Asset Protection for Real Estate Investors and The Dangers of Our Current Real Estate Market with Doug Lodmell

Today's Guest: Doug Lodmell

Doug Lodmell is a co-founder and Managing Partner of Lodmell & Lodmell, one of the nation’s leading Asset Protection Law Firms. Today, Doug’s law firm is responsible for protecting over $4 billion in client assets. He is originally from Geneva, Switzerland, and he stood out at an early age as one of the brightest minds of his generation. Doug spends much of his time teaching, speaking, and leading thousands of professionals in business in Scottsdale, AZ. He is also the author of The Lawsuit Lottery: The Hijacking of Justice in America and was recently featured in BiggerPockets.

Highlights From The Show:

We begin the episode with Doug sharing his background story and what he does as an attorney. Doug shares that he started practicing with his father. His father was an attorney for many years but didn’t practice law. He was in real estate syndications, but the 1986 real estate crash steered him toward asset protection after the banks failed to reach him even though he had assets in the syndication. When Doug graduated from law school in 1997, he joined him, and they grew the practice along with his brother, which is also their foundation as real estate investors. They all have a deep understanding of real estate and asset protection and how it all works together.

We then talk about what you can do in asset protection to ensure you are doing the right thing. According to Doug, when you start investing, you should keep one concept in mind. The safe part of your life and the risk part of your life should be as separate as possible. The safe part of your life is simply the safe assets you hold. They include your cash in the bank, stocks, bonds, cryptocurrency, etc. You have to keep them in a separate legal entity from assets that can create liability. A home you are flipping can create liability; you have workers, equipment, and a house that can fall or burn down. Doug says the first legal entity you should understand is a Limited Liability Company or LLC. Its purpose is to help you limit liabilities.

Next, we discuss why you should buy your first property in an LLC and not in C-corp or S-Corp. Doug shares that an LLC and a corporation are two different legal entities, but you can have an LLC taxed as a C-corp, S-corp, partnership, or disregarded entities. According to Doug, the reason it’s always going to be an LLC for asset protection is that LLC has members, and they can create restrictions on who can be a member, which can help eliminate entire classes of people from ever becoming a member. Corporations, on the other hand, are not membership entities. They are shareholder entities and have no way to exclude anybody from becoming a shareholder.

We then talk about the volume of properties you can hold in one LLC. Doug shares that when you are flipping, you get your property in LLC, but after flipping, it’s out of the LLC, and the LLC is empty again. According to Doug, you can use that LLC as many times as you want, but as long as that LLC is alive, it has all the hangover liability from any deal it ever did. Doug advises that you should always pick a number that you are comfortable with, such as 10, do the 10 flips in that LLC and then let the LLC die a natural death to start a new one. Why? If a deal goes bad and they come to you years later, you want the lawsuits to be on an LLC that is empty, not in use, and dying its natural death as opposed to your current LLC with properties in it. LLCs are easy and inexpensive to form, so you should often kill your LLCs if you are in high-risk activities such as flipping houses.

Next, we talk about a holding company and the importance of having one from a legal standpoint. Doug shares that a holding company can be an LLC, but Doug recommends using a limited partnership, and a lot of syndication deals use limited partnerships instead of LLCs. You should also select a favorable state, and he recommends Arizona. It has incredible laws, inclusive charging for asset protection, great case laws, and their registration is perpetual. According to him, little things like fewer moving parts matter a lot. So, if you are flipping and get a property you want to hold, you have to take it out of the flipping LLC and into a long-term holding company. Doug emphasizes that as you take assets for long-term holding to build your property portfolio, they should be in the long-term holding company structure. Also, don’t put your flipping entity in the holding company because it will increase your exposure to risks, and it’s transient.

We then talk about the market and some of the risks associated with the market cycle that we are in right now. Doug shares that the biggest risk is over-leverage. Doug advises that we slow down on anything that makes us overleveraged by doing fewer deals, carrying more cash, and putting more cash down on the deals we are doing. According to him, the risk is bigger for the flippers than the portfolio because if you have tenants, they will still pay the mortgage if the market goes down. However, if you’re relying on properties to go up to make money, you will be stuck with the deals in your pipeline, and you might have to sell them for less.

Make sure you don’t miss another amazing episode of the Just Start Real Estate Podcast with Doug Lodmell and get valuable information on real estate asset protection, managing cash flow, and the dangers of the current market!

Notable Quotes:

“When you start investing, you should keep the safe assets in your life and the risk assets in your life as separate as possible.”

Doug Lodmell

“The first legal entity you should understand is a Limited Liability Company, LLC. It will help you limit liabilities.”

Doug Lodmell

“LLCs are membership entities and are the best for asset protection. Corporations are shareholder entities and have no way to exclude anybody from becoming a shareholder.”

Doug Lodmell

“You can use your flipping LLC as many times as you want, but as long as that LLC is alive, it has the hangover liability trailing from any deal it ever did.

Doug Lodmell

“Your LLC is a sub-entity of the holding company, and that is why your LLC should not be an S-corp as it makes it possible for the holding company to own it.

Doug Lodmell

“Just because you have LLCs set up for a set of properties doesn’t mean that you need bank accounts or to have all the income and expenses go out to those LLCs.”