Patrick Donohoe discusses the importance of asset protection, even if you don’t think you need it right now.
With technology today, it’s becoming easier to obtain personal information. By protecting your assets and knowing the laws of your state, you can make it more difficult for people to come after you.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now let’s meet today’s expert host.
Patrick: Hi, everyone. This is Patrick Donohoe, and I’m the President and CEO of Paradigm Life. My website is paradigmlife.net. At Paradigm Life, we are essentially financial advisors and we do everything kind of outside of Wall Street, and that’s why we love real estate and that’s why I’m going to give you your guys’ tip today on the REI Classroom. So the topic I’m going to talk about is asset protection.
Mike: This show is sponsored by passiverental.com.
Patrick: Now, looking at asset protection, I think that most people have heard that topic before and there’s lots of different strategies to execute it but I would say, if you’re a real estate investor, chances are you are going to need asset protection at some point, whether it’s now or in the future. Now, looking at asset protection, I would say that, you know, these days our privacy is, I don’t want to say compromised but, our privacy becomes less and less over time just with the advent of the Internet and technology. And really, these days, whether it’s an attorney or someone that’s knowledgeable, they can get a lot of your data. They can do asset searches and so forth, so the need for asset protection is paramount.
So I’m going to get into just a couple examples based on the experience that I’ve had with some clients, and then I’ll give you some more efficient solutions. You can go about doing some very comprehensive estate planning and asset protection planning with attorneys. If you’re just getting started, they may not be the best bet, but I’ll give you some efficient solutions.
So, first thing is, I would say, is understanding recourse law. So if you’re using traditional banks when it comes to your investing – mortgage lending, bank lending, even hard money lending – understand the laws and, especially, the laws that are in your states. So, in the United States we have what are called recourse states and non-recourse states, and really I saw a ton of the recourse states and the subsequent banks be brutal with people that went into foreclosure and lost their properties that way.
So let me give you an example. So if you’re in a recourse state, a bank is basically able to sue you if you foreclose and if there’s a deficiency, which means that the amount that they sold it for at auction is less than what your mortgage balance was, plus fees and penalties and interest and so forth, they can come after you personally for the difference. They can do a deficiency judgment, they garnish your wages, they can seize your assets, your bank accounts, put a lien on other properties. Banks really know what they’re doing.
Now, in non-recourse states, and I think I have a list here, it’s Alaska, Arizona, California, Connecticut, Hawaii, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington, these are states where you have very favorable provision when it comes to recourse. So, banks actually cannot go after you for the deficiency. If there’s a foreclosure, the only asset they get is the property that went into foreclosure.
Okay, so let’s say that you are in a recourse state. I experienced a few, kind of gnarly examples. The first one was in Missouri and it was a huge development, and the client that I had had over a million and a half dollars in development money that was on this massive, it was like our vacation retreat and compound, and it had the biggest indoor waterpark in the country that was going to be built. So the whole thing went to crap and, really, the client that I had, he had signed certain notes and in Missouri there’s a 10-year statute of limitations, so the banks started coming after him even though the project didn’t finish and, really, the developer went bankrupt. It was a mess.
But luckily, he was able to work with some attorneys that I recommended and he found out that the note that was on the property was written in the state of Kansas, and so the governing law . . . because the mortgage note was in Kansas and Kansas only has a five-year statute of limitations, and they actually started to legally pursue him about six years after the whole thing went defunct. So anyway, understanding the note and the language of the note when it comes to mortgages, whether it’s conventional or unconventional or hard money, and then also the recourse side of things when it comes to your specific state.
So, a couple things that you can do to really create asset protection. First off, any good asset protection attorney’s going to tell you that there’s no bulletproof asset protection. Everything is going to have some ability to penetrate. And so, if somebody is persistent enough and has enough money, then they’ll really be able to get into that, whatever the asset is.
Now, the second. So yeah, looking at, really, asset protection itself, it’s more about just making it frustrating for the attorneys and the actual people to come after you, but a few easy ways is, obviously with us, our preference for a replacement of a bank account, long term savings, even short term savings, is a specifically-funded insurance policy. We call it the wealth maximization account and this is a policy that is liquid. You can borrow against it, it earns interest and it’s completely private. That’s kind of our foundational product that we use.
Now, another thing that you can do and I’ve actually done this personally, is a lot of people these days will own a property free and clear, because either they’ve eaten into their 10-property limit when it comes to mortgages and they’re buying property cash. And they’re either holding it in their personal name or holding it in an LLC, but typically if you go through, like, title process and you can see kind of who owned it before it was put into the LLC.
But a great way instead of spending money on an LLC and having to renew it every single year, making sure that you’re paying your dues and it’s done the right way, that costs a lot of money. One of the easiest things to do is you can encumber a property with a finance company that you own and set up. So you set up one LLC and, essentially, the money that’s going to go into purchasing the property can flow through this LLC. And the LLC’s a finance company, so it will purchase the property on your behalf and it will encumber it with a mortgage, essentially.
So, when an asset search is done, they see title, they see who’s on title, but they see a finance company that has a lien against title, therefore an encumber property makes it frustrating for creditors to come after them. So, as far as a finance company idea, you have to treat it like a legitimate company, right? You have to do the mortgage note, you have to make payments, track those payments and so forth. But anyway, that’s a way and it’s called equity stripping. There’s some attorneys out there that really understand that idea.
The other thing too, is to go to a good asset protection attorney. You know, they’ll put properties in, typically, an LLC structure and that’s a great way to go about doing it, owned by kind of a master holding company that’s also an LLC in a state that has charging order protection. So really, again, there’s so many details in regards to asset protection, but there’s some resources that I know that REI Classroom has. And then we have some resources on our website as well, so go check that out at www.paradigmlife.net.
And that’s it for today. Remember asset protection is important. And you find it valuable once you do find problems, so it’s best to just have your ducks in a row, your house in order and set up your asset protection from the beginning, so that once something does happen, you’re not caught off-guard.
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