Renting Out a Property Without An LLC

Brent: Thanks for having me, Toby. Appreciate it.

Toby: We’re going to get into the topic of the day, which should be fun, which is renting out a property without an LLC. Let’s go over the pros and cons. The reason I wanted to bring you in—we will show a Reddit thread that was the basis of this—I wanted to bring you in as an investor. Not as an attorney, an accountant, or anything like that, but as somebody who made their way in the world of investing. Let me ask you a few questions just to set this up.

Brent: Sure.

Toby: How did you get involved in real estate investing? 

Brent: Everybody has their story about how it was introduced to them in their life. For me, a couple of buddies of mine that I went to school with were doing pretty well with it. I was playing in a band, and I was really enjoying writing music and playing music, but then I was encouraged to read the book that we all have all heard of called Rich Dad, Poor Dad. That was the impetus for me to jump into that business.

I can remember it’s 20 years to this year. 2004 was my first ever real estate deal. Was a wholesale deal. Toby, remember, and you know this about me, I was delivering pizzas. Just getting out of college 4½ years and getting through school. But when I did that first deal, that wholesale deal, I can remember looking at the check thinking, man, this is a lot of nights of delivering pizzas, and that was it. I got off running there.

Toby: You got in the hook. It sounds like you started wholesaling, but what do you invest in now, and what has that progression been like?

Brent: The progression was pretty simple because the book Rich Dad, Poor Dad was so encouraging of buying assets and having passive income and cash flow. I can remember reading the book and nobody in my family invested. I remember thinking, man, wouldn’t it be cool to be able to make money passively, make money while you’re sleeping, the whole thing we’ve heard a million times? Eventually, it started progressing into buying rental property.

Ultimately my career, if you look at it as a 20-year career, has been quite boring in that that’s all I focused on, but it’s started to progress from single families, duplexes, quadplexes up into smaller and larger apartment buildings. That’s how I’ve made my career. 

In the last few years, Toby and I talked about this. I’ve gotten more into the lending side and providing capital to other people, but the best financial decision I’ve made in my entire life, obviously, is becoming an investor. I would say to anybody listening, go after it. It’s worth it. 

Toby: What has it done for you financially? Has it turned the world on its head or given you freedom? What has it done for you?

Brent: If I talk to a group of people—as you know, I’ve talked to larger groups of people and tried to encourage people to be involved in the business—the one thing that I always mentioned is the freedom and the time. One thing that we cannot get back is time. The one thing that investing has done is it’s given me the opportunity through the growth of the business to have more time doing the things that I really like.

I always tease you, Toby, about this and going flying. I’m a pilot, and I really enjoy aviation and flight. Being able to own airplanes, being able to fly different parts of the country, and taking my family with me, that’s obviously something that costs money. It’s nice to be able to have assets that can allow me to do that and other things that I really like to do.

Toby: All right, real estate’s giving you a lot of freedom, and real estate’s making you a pretty good chunk of money. Would you encourage people nowadays, knowing what you know like, hey, this is an area that you should get involved in?

Brent: Always. It’s always the first thing that I’ll mention to anybody who wants to know. My wife and I joke about that a lot. There are a lot of people in our world that we know that don’t ask the questions, but there are a few that do. Those who do ask the questions, I always try to encourage them to go down that road because I know what it does, and I know the potential that’s there. There’s just something about being able to invest in something that has the opportunity to create great gains and obviously do things for other people as well.

We’ve been involved in some multi units, where we’ve been able to help families in those particular buildings. That’s very rewarding. Selfishly, it feels really good to do, but also financially it’s nice. Yeah, I always encourage people to do it.

Toby: I happen to agree with you, but let’s just say as a premise that real estate is a great thing to be investing in. Now let’s go to the subject at hand, which is, would you ever own real estate outside of an entity, outside of an LLC, or something similar? 

Brent: Absolutely not. That’s partly because the mentors that I had when I was first getting started said that is an absolutely crazy thing to do. Obviously over the years, I’ve experienced exactly why that’s not a good thing to do. I would definitely advise nobody to do it that way. From the moment you get started, you want to be utilizing entities for protection for obvious reasons.

Toby: I’m going to pull up this thread and I just thought it was really interesting. I’m going to share a screen and you can play along with me a little bit. We’ll go through this. This was a thread on Reddit. Somebody shared it with me and said, what do you think, counselor? Because I am sticking out there on the Internet a lot. 

It said, “My wife and I recently purchased two properties to rent out. My wife insists on doing it without forming an LLC. I think she read somewhere that there were several benefits to doing this way. I tried to sign up for a Lowe’s credit card this week to try to save on materials and shipping when renovating homes. I was declined for the card because the lender said we have no proof we were a business. Has anyone gone through this other than forming an LLC? Is there other means of legitimately establishing that we’re in business?”

That’s the premise, but then this thing just goes into all these comments about just get umbrella insurance, LLCs’ a pain, or then you have a bunch of people that are investors and they’re trying to shed some light. Did you look through this?

Brent: I did. I read through it a little bit. You sent it to me prior to us doing this. I always bring it back to, if there comes a time where you do get sued, you are being sued by somebody like you, Toby, somebody who’s an attorney, somebody who understands the law. The amazing thing is, how many times people will take advice from somebody on the Internet that is not an attorney, that doesn’t have those qualifications to actually give that advice out? I will say that anybody who owns property in their own name, they’ll feel good about it for maybe a year, maybe two years. But at some point, usually there’s a situation where lawsuits fly.

I can speak for myself. I don’t want to be in a position ever in my life, where somebody has access to my personal assets because I didn’t take the time to set up the proper structure, the proper LLC. 

I read some comments there, and it’s nice to see people talking reasonably on there like hey, why are you listening to the random person on the Internet? Get some very good help, get some legal help, people who do this for a living.

Toby: Let’s go through some of it to give it fair. I’m going to pick some of the ones where they’re saying, hey, you don’t need an LLC. There’s no need for an LLC for a couple of properties. You don’t need an LLC to save $200 on shipping and nothing shields you from negligence. Is that your experience?

Brent: Absolutely not. No, that’s not my experience. The 55 buildings that I’ve had, the few 100 doors that I’ve had in the course of my career and still in control, there have been situations where I’ve been faced with lawsuits. These are things that if I was faced with them personally, I would not be in the position that I am right now talking to you. 

It’s very important and something that I would encourage anybody to do to have that proper structure and that proper protection. It’s going to happen, especially if you’re going to grow your business, so why not take the time to do it right?

Toby: Would you share with us a couple of them? I have a ton. Anybody that’s been heavily into real estate has their worst stories, but how many do you have and what are they?

Brent: If I can think through the career of owning residential property, I’ve owned some commercial stuff, we’ve gotten involved in some different types of lending and been faced with things there. Just through my career as a residential investor, I have had a couple of slip and falls. There’s a trip and fall from somebody delivering food on a sidewalk that was slightly lifted.

One of my bigger apartment buildings, there was a gentleman who unfortunately, in the middle of the night, was shot. Fortunately for him and fortunately for all of us involved, he didn’t lose his life. He was injured, and I was faced with a lawsuit. When I say I, the business was faced with a lawsuit. 

It was a situation where I remember talking to the attorneys who were representing my company saying, Brent, this is completely baseless. You did absolutely nothing wrong as a landlord, as a property owner. But they said in this situation, it doesn’t matter. They are going to get something.

They went after the policy limits. It definitely would have been a completely different situation if I didn’t have a good structure in place and if I had that property title in my own name. 

When I read through this, Toby, in preparation for this event, I just couldn’t believe how many people shared that mindset of, oh, that’s one of those things they tell you, you really don’t need it though. Just buy a good umbrella policy.

As you know, Toby, being in this, there are exclusions. There are things that are not covered through those types of policies. We need to make sure we protect ourselves. If you’re watching this right now, if you take anything from this, make sure you utilize entities and state specific. Depending on where you live, make sure you take the time to get that advice.

Toby: I’m just going to put a caveat here. On two sides, number one, as an attorney, one of my first cases was going after somebody on a case where they had actually physically harmed a piece of real estate, like they trashed the place. We sued them, and we garnished their wages from Boeing for over a decade before it was paid back every nickel.

Everybody thinks, oh, I can go to bankruptcy. No, we defeated the bankruptcy. Oh, you never have to pay it. No, somebody can chase you until you’re dead. They can just keep renewing that judgment and keep collecting against you. That’s not true.

There’s something that you just hit on, and I really want to drill on this. When you’re doing an LLC, you’re still using insurance. Your wife is right, just use an umbrella. I could give you three cases off the top of my head where the insurance was declined. It was a mold case. There was a case where they hired a wrong contractor, a case where they hired a valet. I can think of this.

There was a gal that I know because she came in after the fact during when this was going on. She lost 15 pieces of property, her entire net worth because of electrocution of window washers, because the policy said that they didn’t have the right licensing and bonding, and therefore they denied coverage. She did not have the LLC, so they went after all of her assets, including foreclosing on her personal residence because it had a small exclusion.

She ended up losing everything. A tiny amount of what the bankruptcy court allowed her to keep, that was it. Then I read these things and I’m like, insurance companies, they’re great in certain circumstances. You want them to be the target. But if there are the two of you, you have assets, and they have insurance, they’re going after both, and you need to limit that.

Brent: Let me just share this, Toby, because this is important. There’s a mindset amongst new investors where a lot of times it’s okay. Let me do this, let me do that, let me accomplish these things, then I’ll get my thing set up, and then I’ll get my structure. I’m telling you from somebody who’s seen this with a really close friend of mine who was on track to be a really great investor. He was doing great things, he was doing great deals, and he had that mindset. It was all based around, you know? I don’t want to take the time to do it. It’s going to be too complicated. It’s going to cost too much. A lot of people use that.

What happened was he was sued personally. Charging attorneys got right through him. He was in a situation where he had to pay a tremendous sum of money as a result of that lawsuit. What it did, Toby, is it derailed his excitement to continue. Let me tell you, when he was investing, if he would have continued, he would have been in a completely different situation now. It all stems back to him saying, well, I’ll do it after three or four, which is just a mistake that’s not worth making, especially when you consider what can happen.

Toby: I formed an LLC and it was a headache for my account. Timeout. Why? The LLC could be ignored for tax purposes. It can just be a liability tool, so your accountant’s an idiot. She and my wealth advisor both agreed to close the LLC and not open another one until I had four or more rentals, which would be the prudent move. 

Oh, my God. I would say, if you’re asking me to dissolve that LLC, you assume the liability, or you agree to indemnify me. You’re such a smarty pants, this wealth advisor, whatever. It’s like you take on that liability then.

I actually used to do this in the early 2000s, late 90s. People would still buy commercial property outside of an LLC. I don’t even think you can do it anymore. No lender’s going to let you because the exposure is too great. 

There was a CPA who said, yeah, you don’t need an LLC for a commercial building. I’ll never forget this. I said, great, have him put that in writing and agree to indemnify you for any liabilities that occur. The guy was like, I’m not going to do that. I’m like, then why are you giving that advice? If you feel so strong that there’s nothing here, then you agree to take it on, you knucklehead. It was just one of those fun things. 

Brent: You see that Toby. You see the advice in people responding like that, and you’ve got to ask the question, what do you have? What have you done when it comes to investing? One of the best things that I love learning from you and being able to be guided by you when it comes to legal situations is knowing that you’re an investor, knowing that you have a tremendous amount of real estate. 

The obvious thing when I talk to people about asset protection is, are you getting this advice from somebody who’s doing what you’re doing or has done it in the past? Unfortunately, a lot of people are getting those structures and advice from people who haven’t done so.

Toby: Some guy in a Reddit thread, right? “I’m a real estate agent. I have a client who has many investment properties. He creates a separate LLC for each one. That way, any legal issues are isolated to that property LLC and can’t snowball.” I like that.

Let me ask you this. You got served by the people in the unfortunate shooting on your property. What did it do to you emotionally? How long did it go on and what kind of toll was paid emotionally? 

Brent: It’s the sleepless nights. You hear it all the time from people. When they go through situations like that and they have the mind that races like that, there’s definitely some uncomfort that is created in your life. It unfortunately transfers into other things that you do. It makes you less productive, it makes you less present. I have three kids, and I have my wife. It’s one of those icky sticky situations that you don’t want to be in.

One of the main reasons that I wanted to come and help you guys at Anderson and be on this podcast is to encourage people to take a look at the structure that they have and make sure it’s done right, make sure you’re getting the proper advice and the proper guidance. 

That type of thing doesn’t happen because now, after adjusting some things, after becoming a client of Anderson, it’s been totally different for me as far as the comfort level when something like that or if something like that happens again, which inevitably it does. We live in a very litigious country, and there are many assets that I have in different parts of the country. Those types of things do happen.

Toby: If you have enough doors, you’re going to get sued. It just goes with the territory. You have to make it into a transaction. What you can’t be is fearful that it’s going to affect you and your family in an extreme way. In your particular case, you had the LLC, so you knew that they were just going after insurance. In fact, they probably sued just for the insurance. They didn’t sit there and try to make claims against you as doing anything beyond, they just wanted that policy.

Brent: Correct.

Toby: A lot of people would say, that’s just the cost of doing business like getting into a car accident. I don’t sit here and cry about it, and I don’t care what the other side who gets Mike the hammer, the lawyer, or whatever these guys are. We only get paid if we win. Whatever. They’re going to sue me. I get it. I have insurance. It’s not fair, but I’m not going to sit here and fight.

At the end of the day, unfortunately there’s a lot of crud that goes on in the legal system, but I just want to be able to walk away and go about my life. That’s the whole idea, otherwise you’re going to be sitting there staring at the ceiling at 3:00 AM every night doing the Perry Mason thing, thinking about all the stuff you’re going to do. I say that is a much greater toll than money. That has a physical impact on you. That makes you miserable.

Brent: That could cloud your judgment for the things that you’re looking into, the projects that you’re doing. It could put you in a situation, where maybe you don’t pull the trigger on that deal that you know is great because you’re just still thinking about that. From what I’ve learned over the course of my career, that can all be avoided by having good asset protection from the onset.

Toby: Make the target small. In other words, hey, I understand that I have a regular liability policy, I have an umbrella policy. They may go after that. What I want to make sure of is that they never look at me as the target. That LLC keeps the target small, hopefully to that one property. 

Here’s a good advice. “Please speak with your attorney and accountant. Anyone here without those credentials is not qualified to help you with this.”

Brent: I know. I like to read through some of these responses because some of them, I was shaking my head. Okay, finally some voices of reason here. They’re being very direct on some of them.

Toby: This is my favorite. “Most of the responses here are utterly moronic. Holding investment property in your personal name subjects you and all of your non-exempt assets to liability. Putting the property in LLC limits the liability of that single property and protects all your other assets. There’s no other correct answer. If that’s too complicated for your accountant, you need a new accountant.” Do you agree with that one? 

Brent: Wholeheartedly. I agree with the way that he structured that response too. It was great.

Toby: I like this one too. “Set up an LLC. You need to legally protect yourself personally. Being a landlord is not child’s play. There are a lot of litigious people out there. I’ve met a few. Plus, you’ll need to establish a business bank account to make sure you’re not intermingling your personal finances with your business.” There are over 100 comments on here, they just went on forever.

Let’s play devil’s advocate. What if you’re just brand spanking new and you get your first property, is it really that big of a deal? If you’re looking at that person, are you like, hey, it costs money in my state, California, there’s a work around from that franchise tax, don’t worry, there’s actually different type of entity we use because everybody jumps up and down and says, it’s $800 a year depending on your state? What would you say to that person?

Brent: I think I’ve made it very clear. I don’t think that we should ever be entering into this type of business, really into any type of business without protecting ourselves, without protecting our own personal assets. The only way to do that is through structure and through these types of entities.

Toby: But it’s so expensive and it takes so much time, Brent.

Brent: That’s really not the case. That’s not the case that I found to be true, especially when you have help. I would say there are certain things. It’s such a cliche phrase, but it’s the cost of doing business, but doing it well, and doing it the right way from the get-go.

Toby: But my accountant says it’s so much more complicated and I have to do so much more stuff. 

Brent: Disregarded entity, remember that. Toby keeps talking about that.

Toby: It just means you need a different accountant. Hey, Brent, I really appreciate you coming on. I don’t want to belabor this, but I think that you did a great job. I love your perspective as somebody who invests. I’ll ask you one question. This is something we didn’t, so I’m going to throw it left field. What would you say to the 16-year-old Brent or to a young person as far as what you would do differently if you were getting involved? What would you tell that person? 

Brent: It’s the cliche phrase, I wish I would have started sooner. You could run that one a million times. I started off with mentors that said asset protection is important. What I did is I went down the road of trying to do my own research to find the best structures and to find the best people that helped. What I found early in my career was I was working with people that had the best intentions, Toby. I don’t think any of my early tax accountants or my early attorneys were meaning to do me harm. The fact is they didn’t have the experience.

I always tell people, especially coming from a product of Robert Kiyosaki, says, surround yourself with people who really know what they’re doing. I would say, if you’re going to go get yourself a really solid asset protection plan, then learn from investors. Learn from the real estate association down the road where you meet investors, you talk to other investors and ask them what they’re doing.

I can guarantee you, if you go into any of those meetings with investors who have a significant portfolio, none of them are going to say things like, oh, it doesn’t matter, just put it in your own name and use insurance. You’re not going to get that advice from somebody like them. The 16-year-old me obviously is, hey, start doing this now instead of waiting until you’re out of college. Beyond that, as far as asset protection, I’d say, learn from the people who get it done.

One of the main reasons I love what you do with this YouTube channel, what Clint does, and many of the other people at Anderson is they’re investors teaching other investors the right way. It’s such an admirable thing. Thanks for that.

Toby: I really appreciate you coming on and sharing with us. I appreciate those words. I will say this. If you’re out there listening to this and you know somebody who’s an investor, share it with them. Like and subscribe to the YouTube channel, of course. This type of information, there’s nothing attached to it. There’s no pitch. Just share the information with people so people can make an intelligent decision. If they want to have a conversation, you can always lead it back.

One thing I know about investors—and Brent, you’re no different—everybody’s in it together, they’re always willing to share, and they’re willing to talk to just about anybody. You can always reach out and talk to an investor. Like you said, go down to those investor associations. There are a bunch of folks down there that are probably willing to share how they got successful and where their failures were too. They’d probably be pretty candid with you so that you can avoid some of those pitfalls. Anything else you want to throw out there?

Brent: No, that’s it. I have 20 years of experience. I’ve been doing this for a while in many different capacities. When people ask me questions, I love that. I love the idea that I can pass on some wisdom.

When you and Clint initially called me and said, hey, do you have any interest in, taking a day or two out of your month to help us educate people on this stuff, I said, this is a pretty rewarding thing to be able to do when you can create a situation where somebody is faced with the unforeseen lawsuit that they’re going to be protected. They’re going to be in a situation where they’re glad, hey, man, I’m glad I listened to Brent teach for a couple of hours or listen to Toby teach, Clint, or whoever it might be that you’re going to learn from. There are things that we share that can be valuable, especially moving forward as an investor. I’d leave you with that. Always be willing to learn.

Toby: Again, I just really appreciate you coming in and willing to share. You’re like so many investors I know. You’re just transparent and always willing to give an honest answer. I appreciate that. Thanks again, my friend.