I remember the conversation as if it were yesterday. I saw the cars he drove, the house he lived in, and the number of luxury vacations he and his family took. I asked my pops, “hey pops, what does Patrick do for a living?” With a huge grin on his face pops handed me a document with the large letters “HUD” written across the top. I didn’t realize it at the time, both my dad and Patrick were doing what many people across the globe did to build their wealth, real estate investing.
Today, next to stocks and cryptocurrency, generation Z and millennials are putting the majority, if not all, of their money into the buying and selling of real estate. Using different strategies like wholesaling, fix-n-flip, BRRRR, buy-n-hold, and REITs, investors are finding themselves significantly increasing their net worth through real estate. Research shows that 90% of Americans have invested in real estate in some shape or form. Whether house hacking or just purchasing their first home, becoming a homeowner is the notable milestone of the American dream. As we consider how real estate can considerably increase someone’s net worth, we must also consider how to protect the wealth.
During the COVID-19 pandemic, people predicted the real estate market would take a downturn. The uncertainty as to the climate of markets across the U.S. left investors asking what should they do? Many investors stopped marketing. Still dealing with some residue from 2008, a few investors began to liquidate their portfolio thinking another market crash would occur. Evidently, the market did not tank. The National Association of Realtors reports that housing sales have recorded month-over-month gains. The inventory of unsold homes increased from 7.3% to 1.32 million from June to July 2021 — equivalent to 2.6 months of the monthly sales pace. This does not include the number of properties sold off market.
Real estate investments make up about 10% of the U.S. GDP. Averaging anywhere from thirty thousand to two-hundred thousand dollars per month in revenue, real estate investors are part of the top earners across the spectrum of U.S. careers. One would think that all of these investors are experienced aged business entrepreneurs. Surprisingly, not even so. In today’s market, several of these investors are recent high school graduates or still in high school. Many are the first in their family to own a business yet alone to enter into an industry where they can earn as much as five-figures from flipping their first contract. For a prudent investor, protecting this new-found wealth should be at the forefront of one’s mind.
Wholesaling real estate has become the entry point into the field of real estate investing. Requiring little to no overhead, one can successfully wholesale a house and earn north of ten thousand dollars with startup cost as low as three hundred dollars. Real estate investing is no longer a niche for the person with a pocket full of cash or the large inheritance. Similar to athletes and music artists signing million dollars contracts, today’s real estate entrepreneurs are walking into money they only once dreamt of.
Real estate investing has been the vehicle for most people looking to grow their wealth and over the recent years, has only grown more and more. With the rise of wholesaling real estate and the barrier to entry being made as easy as enrolling in ‘YouTube University’ or signing up for a nominally priced coaching course, one can only easily tap into a lucrative niche and see a drastic change in income.
Part of what makes wholesalers so successful is their ability to find motivated sellers who need to sell their property at a steep discount. Upon finding these properties, a wholesaler would enter into a purchase and sale contract with the seller and then market their equitable interest in the contract to an end buyer who is willing to pay significantly more money for the property. The wholesaler would then assign their rights in the contract and earn the difference between their contract with the end buyer and the seller. Once systemized and implementing the right processes, a wholesale operation can grow from generating a couple thousand a month to hundreds of thousands a month, the well-oiled machine. The same for fix-n-flip, BRRRR, and buy-n-hold strategies. My dad’s friend Patrick currently generates a little over two hundred thousand dollars per month in his real estate business. Like many real estate investors, he takes title to many of his properties in his personal name. That method is not recommended.
When seeing the amount of money one can earn through real estate investing, one is forced to wonder, how are these entrepreneurs protecting their wealth? How is their business structured? Are they shielding themselves from creditors? How are they handling the Telephone Consumer Protection Act (TCPA) complaints? As with the rise of Uber, the growth in the number of real estate entrepreneurs comes not without its hand of disgruntled consumers.
As this money is being generated, many investors have this cash just sitting in their business bank account. Others are buying more properties or increasing their marketing budget to wholesale more properties. There are investors who title all their properties in their personal name or multiple properties under one entity. When you walk into a real estate investment association (REIA) network meeting or talk to a real estate entrepreneur, the conversation is typically about new marketing strategies, sales, and negotiation strategies, tracking KPIs, the number of deals per month, or the number of calls, texts, and direct mail sent per week to generate more deals. Usually, not part of the discussion are the steps taken to protect the assets of the business, the several rental properties, or the proper way to structure rehab and construction projects.
In a business such as real estate, it is important to consider asset protection when considering the risk exposure if not properly shielded from potential creditors. Understanding the best way to structure a fix-n-flip operation is pivotal to a business’s success. The proper entity structure can prevent claims of a tenant in one property from reaching the cashflow of another property. When wholesaling, it is not uncommon for a dissatisfied seller to come after you once they see you’re getting a check for thousands of dollars at the closing table. Determining the business asset protection structure while ensuring your goals are met is critical.
There are different ways to go about operating a successful real estate business. By using entities such as limited partnerships (LP) and limited liability companies (LLC) to take title vs titling properties under your personal name, an investor can comfortably wholesale, fix-n-flip, and buy-n-hold knowing they’re not at risk of losing everything due to a tenant or contractor lawsuit. For example, a property titled under a limited liability company shields you from personal liability stemming from a claim brought from a tenant who slips and fall on the steps of the front patio. Additionally, if this were a rental property, titling it under a different LLC from your wholesale or fix-n-flip operation, shields the revenues generated in those operations from the tenant’s claim. Essentially, the goal would be to separate properties and business operations from one another to ensure activities from one property or business operation aren’t influencing another.
Nelson Rockefeller once said, “the secret to success is to own nothing, but control everything, that is the soul of the family limited partnership”. Structuring your business properly can save potentially thousands of dollars in attorney fees and having to deal with creditors coming after your hard-earned money. The well-oiled machine only works if it is protected. Being proactive with asset protection is the wise decision. At The Presser Law Firm, we specialize in building the best infrastructure to house our clients’ assets. Tailored to each individual’s goals, we can guide you and make your assets resistant to creditor claims. The Presser Law Firm, P.A. can be the architect to your well-oiled machine. Give us a call today.