Today, we’re focusing on advanced investors.  After growing a sizable portfolio over a number of years, some investors will want to branch out into different types of investments.  We’re going to talk about how to protect your assets—and yourself—in more complicated deals.

Helping explain these concepts is our panel of experts:

• Pam Maass Garrett of Law Mother
• Bill McIntosh of Complete Protection Insurance
• Byron Elliott of 3 Pillars Law

Our experts have great information, but it’s important to talk to your own team or reach out to our panelists directly for advice specific to your life and situation.

What Does an Advanced Investor Look Like?

Once investors reach this stage, they have a high net worth and want to passively invest or structure their own deals.  Their kids tend to be older, and they’re more established in life.

Investors at this point will need to know how to take on capital to fund these deals and become deal sponsors.

What Are Syndications and Limited Partner Investing?

This is one of Byron’s favorite subjects.  He talked previously about using your primary residence as a way to infuse capital into your portfolio, but another way to get in the game without expending a lot of money is through syndication.  Syndication is a legal and ethical way to raise money from investors to fund a real estate project.

A common scenario would be an investor who wants to buy a 200 unit apartment complex.  They would work with a commercial lender who typically requires 30% down, plus additional fees and Capex for renovations.

The General Partner (GP) puts the deal together and raises money from the Limited Partners (LPs).  GPs oversee the execution of the project and are on the hook for the loan. The LPs simply write a check, and at the end of the project, they get their money back plus part of the profit.  A benefit to being an LP is that you aren’t liable for anything beyond the amount they contribute to the fund.  If someone were to get injured on the property, none of your assets are at risk.

I started investing in syndications last year, and see that they’re becoming a lot more popular.  Often, people write the check from their self-directed IRA, 401K, or after tax dollars.  As long as you don’t need cash flow from your investment, this is a great way to grow wealth exponentially.  A good operator or sponsor can deliver returns better than the stock market.

Should I Invest in a Syndication through an LLC?

Byron says that you can create an LLC to invest through, but the juice probably isn’t worth the squeeze.  Because of the structure of syndications, LPs are already shielded from liability. 

When you put your $50K into a special purpose entity, you aren’t purchasing the piece of property itself.  It’s an ownership interest in an entity that isn’t considered real estate.  This is also why 1031 considerations don’t apply here and why you can’t do a 1031 exchange with the profit.

What Are Some Other Ways to Bring in Partners for Deals?

If you don’t want to put together a syndication, there are other options for bringing in partners.  One of my goals is to bring in a few partners to buy an office building for Envision Advisors. 

Byron says that it’s common to get to a point where investors want to work with other investors who will bring capital to the table.  Investors should create an LLC and clearly spell out the terms and conditions of the partnership.  The agreements need to show the level of participation by each person.

It’s important to understand that in a joint venture, each person is actively participating.  This is not a vehicle for passive investing, and there are legal implications for mischaracterizing a joint venture.  If someone gives you money and they are entirely reliant on your hustle for the return, that is considered passive investing.

When Should I Talk to a Lawyer about How to Structure My Agreements?

Byron’s firm wants to be on the frontend of any discussions as soon as possible.  A lot of people think they’ll spend a lot of money talking to an attorney so they avoid it, but a quick conversation can ensure there are no SEC violations and that deals are structured properly.

There are a lot of complexities when it comes to putting together deals that a lawyer can help navigate.  You want to make sure you aren’t spoiling opportunities to raise capital because you didn’t follow the correct steps.

When Shouldn’t I Transfer My Assets?

If there’s a claim against you, say for a car accident, and you try to transfer your real estate assets to someone else to protect them, you’re opening yourself up to a fraudulent transfer.  We talked with Pam about fraudulent transfers before, and it’s a serious violation. 

This concept also applies to insurance.  If you’re in the midst of a claim, you want to wait until it’s complete before moving to a new company.  Otherwise, the previous insurance company won’t have incentive to keep their customer happy. 

Bottom line: Once something happens, own it and don’t make any rash decisions.  The outcome depends on how well or poorly you prepared your assets in advance.

How Can I Benefit from Cost Segregation?

This is another topic that Byron loves.  When he retired from the military in 2019, he stumbled across the Real Estate Professional designation you can get from the IRS.  If you meet the requirements to get the designation, you can offset passive losses that aren’t allowed otherwise.

For Byron, he had six months of active duty income while on terminal leave and also had money coming in from practicing at his law firm less than 50% of the time.  He was also heavily involved in real estate activities.  These activities allowed him to claim the designation and implement a cost segregation strategy that effectively meant he paid no income taxes for the year.

By doing at least 750 hours a year of these activities, investors can apply losses against ordinary income.  A cost segregation study will break down your property into components that depreciate at a faster rate than the standard depreciation calculation.  It allows investors to take a lot of the depreciation expense upfront instead of the usual 27.5 years. 

This is a powerful strategy that is very complex.  While it can look like you’re taking massive losses on paper, that amount isn’t what’s leaving your checking account.  I recommend researching this for yourself and seeing how it fits into your overall strategy. 

How Can I Minimize Estate Taxes?

In Colorado, there’s only the federal estate tax.  If you own properties in other parts of the country, state and federal estate taxes may apply.  You want to start planning now because the federal estate tax is 40%.  There’s a certain amount you can pass on tax free: currently it’s $11MM, but it’s eventually going to sunset down to $5MM.  Essentially, the political party in power will determine that amount, so Pam advises her clients to use $6MM as their guiding light.

Putting assets into a living trust with all of the asset protections in place will ensure that your assets aren’t taxed until time of death to time of sale.  For example, if I own a fourplex I bought for $1MM and it’s worth $3MM when I die, I have $2MM in capital gains.  With proper estate planning, my children would pay zero taxes as long as they sell the property and also wouldn’t have to pay capital gains. 

Connect with Our Experts

We hope you enjoyed this series and now have a good understanding of the high level concepts.  Let us know what specific questions you have on LinkedIn and Instagram so we can come back for a deeper dive on the topics you want to learn about.

In the meantime, reach out to our panel of experts:

• Pam: [email protected] 
• Bill: [email protected]   
• Byron: [email protected] 

Pam is offering a free copy of her book Legally After Ever that shows parents how to create an estate plan that will protect their children.  Use the promo code RICO to download your copy today: https://lawmother.com/freebook/.

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