LLCs, Insurance, Partnerships, & Trusts

Ashley:
If you’re a new investor wondering when to set up an LLC or how you should protect your assets before you even close on your first deal or if you are a couple deals in this episode is for you.

Tony:
So this is what you can expect to learn today as a rookie investor. First, what asset protection actually means, why it’s super important, even if you only have one property, some simple beginner friendly steps to protect yourself legally and what to do now and what can wait until later. Today’s guest is Bonnie Galam, real estate attorney, investor and educator who helps investors protect their portfolios before problems ever even arise. So Bonnie, welcome to the Real Estate Rookie podcast.

Ashley:
Thanks, I’m excited to be here. So before we get into it, if you’re just getting started and want to avoid the common legal headaches and new investors face, make sure you hit subscribe so you don’t miss any future episodes. So Bonnie, before we get into anything else, what is asset protection?

Bonnie:
I actually think asset protection is a little bit of a misnomer because if you think about asset protection, the goal is to protect assets, but there’s a lot of things that we as real estate investors want to protect our time, but also our income. We’re not doing this as a hobby, and so if the work and the income that is being spun off of our assets isn’t also being protected, then we’re just spinning our wheels. And so when I think about asset protection, I think of two different forms. I think of proactive asset protection and reactive or offense and defense. Defense is usually what you hear most attorneys or people in forums talking about. It’s things like LLCs and insurance. Those types of asset protection are there for you when something goes wrong, but they’re kind of just floating around in the background unless something goes wrong. Whereas on the other hand, there’s a lot of proactive steps that real estate investors can take to protect their bottom line, to protect their relationships with their partners, their tenants, and all the people that they’re interacting with as real estate investors along the way. And I really love that piece of it because in my experience as an investor, that’s really where I’ve seen the most bang for my buck on the legal stuff.

Ashley:
For a rookie investor that doesn’t even have their first deal, why is it important that they’re starting to think about this now?

Bonnie:
So the important thing from the perspective of a lawyer is that it’s a lot easier to start from the ground up than it is to clean up messes down the line. Also, in some states there may be transfer taxes if we move properties into LLC or we change the title down the line. And so it’s important to be thinking about these steps from the get-go, even if it doesn’t make sense, as long as you have that informed decision in the back of your head like, Hey, an LLC might not be ready for me now, but at least I know that when I do this is what the cost and the expense is going to look like. And the big thing is that you also just don’t want to be kicking. That can too far down the road. A lot of people will come to me when they’re like, oh crap, I actually feel like I’ve got something to lose. Whereas maybe that sense of urgency isn’t always there when you’re just deal hunting for the first time, but there’s actually the risks are really the same. Yes, maybe the frequency of your exposure to that risk changes over time that the more deals that you’re doing or the more people who you’re interacting with, but those risks from doing due diligence, going under contract forming partnerships, that doesn’t change whether it’s your first deal or your 10th deal.

Tony:
So if you think about the journey, Bonnie of a rookie investor who’s on the hunt for their first deal, at what point in that journey should they start planning for asset protection? Is it once they’re under contract on that deal? Is it after they’ve closed? Is it when they decided on a market? At what point should they actually start this process of thinking about and planning for asset protection?

Bonnie:
Well, if you’re talking about asset protection from the perspective of what’s the holding structure be? Should I have an LLC? Should I be using something else to hold the title? It’s always best to do that, at least in the contract period if not before. But ideally you want to be thinking about this decision beforehand because oftentimes it affects the type of financing you’re able to have and it can also affect title and things like that that you don’t want to be fiddling with, especially as it gets really close to the closing date. But the other pieces of asset protection, right? Am I doing due diligence, right? Am I forming partnerships? What is the lease going to look like? What the tenant the day after I close? All of those pieces are also asset protection too. I don’t think that there’s a period where it’s too soon to be thinking about it. I mean maybe if this is the first time you’ve ever thought of real estate, but if you’re actively on the hunt for it, then I think you’re holding strategy the same way that you’re thinking about your exit strategy needs to be kind of formulated from the outset.

Tony:
I think one of the challenges that a rookie investor faces is that they’re bombarded on social media with all of these super experienced investors who are on the whiteboard talking about their complicated LC structures and they all think that they need to do the same thing. So how can a rookie approach both from the offense side and the defense side, how can a rookie approach asset protection in a way that’s actually not over complicated and suits the size of their portfolio?

Bonnie:
Yeah, that’s a really huge issue that I see I think a lot of, and it’s not just people in forums, it’s other attorneys. They’re really scaring people into thinking unless you’ve got multiple layers of LLCs and Wyoming or Nevada and all these other states, then you’re not doing it right And that’s absolutely not the case because if you think about it from the most fundamental standpoint that LLC is on the defensive side and what else is on the defensive side insurance. And so from my point of view, you don’t need an LLCI would hate for someone to not jump into real estate investing and not be able to create the generational wealth build the ROI get the tax benefits, all that type of stuff because they feel like they need to have some sort of convoluted entity structure. Those can be nice, but this also sometimes planning for people who have nine figures of wealth billionaires and when you’re buying your first level of property, you have to do what makes sense for right now we can always adjust and improve and do those types of things or not.

Bonnie:
LC is an insurance more or lesser kind of on that same defensive side. And so lawyers, we can only sell LLCs and so most lawyers are going to say, you need an LLC, we have a hammer, everything looks like a nail. Whereas insurance can also do the same thing. And so if someone’s not ready for an LLC, usually for a financing reason, either they don’t have 25% down for a commercial loan or they just want to do a house hack and get the benefits of an FHA type of purchase, have it be a primary, get those tax benefits and that’s totally fine. I would never tell someone not to do that. Just say, alright, you got to go call your insurance broker and make sure you’re properly insured on that side as well.

Ashley:
Bunny, you literally hit the question that every rookie asks that we see all the time in the BiggerPockets forums in the real estate rookie Facebook group on our YouTube comments as do I need an LLC? So just to kind of clarify what you said there was you basically have two options where you can get the property in your personal name and get insurance to cover you or you can go ahead and put the property into an LLC. Could you maybe talk a little bit more about that insurance piece as to what insurance should we get on the property? So it is comparable to an LLC on the defensive side,

Bonnie:
When we think about holding a property in our personal name, it’s basically commingled that risk is commingled with everything in our life. And so when I think about insurance, yes, we want to think about the property casual insurance for that particular property as well, but I also tell my clients, what’s your car insurance policy? The most common personal injury lawsuits in America are not people tripping and falling all on rental properties, it’s people getting hurt in car accidents. And so if you want to protect your rental property, well then you better make sure that you don’t have the state minimum car insurance policy. And so we got to make sure that all of those things are all being covered.

Tony:
That is a super interesting take. I’ve never even thought about that before

Ashley:
Me either.

Tony:
Now I’m terrified.

Ashley:
Everybody always thinks about losing their personal assets because of the rental, not losing the rental because of something else that happens

Bonnie:
And it’s totally the opposite that I’ve seen in my experience. The most common things like 50% of marriages end in divorce, how many investors have a prenup if they started investing? All of these things are different ways that we can implement asset protection in very approachable ways that are not affecting our financing per se. They don’t care about the car insurances, but that is really adding a strong layer of asset protection to protect that rental property.

Ashley:
So we have to take a quick break, but while we are gone, take a minute to download the new BiggerPockets app in the Apple store. You can check out forum posts, chat with other investors and quickly use the tools and resources that are available to BiggerPockets. We’ll be right back with more from Bonnie on what actionable steps you can take today to stay protected. We are back with Bonnie talking about asset protection. We’ve talked a little bit about LLCs having it in your personal name. What are the two to three actionable things that rookie investors should be doing right now?

Bonnie:
The number one thing is keep calm and put it in writing. When in doubt, put it in writing. If you have a call with a tenant, if you are working on a deal or a partnership with somebody, put it in writing. If you’re dealing with a contractor, have a writing not just like an invoice on carbon copy paper. All of those things are evidence and so if any part of that deal ever goes sideways, you have something to show in court. All too often, this is something I experienced as an investor early on in my career was ending up in legal hot water and it being a he said, she said, and this is such an easy thing to do, whether it’s an email, paper trail, I don’t like texts just because they’re often hard to move into evidence, but besides that fact, emails send a letter if things are getting really nasty, it’s not that hard to document your communications or have contracts with the people who you’re interacting with.

Bonnie:
Another thing that I would say is invest in your foundational documents. Invest in a good lease, invest in if you’re doing some sort of creative financing or if you’re doing wholesale, whatever your entry level first property is going to be, whatever your exit strategy is going to be, make sure those documents are rock solid. I see a lot of newbie investors coming to me saying, Hey, my coach gave me these contracts. How do they look? And I’m like, they’re for North Carolina, this is Jersey that’s not going to float here for a myriad of reasons. And so you have to be really careful what the information that is being provided to you and making sure that it’s state specific because so much of real estate is state specific and so that’s great that somebody who may be successful with a particular exit strategy in their state, you just always want to double check that with a local attorney to make sure that everything is up to snuff where you’re looking to actually do the investing.

Bonnie:
And the other thing that I see with early investors is partnerships, whether it’s for money reasons or you’re partnering with someone who just has more experience than you. I’ve often seen these partnerships go sideways either for experience reasons or just for ethical reasons. Someone just wasn’t living up to their end of the deal. And so you just really want to make sure whenever you’re going into business with anyone and real estate investing is a business that you are properly memorializing what everyone’s responsibilities are supposed to be, who’s responsible for what and what happens if things go sideways.

Ashley:
Funny when I bought my first rental property, it was a duplex and the guy that did the home inspection was asking me, he is about the property. He’s like, wow, that’s so great. He’s like, I used to be a real estate investor too. I had 10 properties with my partner and he said, we don’t have any anymore because my partner got divorced and he didn’t have the money to buy his wife out and we had to sell all our properties. I didn’t have the money either to buy him out. And it just reminded me of those two things that you mentioned is divorce and partnerships as to those can be something to wipe out your properties.

Bonnie:
It can totally wipe things out and it’s something really easy just to set up in the get-go when you’re creating or forming these things.

Tony:
So if you are investing with the partner body, I guess what are maybe some specific things you should be including to make sure that you are protecting yourself appropriately?

Bonnie:
That’s such a great question. My first thing is does it have to be a partnership? I am always pushing back on my clients, is there another way we can structure this? Because it’s like a legal marriage, right? You’re filing tax returns with this person, you are sharing money with this person. If they don’t do it, then you might have to pony up in a capital call. And so that’s step number one is I’m always thinking can we make this a loan if we can just make this a promise where note because that’s often probably 50, 60% of partnerships is someone just giving money and so instead of giving equity, can we just make this debt?

Tony:
So just really quick on that point, I think it’s an interesting one. What are the different legal or just ramifications of partnering with someone on an equity basis versus partnering with someone on a strictly debt basis?

Bonnie:
A debt basis is a lot simpler. It’s a lot cleaner I think from a legal standpoint because you just have a contract with this person that you owe them money basically. Maybe there’s security where we’re putting a mortgage or some sort of deed and trust depending on what state you’re in to be able to have security on that note, but it’s just a lot simpler. They don’t have decision making power. They’re not involved in from a financial standpoint, they’re not having too many cooks in the kitchen when it comes to budgeting, when it comes to what contractors are we picking, who’s the realtor going to be if we go to flip this or find a tenant for? And so there’s so many decisions that have to be made where if someone just has money and they have nothing else to offer you can we just make this debt?

Bonnie:
Whereas on the equity side, it really is a legal marriage, right? We’re going to be sharing bank accounts, there could be credit involved if something goes sideways, who’s going to be the one to pony up to be able to close that issue? And so it’s really you have to do due diligence on your partner, what is everybody’s track records and be able to ask those uncomfortable questions that almost like what a mortgage company would be asking you, what is your financial history? Have you ever filed bankruptcy? If you’re not comfortable asking your partner, your business partner, those types of questions, should you really be able to go into business with them? And their answers to that don’t have to be deal breakers, but you at least need to have the honest conversations around the tough stuff that can come up.

Ashley:
Now Bonnie, I’ve also seen on Instagram that investors are talking about you need a trust, you need a family trust. What is a trust and when do you actually need one as a real estate investor?

Bonnie:
Yeah, this is another one where there’s a lot of really terrible misinformation going around there. Trusts are a box that you put assets in and you can put rules around the use of that box. There are probably hundreds of different types of trust that you can have. So when someone says you need a trust, my first question is what kind are you talking about? The second thing is what is your intention? There’s some trusts that are designed more for asset protection. There’s some that are more for estate planning purposes. I love the ones that are for estate planning purposes. I love creating trust fund babies. I love creating really simplified ways for people to create generational wealth through trust planning and I think that that is really important if you’ve got properties in multiple states because you actually have to do probate in every single state where you own real estate.

Bonnie:
And so that’s a huge expense that we shouldn’t have to liquidate a property to pay for. Let’s just consolidate everything into one trust and we don’t have to deal with that. There’s actually also a lot of trust that I’ve seen floated around on social media and other places that are just straight up illegal. The IRS has come down saying we do not believe these trusts are valid forms. They’re trying to be tax loopholes in ways that are not enforceable and so you don’t want to be banking on things to do things that are on the edge because the IRS doesn’t like that. So certain types of trust are fantastic. I would use them all the time, but certain other ones I’m just like, oh god, where did you care about that from

Ashley:
Out of curiosity, I have a question as to sub two deals where people put the property into a trust. Is that something that you should be doing or No,

Bonnie:
This is the tough one. I actually dmd a big sub two person, you probably know who I’m talking about, about this issue because here’s the thing, and pretty much every other attorney I personally know will not touch sub two. That doesn’t mean that there’s not to be money and made in it, but it does mean that we are knowingly putting the investor buyer and that seller in breach of someone’s mortgage note, right? That mortgage that person took out says they’re not to transfer the property and if they do, there’s going to be a due on sale clause. Now we can use trusts to make that transfer hidden from the mortgage company, but guess who’s going to get the finger pointed at if someone finds out it’s going to be the lawyer and that is just not worth the malpractice risk to me personally. There are obviously attorneys out there who are fine doing that and that just comes down to their risk tolerance.

Bonnie:
I don’t judge them for that. It’s that’s the line that I’ve put in the sand. I think it is risky and ultimately the person who is going to be hurt the most is going to be the previous owner. You’ll call it the previous owner, the seller of the property should something go sideways. I have some clients who don’t use me who do do this using templates from, I don’t know where they’ve asked me about it and I said, look, if it’s something where it’s really short term, you’re holding it for three to six months in sub two, the risk is probably pretty low for everyone. But if this is something where you’re going to do sub two for the rest of someone’s 30 year mortgage, then I would be really, really antsy about that personally. But one thing about me, I never want to impose my risk tolerance onto my clients. That is their prerogative. There’s a million ways to make money, I just don’t need to be a part of it.

Ashley:
Yeah, thank you so much for sharing that and your honesty on the subject. I was just very curious because if you go into the BiggerPockets forums, there’s so much debate over sub two and the trust that you’re putting the property in and things like that, so thank you for sharing. When should a rookie investor think about getting a trust? Is that should you have X amount of properties, should you have X amount of net worth? When’s the right time to actually consider a trust?

Bonnie:
Sure. So if we’re thinking about it from just purely an estate planning perspective, which is probably the simplest when you’re thinking about revocable living trust, trust for your kids or grandkids, things like that, then there’s really no time to wait. I mean, I have people who are not investors at all who have trust because they want to avoid probate or they’ve got, they’re snowbirds and they’ve got a house in the north and they’ve got a house in Florida or something like that. And so there’s a lot of different reasons why people have trust that have nothing at all to do with real estate. Some people do it because they’re trying to protect assets from nursing home and be able to be eligible for Medicaid and things like that. And so I would not wait for any of that stuff, number of assets, number of states that you own properties in or net worth or anything like that because everyone should have an estate plan if you’re over the age of 18 because that’s when you become a legal person to be able to make those types of decisions for yourself as opposed to your parents.

Bonnie:
And so if you don’t have an estate plan, go get one. That’s an easy asset protection fix that is available no matter what stage of investing you’re in.

Tony:
You kind of defined trust earlier, Bonnie, what it is, but I guess specifically from a, and you kind of touched on it right now, but specifically as a real estate investor, what are some of the maybe benefits, advantages and disadvantages of a trust?

Bonnie:
Sure, so the big thing, I’ll say there’s two real big buckets of types of trust. The first is revocable, meaning you can change the terms of the trust and that’s probably the most common one that is used just for people generally. It’s used very commonly for estate planning purposes and there’s really no downside to it. It doesn’t trigger due on sale clause. It’s just a bucket that we put everything into simplifier estate and avoid probate, which is often a big benefit in many states, not all states, and it’s also private. I don’t know if any investors have used probate list or work with wholesalers who screen probate lists, but that’s what they do. They’re screening people’s wills to see what assets are there now available to target get the other type of trust is irrevocable. And the downside to those types of trust is that they’re just, they’re irrevocable.

Bonnie:
And so in order to get usually some form of tax benefit or asset protection benefit in return, you have to give up control of that asset and that’s a big piece that I think of a lot of investors are missing, especially younger ones as we’re growing or if you’re in your thirties or forties, you probably don’t want to be giving up control of your assets. When people start getting older and they’re thinking about, well, I’m probably not going to be around in 20, 30 years or I don’t necessarily need this asset for my income right now or things like that, then perhaps giving up control is a conversation worth having. But generally speaking, the irrevocable trusts are not the baseline of what people should be thinking about, but it is a lot of what people hear about because they’re like asset protection trust or get these tax benefits through these trusts, which is true, but you’re giving up something in order to make that happen and that is control what you’re giving up. And for a lot of people when they hear that part of it, it’s like, okay, let’s pump the brakes a little bit because that may not make sense for the way we’re running our businesses and the way that we expect to receive income off of these assets.

Ashley:
Who are you giving up control to? Is it the executor of the trust?

Bonnie:
It could be a trustee, it could be a third party like trust protector or manager, things like that, and you can’t control them. If there’s any inkling of you actually being the puppet master, then any court would be like this trust doesn’t count. You don’t get the benefits of it.

Ashley:
Yeah, that’s so interesting because I have a friend who has an irrevocable trust and he’s involved in this lawsuit right now where it’s like makes me scared of ever going into an irrevocable trust ever.

Bonnie:
Well, because they’re really hard to change. It’s not a thing that you tread into lightly, especially on the younger, I’ll say younger people.

Tony:
The main benefit then of the trust is just how the assets within that trust are handled after you pass away or are there actual benefits today of like, Hey, I can reap better tax advantages of using this trust than if it were in some other type of asset protection category?

Bonnie:
So revocable trust, the benefit really comes when someone passes away irrevocable trust. They can have definite lifetime benefits. There’s things that you can do to shift wealth and income to other people, and sometimes they come up even in the instances of divorces where someone needs to create a trust for their spouse during their lifetime or their children from a former marriage during their lifetime. So there’s definite uses of trust during people’s lifetime. I don’t want to say that that’s not the case, but there comes a cost to that, right? They’re usually irrevocable in order to be able to get those assets because what you’re doing is permanently retitling these assets to be not yours anymore. And so once that happens, then yes, you might get a tax benefit, but there’s kind of no takebacks either.

Tony:
Let me ask one final question just because there’s a lot of different options that rookies have when they think about asset protection. You have the trusts, you have LLCs, you have your insurance, your landlord insurance, you have umbrella policies, so is there a decision tree that one should follow so they know when to add one of these elements to their asset protection game plan? Should everyone just, obviously insurance, everyone should just always start with, and then is the next layer an umbrella policy or is the next layer the LLC or is the next layer of the trust? What is the kind of incremental steps folks should be taking as they’re adding on to this asset protection plan?

Bonnie:
I wish I could say that there was a definite ladder of asset protection that people follow. I do think, like you said, that insurance is probably the baseline and then from there it is usually some sort of conversation about umbrella policies and or LLCs. The reason to say or is that LLCs, there’s still usually some sort of financing component. So we have to say, does this make sense? I mean, literally when I do my asset protection audience with clients, I will say, what is your mortgage payment? And we’ll compare it. Say you had to refi this property into a commercial loan product. What does that do to your cashflow? Is that cashflow better used somewhere else? And so these decisions can’t be made in just the pure abstract. Another thing I just want to bring up as it regards to trusts and LLCs and things like that is that there’s this concept of land trusts, and I didn’t really talk about that.

Bonnie:
Land trusts are statutory in most instances, meaning Florida for example, people don’t use single member LLCs in Florida, they’re kind of useless. And so people use land trusts down there. Illinois has a land trust. They may have been even the first state to have one, but if you’re not in one of those states where there’s a statute law in the book saying, we have a land trust and this is the asset protection it provides you, there’s no real guarantee it’s going to work out outside of that state. And a lot of states, there’s increasing case law out there where states don’t like people going outside of their state to get some sort of asset protection conundrum in place and then coming back and doing business in this state in a entity that they don’t recognize and trying to be like, well, you can’t get me now. And states are just, they’re catching up on this, right? The courts are saying, this doesn’t feel right that you can go and do all this stuff that we wouldn’t permit as legal in our state and then do business in our state and then try to get away with not being subject to lawsuits.

Bonnie:
So to think about that latter, I also say, just say I’m like, what feels good? I have some clients who only feel good if they’ve got one property per LLC, that is what makes them sleep good at night. I have other people who have $1 million give or take, because right properties appreciate per LLC and that makes them feel good at night. And so I never want to subject that because also I think a piece, especially if you’re not in a state that has serious LLCs, if you’re truly doing one property per LLC, that’s a lot of QuickBooks. That’s a lot of bank accounts. It’s a lot of things to manage. It’s really fun and dandy when you’ve got three LLCs, but when you’ve got a hundred LLCs, that’s not fun. That’s a hundred thousand in tax returns just for the CPA filings. It’s just at some point you have to figure out a structure that consolidates that in some way. And so it’s an evolving discussion, I don’t think on day one. You need to figure out what steps need to look like in your five or year 10, but you do need to decide what makes the most sense right now for your exit strategy and your financing and your risk tolerance.

Tony:
Bonnie, so much good information here and I feel like every time I talk to an attorney I learn something new about asset protection, so thank you for even educating me on here. We’ve definitely got some more we want to get to with you, but we’re going to take a quick break first and then we’ll be back with Bonnie after this break. Alright guys, welcome back from our break. Bonnie, we’ve gone over a lot, but I think one lingering question, and you kind of touched on this before our last break, but what exactly does the team look like to help you fully set up your asset protection? I know for me personally, I’ve seen that sometimes your lender, your CPA and your attorney can all be at odds about what they think is the best path forward for you. So who all should be on the team and how do you coordinate those folks to make sure they’re rowing in the same direction?

Bonnie:
Lawyer, CPA insurance broker, don’t forget about the insurance broker should be on the team lender to an extent, but I feel like there’s enough different financing options that whatever you decide works for you from an asset protection standpoint, you can just go find a different lender who will match that. Sometimes lenders are constrained by their own boxes of what products they’re offering, and that doesn’t necessarily have to match up with whatever legal strategy that you have. And when it comes to lawyers, it’s not uncommon, and I don’t take any offense to it myself for people to have multiple lawyers. It is okay to have a business lawyer, to have someone who helps with the transactional stuff, maybe a different lawyer who does zoning or evictions or things like that. We are specialists and you want to hunt us down and it is okay. We don’t take offense when you say, I did this with this lawyer, now can you help me with this part of the project or something like that. Its kind of the same thing with lenders, right? If one lender’s not the right fit, then you move on to the next one.

Ashley:
Another thing with this is I see online websites, legal zoom, things like that. Should you be using any of these online resources for your contracts or release agreements, different things like that, or should you be hiring an attorney?

Bonnie:
I feel like particularly when it comes to leases, you want to be working with a local attorney. The laws around that stuff are really evolving. Quite a lot of, especially post covid, there’s been a ton of tenant protections that have been put in place, especially here in the northeast where I’m at that you just want to make sure that whatever you’re dealing with is up to date. And every lawyer, we kind of say we have a love hate relationship with LegalZoom. From a user standpoint, the output is only as good as the input. And so if you don’t understand the decision making process that goes into what’s being generated, then it may not be great. I’ve used it for a trademark myself, but I don’t know that I would use it to do my estate plan. I definitely wouldn’t do that. The reason that sometimes lawyers joke that we actually love these things is that people screw them up all the time and then we get paid to clean up the mess.

Bonnie:
And so that’s the honest truth from being on the lawyer side of things. I mean, I sell some legal templates on my end, but I’m very, very curated in what they are offered because I do think some templates can do more harm than good and it’s really these state specific ones like leases and agreements of purchases of sale and things like that where people really end up in hot water. Another thing that I would not DIY at all is partnership agreements. They’re so customized. There’s a lot of important tax in legal decision making that goes into that process that you really want the guidance. I mean that’s really what it comes down to. It’s like when do you want paperwork and when do you want guidance and process through those decision making.

Tony:
Bonnie, what about artificial intelligence chat, GPT Claudes on it. There’s so many tools out there now. What about leveraging some of those to build out some of these legal documents and templates that you’ll need?

Bonnie:
I haven’t gotten great output from them. Look, I’m playing with it as much as anybody. If I can make my life easier as a lawyer, I’m all for it. That would be great. But I have created tons and tons of different types of problems for chat GPT and GR and all these things. I mean, I joke that chat GPT is my boyfriend and my therapist and everything. I talk to it all the time, but it’s not there yet. I will say it’s not bad on legal research if you can make sense of what it is. I’ve done deep research on chat GT a few times to help with a really nuanced situation where I’m like, give me the case loan, give me this, and that way I can go and check and put all the pieces together. And it took 20 minutes to populate this.

Bonnie:
It wasn’t bad, but I don’t know how many non-lawyers would know what to make of that. And it’s one of those things where it’s like, don’t be pennywise and pound cheap when it comes to some of the legal stuff. I totally get that all day. Almost every day we as investors are making important legal decisions and we’re not calling our attorney to check on that, and that’s totally fine. But when it comes to the big stuff where if this goes wrong, it’s not going to cost me a month of rent, it’s going to cost me a property or a lawsuit or something like that, then it’s worth having at least consulting with an attorney to see what they think.

Tony:
And that’s why I think your point, Bonnie, earlier of having your foundational document done correctly, and like you said, whatever that is. And for me, one of the ones that I spent a good amount of money on was our partnership agreement because we’ve done a lot of partnerships in real estate and we’ve spent a lot of money with our attorney to kind of draft and make improvements, but it was a worthwhile investment to us for all the reasons you mentioned earlier. And now we’ve got a really rock solid document that we can just kind of plug and play as we step into new partnership. So I think that’s really, really phenomenal advice. I think the million dollar question though, Bonnie, for a lot of rookies that are listening is how much does it actually cost to set up a lot of these asset protection measures and what should a rookie expect stepping into this,

Bonnie:
Putting aside all the insurance things, if we’re talking about this from an LLC or trust, the lawyer involved perspective, you could form an LLC on your own, probably a single member LLC for a hundred bucks or so, give or take in most states on your own, the trust work, things like that. Yeah, you’re going into the thousands, but I strongly believe you should not need asset protection from your asset protection and that it comes down to math, right? We shouldn’t be spending more than the underlying problem itself. And I’ve seen a lot of really early stage investors get swindled by some other asset protection attorneys who sell them the moon of asset protection. I’m like, you’ve got $100,000 property. Why are you spending $25,000 on asset protection? The math isn’t mapping. And a lot of times also these out of state asset protection firms, whether they’re law firms, some of them are more like financial advisory firms, like with lawyers on staff, there’s a lot of different variations that they come into be, but they don’t understand the state law specifics, right?

Bonnie:
They’re like, oh, yeah, we’ll move things all around. I’m like, well, they didn’t tell you about the transfer tax and they didn’t tell you that Every time you have to do a refinance, you have to move it in and out of this, and you have to call your lawyer and pay them an hourly fee in order to them act as trustee in order for you to do a closing. There’s all these other little pieces to it that when it comes down to the operational side of being a real estate investor, I think kind of get brushed over in this pursuit of some sort of perfect form of bulletproof asset protection, which in my opinion just doesn’t really exist.

Ashley:
I think that’s such a great point as to one of the really important pieces is getting an attorney that knows your local and state laws to really help you through any of this process. And I just bought a property in another county that I’ve never purchased from before, and I close on the property and I get a notice from the county saying that I’m not getting the deed because it was $400 short for the clerk fee is to actually file the deed. And my attorney had paid those out of closing, and it was just that little tiny thing because they didn’t know what that county does for closing. And it was different from the county that we are in, just kind of shows you just one little thing can happen that, and now my refinance is delayed because I don’t have the deed yet. And so I can’t even imagine on a higher level an attorney not knowing the state or local laws that could have an impact on you.

Bonnie:
I hear those types of stories not infrequently, where it’s just like, oh, we lost a few thousand dollars here, a few hundred dollars here. I’m like, none of this stuff needed to happen that way.

Ashley:
Well, Bonnie, thank you so much for joining us today. We really appreciated you coming on and sharing your knowledge. Can you tell everyone where they can reach out to you and get some more information?

Bonnie:
Sure. So I spent too much time on Instagram at Bonnie Gallim Esq, and I also can be found at my website, on my website, my law firm, gallim firm.com or my online legal education and template. Shop the salad foundation shop.com.

Ashley:
Well, Bonnie, thank you so much for joining us today, and thank you to everyone listening. If you like this podcast, make sure you’re subscribed to the Real Estate Rookie Channel. We’ll be back with another episode soon. And in the meantime, if you want to learn more about LLCs, head on over to biggerpockets.com/blog to read our new article to help you walk through that decision if you need an LLC or not. Also put the link in the description for you guys. Thanks so much for joining and we’ll see you next time.