Let me start by defining “high yield”. I have been getting notes created (and paid off) then assigned to me at 12% with interest only payments for over 2 years now. The servicing and the total control is done by a company in Fresno, CA which I have complete confidence in. I went there to “open the hood and kick the tires” and came away very impressed with their operation. The one in charge is an extremely brilliant guy. I have another opportunity to earn 14% as a second on a MHP in GA (I’ve been there too) and another for 16.5% in Texas and I would go there in a heart beat. That is high enough yield for me. My cost of capital is averaging around 7.25%. Now, you mentioned at least one flaw. What are the others? I am mainly concerned at this point on the asset protection strategy. I can always invest the funds somewhere else to avoid some hard reality but the main point is to transfer them back into the LLC. I would own and control all my REI but the LLC will have (along with the commercial lenders) all the liens and accumulated equity for ultimate safety. Convention bound?
I do not find that much material or disscussion on this topic as a form of asset protection. It seems viable and I am currently devising a plan that will incorporate those techniques. I currently have an LLC that I can contribute a lot of HELOC cash that can be lent back to me and giving the LLC trust deeds thereby further encumbering my properties making them an undesirable target for litigation. This cash that is lent back to me personally needs a “business purpose” to make it a bonifide transaction. That cash will be invested in purchasing high yield trust deeds that can and will eventually be transfered back into the LLC. This program along with a healthy liability policy (used as a bigger, better target) will make it hard to get my real estate. I see several benefits to this plan. First, it avoids the typical DOS discussion, insurance issues, and transfer expenses for putting property into a (or many) LLC’s. Secondly, the LLC can foreclose and take the property in the event of a problem. Third, the LLC is designed as a “real estate related investments” organization and has no liability risk. It holds safe assets. There are some more but I don’t want to get to lengthly. I want to start a healthy thread of discussion and collect thoughts, ideas, analysis, questions and comments on this subject. One cannot think of everything by oneself.
Wayne,
My suggestion is to use a land trust to asset protect your investment properties and use your LLC entity as a beneficiary in the land trust you create. Bill B and Bill Gatten and other land trust experts have advised this approach as a very prudent asset protection strategy sicne it bascially gives you a two tier layer of asset protection the LLC protects you and your LLC member and the trust the title on the real proeprty.
I can not give legal advice these are my suggestions for you.
Using a land trust legally circuments the DOSC under section 8a under the Garn St Germain Act of 1982 but if you vest title to your LLC a lender can potentially call your loan due especially where interest rates are on the rise which is starting to happen so be careful there.
LLC are not my area but if using the trust I would use the LLC as a holding entity where you do not have all your asset for obvious reasons.
The only thing I quesiton in your LLC strategy is you do not seem to be at a arms length transaction…
I work with land trusts so that is just my take on things.
As to the financial operation of your LLC get with a good corporate planning attorney who can see if what you are doing is viable I do like the creative flow of ideas…
Good luck…
Posted by John Merchant on March 03, 2006 at 10:46:41:
Your plan has at least one flaw:
“High yield Deeds of Trust” aren’t just found loose on the street these days, and I’m going to doubt your ability (or anybody else) to use your $$$ effectively and consistently for such.
In these bank-crazy days, even long time and much experienced note buyers and brokers are not finding the notes/Deeds of Trust to buy.
There are lots more note wanters than good notes for sale…despite what any “guru” claims or teaches.
Now you might be able, with some education, to use your HELOC for HM loans as there is always a call for that use…and a good note taken on a good loan is always good collateral for a bank loan, whether it’s just taken or bought.
I’d caution you to work with some private lender you really trust and have checked out, if you do start private lending, to make sure you don’t get ripped up, down and sideways.
Kevin, yes it will have a negative effect on credit scores, make no doubt about it. How much at this point I really don’t know. I am not too worried about it since I have credit cards that are not even close and some that are very old that I never use. My score is in the high 700’s and as long as it stays above 720 I will be fine. Also, I have no more extractable equity left so I don’t need to apply anywhere. My next mortgage will come from a commerial lender with only the LLC as the borrower. It will have lots of assets at that point and a great credit history. I worked that out just yesterday for when I might need it. In short, the maxing out of the HELOC’s is not for everyone. I did it to create the additional debt. The lien is recorded for the full amount, but any SHARP lawyer will ask for the unpaid balance and freeze the account. Guess what? The difference is seizable equity! I do not want that to happen. However, if I need to withdrawl capital from my LLC I can dump it right back in a HELOC.
My LLC also owns other investments (TD’s) for at least a year and a pickup truck. In other words, it was not established yesterday for the sole purpose of self dealing. It has a track record of real estate related investments as described in its’ articles of organization. I just wanted it utilize it further in another capacity.
Thanks for your logical approach. My plan does avoid all DOS and insurance issues. The arms lenght transaction is my hurdle so as I mentioned, a business purpose has to be clearly determined. First off, my LLC is a separate entity and run as such, so a business transaction is what it can do. All of the transactions will be done through an attorney and recorded as such with the following investments above board as well. I want to be the “hot” company that owns and controls everything and my LLC will have a lien on the equity and first dibbs on foreclosure. Your further comments are welcome. I want all to have a complete understanding of my plan and fire away. BTW, this idea is not new and not created by me. I just studied and adapted it to my situation.
Basically, I am removing the equity in a property and transfering it (the equity, not title) into an LLC in the form of a mortgage. Should I ever be suied personally, I will own and control everything but the value to be taken will be elsewhere as liens are recorded and paid before judgements. My insurance will then be the likely target.