s typically we’re going to find like most investors that are using these types of series structures are typically one to four unit types of investors. Once you start going into like multifamily flipping, those kind of things, now are those are different types of solutions than the typical superstructure.

Robert Leonard  30:13

So I’m sure that this answer is gonna vary drastically, depending on everybody’s situation. But everything we’ve talked about so far, what is someone looking at generally, for a cost, if maybe they own one property, maybe two properties, maybe even three?

Scott Smith  30:26

We actually have like DIY options, where I’ve actually have like forums, templates, and instructionals, I’m gonna go through that where you know, you can get stuff really high quality stuff, like put together and as long as you’re willing to do part of the shoulder, you know, part of the work on your own. You can get incur, like, really high level stuff put together for yourself for just a few $100.

Scott Smith  30:44

When we want the professional team to be meeting with you frequently about it, to be putting it together for you, doing like a lot of the in person types of explanation and holding in this cost can go up significant. I would say for, there’s DIY options that we have that are within the hundreds of dollars range, most of the time when working with clients that are in the, want the personal contact with like having a personal dedicated advisor and those kind of things, those are in the 1000s of voluntary.

Robert Leonard  31:12

So I think a major hurdle keeping new investors from getting started, is this dynamic that we’ve been talking about whether or not they need an LLC to invest. For someone brand new starting out, do they need to even worry about an LLC to buy their first property?

Scott Smith  31:27

No, I mean, what I would do is I would just, what we always say to people is don’t ever let anything else stand in the way of you making money. So go out there and make the money first. After you acquire that first property, then you can make some decisions on what it is that you want to do, but here’s a real kicker, right? Before you even jump into that first property, but I’d recommend doing is going to the website, Royal Legal Solutions.com website and getting all of our free info into it so you can have like a game plan to put together for yourself.

Scott Smith  31:54

You can talk some of the staff. There’s free options to be able to have that and to be able to just create, like, where are you going to fit in? Like to like what it is that we specialize in? And, and then you’ll be able to make those decisions on your own too, right? Because that’s depend on your own personal risk. But like never, don’t make money, right? Like always make the money.

Scott Smith  32:12

I’m like, once you make the money, other, you can always clean stuff up afterwards, you can have professionals come in and do it but you should never like wait on making money.

Robert Leonard  32:20

So what is the best solution for someone in that situation? Where they’re trying to decide, do I invest or not? Because I don’t have an LLC, and they take our advice they invest? Then what do they do? Do they buy an insurance product? Or what is the next step?

Scott Smith  32:33

You’re gonna have to buy an insurance product, like from the bank, ’cause the bank is gonna require you to do that, right? Unless you’re buying the property cash. So you’re gonna have like, the minimal productions that are going to be in place. And so when I’m advocating for people to say like, well, do the, do the educational component. Join the community of people that are talking about these types of contexts and educate yourself now so you’re not stuck in this position of saying,”What do I do now? and do I have to do this or that?”

Scott Smith  32:55

And you’re gonna put yourself into like, a frantic place of like, am I risk or not? And how much? Or whatever. So my advice would be like, get the education early, join the community, start meeting more people that are going to be thinking about the same type of topics, but if you have the option, like right now, if you’re into and you’re like, “Hey, I’m gonna buy this property tomorrow, should I wait or not?” I’m like, “No, go buy the property right now.”

Scott Smith  33:14

But for most people, I’m like “Listen, if you’re just starting out, and you’re trying to like save money, you’re pinching your pennies to be able to go do it, and to get into your first property, then don’t spend money on all this other stuff. Just go get your property, maybe look at a DIY option that we have there, and all the free education materials that we got. Because if you don’t have a lot, you need to really just focus on making more money. I mean, that’s just the hard truth. Focusing on all these other things is really just a not the most effective use of your time.

Robert Leonard  33:40

So going back to one of the things we talked about a few minutes ago, and that was having this series entity and how there’s the parent entity, and then there’s the children under it. Are those all separate entities? So if you own 10 properties with the one parent, and then they’re all sub entities or children entities, if one of those entities gets sued, are all the other properties or entities shielded?

Scott Smith  34:01

That’s the purpose of a series entity, is it allows you to be able to have to only pay for one entity, but the state but you get to create an unlimited number of child series for free and they all compartmentalize of each of the properties in conjunction with the trust. And I have a bunch of cool diagrams on the website because I’m sure everybody listen to this is like “What the heck, how does that work?” But we have cool diagrams on there that you can see.

Scott Smith  34:22

Once you see it visually and be like, “Oh, it’s super simple.” But that’s the whole point. The whole point is to be able to say like “I had a lawsuit. Grandma fell through the staircase,” You know, “I want of my property,” right? Because she fell to the staircase and she got catastrophically injured. Because she got catastrophic injured, the insurance company’s business model says that they deny coverage that I mean, that was gross negligence.

Scott Smith  34:41

Shaula means is an accident you should have known was going to happen. I don’t know how you still know what’s gonna happen but that’s what they claim. So that allows them to be able to deny you coverage, and then now grandma’s gonna sue, who? Well whoever owned the property. At that to you personally, your entire net worth is exposed. So get ready to shell out some serious bucks to an attorney or get ready to go bankrupt from being in that, being in that position.

Scott Smith  35:01

If you had this compartmentalised underneath a series LLC structure or a DST structure inside of these child series, then the most you could actually lose that one property, and just the equity and that one property. So that shifts the leverage back to you because now you’re not completely exposed your entire net worth or facing bankruptcy if this thing goes wrong, and now you can make a lot more technical decisions of what’s happening.

Scott Smith  35:22

So when it’s just a lawsuit against that one property, instead of a child series, it’s just that one property. They can’t go after any of your other properties, they can’t go after your personal.

Robert Leonard  35:30

One of the things I like to do with the show is talk to guests about mistakes they’ve personally had or even seen other investors make. That way that the audience and I can both learn from those people’s mistakes and not have to make them ourselves. So what are the most common mistakes you’ve seen other investors make when it comes to asset protection? Or even what are some of the mistakes you made before you knew everything that you know today?

Scott Smith  35:53

Oh, man, I’ve made so many mistakes. I mean, I literally think I’ve made so many mistakes, and Entrepreneurialism and Real Estate Investing has cost me millions of dollars. I mean, actual millions of dollars, not like, like hypothetical opportunity cost dollars.  Just because the, you know, and it’s really weird, right? Like, it’s one of those hard things to learn that it’s like the cost of education, when you’re in business is actually much more expensive than any other type of education that you can buy or not buy.

Scott Smith  36:17

But one of the key things and we talked about a lot on, on my podcast, Real Estate Nerds, as a mindset around what it takes to be able to have consistent growth over time. When we talk about investors in their best and worst deals and what they did or didn’t do that let them there, all these guys were gangsters.

Scott Smith  36:32

When it came to like how well they knew how to technically invest, because there’s a mindset behind what happens when you’re getting into a deal or when you’re doing a business transaction that it’s very important to be cognizant of, and to actually have high levels of awareness about because every time you do a deal, you think it’s a great deal. Otherwise, you wouldn’t have done that deal. So why is it that we can have all of the technical skills that sometimes work and sometimes don’t?

Scott Smith  36:56

Well, it has to do with like a mindset that’s approach. And that’s grant car down, Rod Cleef. All those guys talk about that on podcast. Now, the one thing that I’ll say another piece, I’ll say that, that’s important to be aware of, too, is what got you to where you’re at right now isn’t going to be to get you where you need to go of two different pieces. Where what you know, right now is getting to where you’re at right now. Where you want to go, that’s probably a new skill set and a new set of learning. A different way of thinking and different way of operating.

Scott Smith  37:20

So like, that’s why I was like bringing up the story about my, my friend who lost over $3 million in real estate, when he’s really well insured. Being really well insured with an umbrella policy and liability insurance policy is totally appropriate if when you have one property, or when you’re just getting started, or if you have really low net worth, and you have really low equity in your properties because you don’t have a ton exposed me. It’s really bad when you have a lot of equity.

Scott Smith  37:40

But he took a strategy that worked from at one point and then extended it and didn’t reconsider of whether it was still appropriate at a different level. These were a points of awareness become exceptionally important where you need to know when does the game change. Because the game is going to change whether you’re Cognizant or not. And you need to be around people and around a community of people that are talking about the game.

Scott Smith  38:00

If you’re an entrepreneur, this is the difference between working on your business versus working in your business. Working in your business, you’re going to do okay. You’re basically going to be you maybe a couple of employees maximum. Working on your business is where you’re really going to scale working on your business is a totally different skill set than working in your business. It’s understanding how the game itself is played, not just how to do the actual turning of the crank.

Robert Leonard  38:20

So how about all of what we’ve talked about so far, it all makes sense in the real estate space. But now how about somebody who’s a Real Estate Investor, but they also have a W two job? Let’s say that they have a regular job as well. But let’s put that to the side for a second. But what if they also have a side business, a small business, a side hustle, something along those lines? Do a lot of the principles that we’ve talked about so far apply to that type of situation as well?

Scott Smith  38:42

Yeah, it’s actually the exact same principles. Despite all different replace real estate asset with website, with bans, with an intellectual property. And it’s the same exact principles. Asset holding company owns all the assets. Operating company interacts with all the clients to be able to shelter the asset holding company and yourself from liability, to the extent that the operating company is using any of those assets and leases those assets back from the asset holding company to the operating company, so with operating companies ever sued, they can wind down, start a new operating company, all of your assets are still intact, you’re back in business and the next day.

Scott Smith  39:16

So, the same types of legal principles are there, real estate, just a vein, where a lot more people have a lot more risks that are very cognizant of. Although every business owner should be aware that their brand, their website, all of these things would take them years more to develop. If they had to start over from scratch because you had some vindictive person who sued you and then took all of it.

Scott Smith  39:37

And essentially just in wiped out into it. So these things can cost a few $100 There’s you know, DIY options that cost a few $100 It can cost a few $1,000. If you have other people that are actually going to do it all for you and coach you through it and be able to walk you through those types of systems and processes of how to think about it and what and what actually to do with that.

Scott Smith  39:56

And the way I look at it say is like we talked about like the mental vampires as one way of looking at like a decision making, like, “Do I need to do this?” Another way of looking at this is “How long does it take me to recover,if something bad happens?”. Honestly, right? If you said like, “I have a half million dollars at stake,” and then “I have a half million dollars and network”, and they say, “Well, Scott, like how long? You know, should I invest in asset protection?”

Scott Smith  40:18

My question, or whole rest of our conversation would be like, “Yeah, absolutely fallen to the criteria.” But a more sophisticated question might actually be like, “Well, how long would it take you to recover the half million dollars?” Because that actually is the true resource. I mean, the time is the one thing they’re not making anymore. And if you can recover that half million dollars in two weeks, or a week or the next day, I’d say, “Well, maybe don’t worry about it.”

Scott Smith  40:38

I mean, like, you don’t really have much risk here, you’re only talking about one day, your time. If that represents five or more years of your life, well, are you willing to not spend a few $1,000 to make sure that you don’t have to get reset the clock for five years, to be able to get to your ultimate goals? And that’s where I look for saying we need to think long term here.

Scott Smith  40:55

And I’m thinking about like, how much time do I really want to be in this game before I’m actually financially free? And how can I create safety for myself to know that I’m a consistent gains over time to know when I’m going to be able to ring that bell and be like, “Alright, cool. I’m out of here.” without having big setbacks.

Robert Leonard  41:10

So when we include this idea of a side hustle with also a real estate business, because I think a lot of people in the real estate space, who maybe haven’t quit their full time job yet, they, they’re very, or even people who have, they’re very entrepreneurial, they like to do a lot of different things. So a lot of people have side hustles on the side, on top of real estate. Do those types of things fall as a child of the larger parent entity that we were talking about before? or does that start it’s entirely own series entity?

Scott Smith  41:35

You think about these two things is two totally separate. So we talk about things being like personal asset holding company, where you’re accumulating all of your real estate. You have an operating company, that’s a wing of your real estate company, that’s your property man, or you’re hiring contractors, or doing collecting rental payments from your lessees.

Scott Smith  41:51

Now, when you have an active business, that’s it. That’s a totally separate deal. You’re gonna want to keep those separate. But among other things, it’s also for tax reasons. You don’t want to be mixing passive income and active income together inside of the same entity. Now, there’s tax implications for doing that. There’s also asset protection issues and other legal issues with that.

Scott Smith  42:08

So treat like your personal pieces and your real estate, separate from your, your active or your side hustle.

Robert Leonard  42:15

And one final tactical kind of nitty gritty question about the series entity structure of a real estate property or portfolio. So assuming we have that parent company, the series parent company with the children below it. What if you have a partner for one property, and then you have another property with a different partner, and then another property with a different partner? Is it possible to still have the one same parent company with them, each owning different percentages or equity stakes in those children entities?

Scott Smith  42:45

There’s some more paperwork that has to be done to be able to accomplish that and but legally speaking, technically, it’s actually totally possible. Each child series is only going to T can have its own operating agreement, its own partners, its own EIN number and its own bank account, file its own separate tax return issue, its own K ones. So literally, you can actually create a series LLC and have an infinitely scalable company that has all the flexibility as if you would have filed individual LLC.

Scott Smith  43:07

Now, keeping track of all of that in a way that’s going to be easily manageable, that’s its own separate challenge, right?, when you’re trying to do that, but is it possible? Technically, yes.

Robert Leonard  43:18

Really, really interesting stuff. Scott, thanks so much for sharing all your knowledge and wisdom about asset protection in the context of Real Estate Investing side hustles and just general entrepreneurship. I could probably talk about this, I could geek out with you about this topic for probably hours. But let’s wrap up the show here. I mentioned at the beginning of the show that I’m no expert when it comes to this topic, so I really love learning this material alongside the audience today.

Robert Leonard  43:44

For those who may have more questions about what we discussed, or they’re just interested in connecting with you, maybe having their situation analyzed, where’s the best place for them to go?

Scott Smith  43:54

Honestly, man, they’re like, we have everything that we know, on the Royal Legal Solutions.com website. It’s actually like almost like a choose your own adventure story kind of website. So whether you’re looking at, like what’s the type of assets that I’m buying my interest in generational wealth, building interest and tax savings, the websites designed to be able to guide you through a tailor made type of information, that comes from like that type of Persona, what is the information they’re going to need?

Scott Smith  44:18

Now, it’s also super cool as that we actually have personnel on staff that I’ve trained to be able to manage the chat that’s in there. So if you want direct access for questions that you have, you can interact with the chat. And they’ll either be able to answer your question there or connect you directly into what’s the resource that we have on the website that’s directly applicable to your question.

Scott Smith  44:36

So like you can get a hold of us like through the chat you can go through like that, get a price piece and like watch like the long form videos, we have ton of articles in there. Again, you can either search for those, or you can get them through the chat. But like I’ve tried to is unreal, legal solutions.com to be like the places they like, we don’t want to talk to just like a million people. It’s like go there, do the study.

Scott Smith  44:55

Find out what the information is and if you need to reach out to see like “Where should I be looking for different types of things?” We’re there to help guide you into that help educate you over time to say like, “Hey, you might not be a customer today, you might not be somebodyb who can help today.” right? But you might be somebody that we can six months, a year, two years, five years down the line, now by just getting connected up to like, what’s the absolute best information that we’ve been able to gather?

Robert Leonard  45:15

Yeah, that’s all really, really great. I like what you guys are doing at Royal legal solutions. I’ve been on the website a little bit. I added to my to do list to go check out that video. And I’m also going to walk through the get a price process and go through that so I can learn a little bit more about it as well. I’ll be sure to put links to everything that we talked about. All of your resources in the show notes also put links to some books related to this type of material in the shownotes. Everybody can go learn more about it if they’re interested. Scott, thanks so much. I really appreciate it.

Scott Smith  45:41

Awesome being with your day, brother. Thanks.

Robert Leonard  45:43

Alright guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro  45:50

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