Utah Real Estate Investors Association

When we talk seller-financing, or “creative” financing, we are really talking about a very large number of ways to structure the deal. Each kind of deal is structured differently, has different documents, and has different risks involved. That’s why the first key to seller-financing is understanding all the different options and deciding which is the best route.

There are 4 major types of deal structures (and even these can be broken down). I categorize seller-financing the way I do based on a) who owns the property, b) what documents are needed and c) the risks involved.

Here are the 4 main seller-financing deal structures:

1. Seller Partnering
2. Traditional Seller-Financing, or Note & Deed Seller-Financing
3. Lease Options
4. Contract for Deed

One common element among all types of structures is the long-term arrangement with the seller of the property. In a typical purchase and sale, the seller sells the house outright at a closing and is never heard from again. But in these deals, you will have some “connection” with the seller that extends beyond the contract or closing—possible for decades. You need to understand that all of these deals are long-term partnerships with the seller. Understanding partnering in real estate is crucial.

The first structure, Seller Partnering, is any deal where the investor “partners” with the seller no differently than a partnership with another investor. This can take on any arrangement (other than the other 3). Normally, this will include a joint venture agreement with the seller. Here’s an example:
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“Success is not final; failure is not fatal; it is the courage to continue that counts.” – Winston Churchill

Most of us spend a considerable amount of time and energy in our lives working for our families and accumulating wealth.

But unless you're careful, much of it could go to waste.

That's why a well-crafted estate plan is so critical. It ensures that your hard-earned wealth (including intangible, non-financial assets) can pass intact to those you intend to be your beneficiaries, instead of being siphoned off to government processes and bureaucrats, or even being lost. We all dislike handing over our resources to those who don't have our best interests in mind.

A well-made estate plan guarantees that this will NEVER happen to your family.

"But Janet, what happens if I don't create an estate plan? Doesn't the judicial system have easy steps in place for families?"
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Previously, I taught you the basics of how to protect your rental properties. That’s because rentals are long-term assets that build wealth. So, protection is key. But what about flipping properties? There is certainly liability because accidents can happen on the land. But probably not as much liability as having tenants. The difference here is really one of taxation!

The money you make from a rental (rent) is taxed differently than the money you make flipping a home. Rent is passive income. Flipping is active income. And active income is taxed 3 times, while passive is only taxed twice. The third tax on active income is called the “self-employment” tax. And it’s 15.3%! Then, you still pay the other two taxes: state and federal income tax.

Sorry, I cannot help with the income taxes, just like I can’t stop death. But, I can help you lower the self-employment tax! And this tax doesn’t just apply to flipping income. It also applies to wholesaling income, real estate agent commissions and independent contractors! All them can save substantial money by setting up the right kind of LLC.

The Tax Savings LLC is an LLC that has a special “S” tax election on it. That means the LLC has opted to be taxed “like” an S-Corp. I’m sure many of you have heard of the S-Corp. But these days, we don’t’ set up corporations as LLCs are a much easier entity to run. And all we have to do is tell the IRS we want the LLC taxed like the S-Corp and then we get the tax savings.
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"One thorn of experience is worth a whole wilderness of warning." - James Russell Lowell

Rather than seeing these ideas as "rules",  it might be helpful to think of them as principles when it comes to helping your kids see money rightly.

And yes ... some of these may be difficult (the first ones, in particular, if they represent a shift for you), but after seeing many families do this well, these are some of the best things you can do with your children when it comes to financial education.

1. Talk openly about money.
Parents make a mistake when they keep information from their children. The only way children learn what is a good deal and what is too expensive is by the experience of what their family earns and what items cost. Hiding this information robs children of the financial education they need.

2. Talk factually about money.
Many parents have strong emotions about money based on their childhood experiences. These emotions are always transmitted to children. Instead of helping children, they can cripple children from growing up to make sound financial decisions
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In our last article, I taught you that the Series LLC forms the base of your asset protection structure. It’s simple, inexpensive and provides a great deal of protection. And you’ll learn the basics of how to run and manage an LLC before getting more complicated.

Many clients, especially as they build their portfolio of rentals, seek out additional privacy and protection. This is great! But it does add layers of complexity and cost. But, as your assets grow, then it makes sense to up your asset protections as well.

For privacy, many investors use what is called in the real estate industry as a “land” trust. These kinds of trust do not exist in Utah and most of the country. But we have a modified version of them investors use that we call “real estate” or “property” or “asset holding” trusts. The key to this trust is that it’s not registered with the state. That means it’s a private document that keeps the owners of the trust totally off the record.

Most investors use these trusts to “hold title” to the property privacy purposes. However, these trusts do not provide any asset protection! So, you still need an LLC that will own the trust. Then the trust owns the house. See how that sticks an extra “layer” in between the property and yourself?

On the county land records, only the trust appears, not your LLC. And since the trust isn’t registered anywhere, no one can find out that your LLC is even involved. This can keep plaintiff’s from seeing all your assets and believing that you are a big target for a lawsuit.
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In our last article we explained how the LLC can offer great protection for your personal and real estate assets as well as provide some great additional benefits. In this article, I’m going to discuss what you need to get that protection! Here we are talking about the LLC to protect your rental properties!

NOTE: This is a different LLC than you’d use for your flipping, wholesaling and other real estate investing areas! That we’ll discuss in two weeks!

This LLC should be formed correctly, meaning you need to choose the best way to set it up when it’s first created! An attorney can help with those decisions. Then, you need all the critical documents. The most important of which is the “operating agreement.” This is the “constitution” of the LLC and where you get the protection. Without an operating agreement, all you have is a name and no protection. Only an attorney can create this document!

Further, the operating agreement should be prepared by an attorney with asset protection experience. This is not just another business entity. There needs to be a number of clauses in the agreement that provide the specific protections we mentioned in the previous article. This is where the real value of a good attorney comes in. It will be worth it!

Luckily, we also live in Utah where we also have what is called a “Series” LLC. This is a very special kind of LLC that can own multiple properties at the same time while keeping them separate for liability purposes. This saves you a great deal of money as you don’t need to set up an LLC for every rental! You should work with an attorney who is experienced in these kinds of LLCs as they also have very different documents.
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In our last article we warned against going too big too soon with asset protection structures. In this article I’m going to simplify the two kinds of liability that you face as real estate investors and how to protect yourself from them.

The first liability is risk you have while running a business. This is called professional liability. The classic example is a “slip and fall” in a rental or flip project that you own. If that happens, the plaintiff will sue the “owner” of the property. If that’s you, you will get sued and all your personal assets (house, savings, cars, jewelry, etc.) can be lost in that lawsuit if the damages exceed your insurance coverage. However, if you own that property in a limited liability company (or LLC), then the LLC will get sued and your personal assets will be protected!

The second liability is a risk you have just be being alive. This is call personal liability. The best example for this is a car accident you cause while driving. Because you actually caused the damage, you are getting sued, and that means your personal assets are at risk, including your real estate holdings! However, if you have the right kind of LLC set up, you can protect your properties from that lawsuit!

So, the right kind of LLC offers two different kinds of protection from two different liabilities!

There are additional benefits to owning your properties in an LLC. It makes you look professional, running a real business. It helps bookkeeping and accounting because those transactions are all run through a business bank account. Since LLCs can have managers, it will keep the members (owners) private! This way your tenants and prying eyes won’t know that you also own the business. This can help your personal safety as well because angry tenants have been known to come after their landlords.
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"Action is the fundamental key to all success." - Pablo Picasso

Many different types of businesses suffer from the problem of accumulated "past due" receivables.

And it's a problem which shouldn't *just* be addressed by "normal means" (calling, pestering, etc.).

The good news is that you don't have to accept the normal status quo -- you can actually change the way the game normally works. How? Well, I suggest that you use tactics similar to those which WON you the sale in the first place: discounts, premiums for advance or prompt payments, and good old multi-step follow-up.

If you do have (or ever develop) a receivables problem, you'll need to take this same sort of aggressive action to clean it up. "Preserving the relationship" with a client who can't (or won't, more likely) pay his bills is of little value.  And, left alone, collection problems tend to get worse, not better.

Even large, long-established corporations can find themselves in trouble with their payables. In that situation, you as a creditor could wait years for your money and then recover only a percentage of it.
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Asset protection is always in the background of real estate investing. But it should never be far from sight!

We work hard every day to build wealth through real estate, and that can be substantial and fund our retirement. The last thing we want is to lose what we’ve worked so hard to create. That’s where asset protection comes in.

Protecting assets can be very simple to highly complicated. I get asked all the time about complex trusts and layered structuring to out-of-state LLCs. After being the asset protection business for over 20 years, my opinion hasn’t changed. Start basic and then let your protection grow as your assets grow.

There are lawyers who will “sell” you a big, expensive package of “bullet-proof” asset protection structures. When I went to my first Rich Dad, Poor Dad event, there was a lawyer on stage with a silver briefcase that had the full asset protection entities and documents. This cost $5000! And all it included were fill-in-the-blank forms to create LLCs, Family Limited Partnership, S-Corp and a few other documents. You still had to fill out the forms correctly and file them with the state and pay the fees. I had a client purchase the set of documents and was instantly disappointed in herself when she found out I could do everything for her for half the price.

I tell this story for a reason. Be careful of purchasing so called “asset protection packages” at real estate events. Rarely are they beneficial, and you’re probably overpaying for what you get. Further, you probably do not need all of that structuring up front.
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"It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something." - Franklin D Roosevelt

If you measure your key metrics you can manage the performance of your business, AND you can see problems well in advance of when they might show up in revenue or profit figures.

Each and every business has key performance metrics [Key Performance Indicators (KPI's)], some of which are common to other businesses, some are industry-specific, and some companies create their own KPI's.

These sort of things are our bread and butter, when working with small businesses tax pro.

Do you need help?

Financial metrics are often common to all businesses. Some examples include:
* Average transaction value.
* Gross profit margin.
* A measurement of a company's efficiency during the production process.
* How much is left over after COGS.
* Gross Profit divided by Total Revenue.
* Net profit percentage.
* The amount of profit for every $1 of revenue generated.
* Net Profit divided by Total Revenue multiplied by 100.
* Debtor days or receivable turn days.
* How long your customers take to pay you. (The sooner your customers pay, the sooner you can get that cash working for you.)
* 365 (days in the year) divided by (Sales on credit or invoice divided by Average Accounts Receivable).
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