Ep #293 – Clint Coons – Strategies for Multifamily Asset Protection
Here is some of what you will learn:
Understanding the three legs of a multifamily business
Structuring your business for resale
How to properly structure your LLC
Understanding Member Managed LLC
Tax strategies that work for Multifamily Real Estate
Understanding cost segregation
Why set up management as a C-Corp
The advantages of deduction 280a\
How tax returns can affect loan approvals
The importance of integrity as a leader
To learn more about our guest, please visit: click here
Join us at a Multifamily Bootcamp, visit: MultifamilyBootcamp.com
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Full Transcript Below:
Clint Coons – Strategies for Multifamily Asset Protection (Ep293)
Rod: Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. And I know you’re gonna get tremendous value from the gentleman that I’m interviewing today. I actually met him at a conference a few weeks ago. His name is Clint Coons and he’s interesting in the fact that not only he’s an attorney but in his business he also practices tax, works tax and and has CPAs working with him an attorneys with him and so we’re gonna we’re gonna dig into some strategies and some ideas that that will help any multifamily investor. Clint welcome to the show my friend
Clint: Hey Rod thanks for having me on looking forward to it
Rod: Awesome yeah absolutely. So Clint I know you’re with, I’m sorry Anderson Business Advisors and Andersonbusinessadvisors.com and we’ll put that in the show notes guys but let’s start out by talking about asset protection. So what do you advise people do if they’re buying multifamily properties? how do you structure them? what’s you know what’s the way to protect their assets?
Clint: That’s a great question you know really when it comes to buying multifamily, if you let on the internet and they ask you and you look at how to structure it most people are gonna tell you to set up a limited liability company that’s what a lot of people do and I don’t disagree with that. But when it comes to real estate investing what I tell people and this is what we focus on at Anderson, is you really need to look at investing as a three-legged stool and you have your asset protection leg where you’re gonna say you know in case something happens you’ll save yourself and in the event of a lawsuit, you need to have your tax planning leg to reduce your taxes to the greatest extent as possible but then you also have to focus on the business planning leg and this is where so many professionals do not understand this space because they’re not avid real estate investors you know as we’re talking about before we got started I have over a hundred properties across the United States and I’m not just talking doors I’m talking about actual physical properties and one of the things that I that I’ve come across in my own investing is to understand this basic principle that you need to understand you this is the business. Real estate investing is a business and if you just focus on one leg you’re really impairing your ability to take your business and move it forwards. I give you a couple of two examples of that you know when I started practicing after two years of practice went up to my CPA at that time this was before we brought tax in house and he prepared the return and he said you owe $175,000 in taxes, I was like oh hell do I owe that? where is that gonna come from? I went back down to and spoke with my partner and we went through our return and we looked at the way we accounted for our income and we changed it from owing the IRS $175,000 to them owing us $85,000. I went back to the CPA and I said hey check this over you’re going to sign off in this current return. Do you see any problem with this? He looked at it he said no because you can actually do that because that’s pretty creative that’s a great well let’s do it. So I did that for the next four years I didn’t pay any income tax. I just showed losses on my return and I thought I was the smartest guy out there you see I was focusing on the tax leg of my investing and so as a result of that, it actually hurt me in another way which I did not foresee and that was when I tried to invest in real estate when I wanted to get my start building my portfolio, I couldn’t get loans because underwriters want to see your tax returns and I would turn over a tax return it showed losses on my tax return they say you make no money and I say oh no I do it just my tax returns don’t show it then of course they’re thinking in the back of their heads this guy’s cheating on his taxes somehow someway. So it took me out of the game not only take me out of the game for those years but then two years after because it was an albatross that I had to continue to deal with because he always asked for two years of returns and so what I took from that is that taxes are great but you just can’t focus on that leg you need to understand the business. So I’ll give you an example of someone when you talk about asset protection here. This was an individual that called me up saw me on YouTube and had a question about this multifamily property he had inside of an LLC. Now he bought it four years ago and he went to a local attorney this was an Oklahoma and he asked the attorney what he should do and the attorney said you need to create this LLC for it so you have asset protection and so that’s what he did. And he starts telling me that he’s had three buyers all fall out because of financing. They neither wanted these three buyers could get financing to buy this property because it he’s you know it was a value-add deal for him, he got everything up, rehabbed a property, and now was humming along at 95% occupancy and so he was gonna cash out. Well the problem with it right away is I realized I said let me ask you about that LLC how was that LLC set up for tax purposes. He goes oh well I don’t know. And I said well are you filing a tax return for it? And he said no. I said okay so I know exactly what happened here when you set up that LLC they told you that you could have an LLC that would not have to file a tax return and that’s what you did because it’s gonna save you $1,200 a year. So you were focusing on the asset protection you’re focusing on the tax planning aspect of it you know you want to save $1,200 on file a return but you weren’t focusing on the business. You see underwriters when somebody comes to buy your property what they’re gonna ask for if I’m coming to look and buy your properties in an LLC, my lender is gonna ask me for tax returns associated with that limited liability company. And if it’s set up as a disregarded entity well you don’t have a tax return to provide. So that makes banks really leery and they won’t lend against it and so when you set it up that way then when you’re looking to get out of your property it’s gonna make it more difficult and as I told this individual this is gonna be an installment sale you’re gonna carry the paper for two years and then you’re gonna allow him to refinance out of the property and your greatest risk is gonna be that he doesn’t know what the hell he’s doing. He’s gonna drive that property in the ground. I remember that growing up because I grew up in a multi-family space where my father invested multifamily properties and I recall right as I graduated or was sworn in for the bar one of the first transactions I had to do because my dad saw me as an indentured servant before I became an attorney and then I went to permanent retainer for life of course everything’s free and he was cashing out of one of his buildings and he was selling it to the low-income housing Institute of Seattle and he told them we negotiated this he was part of the correspondents said listen, he he’ll stay on and he’ll run that property for a year you pay him this amount of money and he’ll serve as a manager and they said no we don’t want him we’re gonna take the property over. So they took that property over the property had was over 90 percent occupancy when they took the property in within six months they were down at less than 50% occupancy
Clint: And they thought that they would turn around they wanted to sue my father for misrepresentation fraud in the inducement they brought up all these claims because they said you said you know it was 90 percent now look at us. Well the problem was is they didn’t know how to run that type of property and I mean these tenants there was a certain way in which you could collect rents from them they didn’t understand that and so as a result of the tenants quit paying they saw they can take advantage of them all these unlawful detainers and they’re out. So that’s what I mean is that when you sell property you if you didn’t have to carry back the paper but if he did carry back that note. I mean he would got this property back that he’d spent you know you know 10-15 years building up to where it was and then you’re back at under 50% occupancy and so this is what I’m talking about is understanding the business that attorney that this individual Oklahoma that I met with should have asked him this what do you plan to do with that asset within the next 10 years if he said I want to sell it then it should have been set up to be taxed as a partnership or it should have been an S corporation if he doesn’t have any other partners. And so it’s understanding how all this fits together it’s I think it’s really important
Rod: Talking about the tax planning leg now as well okay. So before we started recording you mentioned an LLC structure that you like. Can you repeat that conversation?
Clint: Sure so the thing about when you’re buying multifamily properties is that you’re gonna take title an LLC that is expected. And so that LLC should be filed in the state where the property is located and so oftentimes you know when you’re dealing with single families you can’t do that because of the residential nature of the loan they’re not going to allow you to but with these types of loans, it’s expected you’re gonna close in an LLC. So you should get yourself LLC set up at a time you should make your offer in the name of that LLC. Now when you’re setting up the LLC one of the things to consider is how is that LLC gonna be owned okay. So one of the things that I like to do personally is I don’t want my information spread out there on the internet that anybody can then look up who the owner of this company is because that makes it really easy for attorneys to get aggressive if something were to go wrong on that property or maybe nothing’s going wrong on the property but it’s in I mean I have clients in California have told me before where people will walk through their properties and slip notices under the door where attorneys are trolling for clients, hey do you notice any mold in your bathroom if so you have a possible cause of action against this property owner give us a call look at you know tons of money because you don’t even understand that you have respiratory issues that won’t show up for 15 years if you’ve ingested mold spores I mean just garbage like that that goes on I mean our country’s full of I don’t know if you just saw that thankfully a case in Florida was dismissed because somebody was suing McDonald’s for five million dollars because they ordered a Big Mac without cheese or a quarter pounder without cheese and they put cheese on and they said well you charged us an extra ten cents for that extra cheese and I don’t know what the basis of their claim is now but just stupid. So what I’ll do when I create the LLC and let’s say let’s say California for instance rather than set the start with the California LLC I’m gonna start with either a Delaware or Wyoming limited liability company for filing purposes. I’ll set that up first because that’s going to give me anonymity both of those states your information is not going to be listed with the Secretary of State so you create that entity first and think of it like a block or entity so once you’ve created that entity in which you’re the owner are the member and the manager, then you set up your state specific LLC for the asset so if it’s California then it would create a California LLC and when I file it I’m gonna set that California LLC up as a member managed LLC. Now that’s key here because that’s what really strengthens the structure and the privacy that I’m explaining here. When you set up an LLC a lot of people will set them up as man managed or even member managed if you set it up as manager manage and you have to list who the managers are so it was my LLC then I’m gonna list my name on the filing with the Secretary of State. So they’re gonna anybody who searches that company’s gonna trace that entity back to me. Now if I listed as member managed and I make the Delaware LLC for example as the sole member then when I file it with California and I submit my list, I will list only the Delaware LLC’s name on there. So if anybody looked up this California LLC all they’re gonna see is this Delaware LLC, if they look up the Delaware LLC there’s no information so they don’t trace it back
Rod: Would you you know it’s my understanding if it’s a single member LLC it doesn’t have the same level of protection that that a multi-member LLC does. Is that accurate?
Clint: Well I mean it’s really not I mean that’s a red herring that a lot of people like to throw out there and promoting other types of structures. I mean what it all comes down to is this your state’s law, some states protect single member LLC’s others do not. So you happen to have an LLC set up in a state that does not offer those protections, then you’re out of luck unfortunately.
Rod: Okay yeah I know that that’s an issue here in Florida you need a multi-member. Now the only caveat I want to add to what you just described is you know you said set up the LLC before you make the offer you know I think a easier strategy would be to have an LLC that you use for making offers and just make your offer assignable and then once you know you’ve got it you’ve got a deal then you assign it to your property specific LLC yeah okay that was the only caveat okay now now now let’s talk about some tax planning if you don’t mind. Let’s talk about some of the you know some of the better strategies. So what was the strategy that you used the in your description that you gave us earlier where you were looking at a big tax bill and you ended up getting a refund? what was that strategy?
Clint: Well that was how I accounted for my income. So in my particular case the way we work with our clients is that when they sign up with us they would pay us a flat fee to do this work and then the work has spread out over time and so what I did is I looked at that and I said well I didn’t earn that entire fee when I received it. So if my client paid me eight thousand dollars to do work over the next year what I did then is segmented when that income came in. So I would push off 50% of that fee into the next tax year the real estate
Rod: Right no no I get it though well let’s let’s talk about some strategies that are applicable to real estate. So let’s start with cost segregation. You want to describe that for my listeners
Clint: oh yeah so costs seg is one of the greatest opportunities that you have right now in order to front-load your deductions on your real estate to really eliminate your your income and with cost segregation what you’re gonna do is you’re gonna hire a professional to come in and they’re gonna analyze the property and they’re gonna look at the various components of your real estate. So what they’re focusing in on is property that has a useful life of either 5 or 7 years and then they’re gonna determine what that value is I mean
Rod: components of the property
Clint: Correct. So take carpet well I would be one cabinetry would be another countertops, shrubs outside the property they would even look at for the landscaping. And so they break all these components down and then they determine what their value is and when you’re gonna have to replace them and they’re gonna give you a number and then that number is can now be used to depreciate those assets you know over a shorter period of time. Now here’s something else that we have right now with the new tax laws you’re allowed bonus depreciation so we can front-load those deductions up into the earlier years if we want to so I’ve had some clients right now what they’ve done is they’ve been in the properties for three four years we’re going in we’re doing a cost SEC analysis on it we’re going back to when they bought the property taken all those deduct depreciation that they should have been taking putting it into this tax year and wiping out their income and so this is a great opportunity for people that own multifamily to real pick up some great tax deductions right now to reduce their income. So you can use that which is one another strategy that I like to do is always use a management corporation for your properties have a c-corporation set up that manages your assets so that the C corporation then is another area which you can funnel money off of your LLC into a different tax bracket with the change in the tax laws. Now C corporations are taxed at a flat 21%. So if you move money off of your LLC into that C corporation that’s money that’s not flowing down to you it’s money that’s now in the corporation that you can spend through deductions, picking up healthcare you know medical insurance through there and maybe you want to fund a solo 401k. So finding other things that you can can write off and there’s a lot of strategies that we teach during our classes on how to find deductions for your business. I mean the simplest one that we really like everyone to utilize is what is referred to as 280a which allows you to deduct the rental use of your home. So as long as you rent out your home for less than 14 days a year your residence the income you bring in from that is completely tax-free now here’s where there’s an opportunity for people you know you have a corporation set up and you have to have meetings you’re required to have meetings by law where do you hold those meetings you sit in your office and hold the meeting with your spouse if she’s involved with you know why not do it at your house you can put together a rental agreement between your house and your corporation to rent your house for half a day maybe you look at determine what I mean we have a packet that walks people through this you determine what the value is of your property and then that income let’s say it was a thousand dollars for the rental use of that property. Your corporation pays you $1,000 deduction to your corporation tax-free income – you do that ten times here that’s 10k you just put in your pocket if you’re in 30% tax bracket you save $3,000
Rod: Hmm okay okay and you know I want to I want to circle back to cost sake for just a second just to give it a little more clarification for those of you that have never heard about it before obviously most appreciation is on it like a 20 year framework and by having an engineer or someone like an engineer go in and look at all these different components and you know a lot of those things wear out before 20 years like Clint said, like carpet and things of that nature and so you’re able to massively increase that depreciation in front-loaded the first few years. I mean it saved me 600 grand on a you know a couple years ago by being able to do this. So it’s it’s very very powerful. So you know besides so we talked about the asset protection with the LLC’s we talked about some tax strategies and when you talk about business planning, can we kind of circle back to that a little bit you know I think you had talked about I forgot what your example was but I just like to maybe enhance that part of the conversation a little more you speak to that a little bit more
Clint: So we talked about tax havens and I gave you some ideas of which you could lower your your income taxes by doing a costs seg or by expensing money up to the C corporation right so at the end of the day when I work with someone on this I often tell people you have to also know what is your goal do you want to continue to go out there and grow your portfolio and if you’re going to be the one going on the loans to grow your portfolio of investments then you need to be conscious of what your tax return looks like to a potential lender and the problem is is that underwriters, I mean I wish they were all qualified the same but they’re not and a lot of times what happens you get a young underwriter that’s looking at they don’t understand your return and then they find out that the loans been denied I can tell you this has happened to me. I was 10 days away yeah they come into the office they say we’re not going to do this loan and I’m like USOB’s I gave me guarantees for the last two months and now I got to go get another extension and it was because of my tax returns. It was too complicated for yeah you’ve had that problem?
Rod: Before oh yeah no no many times yeah particularly in the residential environment. Now in the in the commercial arena it’s not as prevalent because they look first of all they’re looking at the whole team and they are more sophisticated underwriters looking at returns that understand tax strategies more but definitely in the residential environment for sure. So let’s talk about let’s shift gears for a minute because I know you run an organization and you’re a leader. Let’s talk about leadership for a second if you don’t mind you know what is one characteristic that you think every leader should possess?
Clint: Integrity. I mean the people that work yeah definitely and one of the things that has really been a driving force behind what I’ve done and this is seems counterintuitive because I’m an attorney and you would think that whenever I work with someone that I would have an agreement. I mean not with my clients of course but if I was gonna go out and work with a provider that they wanted to enter into a business relationship with my firm, they’ve always been always been on handshakes and I yeah I think of all that we may be one company that I’ve worked with where I’ve actually put an agreement together their legal team wanted it and the way I look at is this, if you’re gonna screw me over you even if we had an agreement in place you would do it, would I sued over it? No because it’s not worth my time or money to go after it it’s just reflection upon you right. I give someone my word and I tell them this is what I’m going to do for you and this is how it’s gonna play out I’m gonna live by that because what you do especially in this day and age I mean with the transparency that’s out there, all it takes is for you to do something to one person it’s underhanded and that’ll destroy your career, it’ll destroy your name. I mean I see a lot of people out there that’s in do what we do or companies that try to do what we do they don’t do what we do and you look them up and there’s all these negative reports and then they hire other companies to come in and try to clean that up and figure out you know reasons for it. I’ve never done that because I don’t need to do it because the way we work with our clients the integrity that we have
Rod: Okay so integrity awesome. So are there any tools or well actually let me back up, is there a book that you gift more often than another when you’re dealing with real estate investors?
Clint: Yeah it’s my book
Rod: oh you have a book
Rod: I didn’t know yeah okay fantastic
Clint: It wasn’t a perfect setup right
Rod: Yeah right perfect all right awesome. So you know everybody thinks it’s an easy road to success you know what did you have to sacrifice to get to the level of success that you’re at right now Clint?
Clint: Well you end up sacrificing time with your family
Clint: And it it’s hard I mean my son’s in law school right now
Clint: Thanks. He had a conversation with my wife about whether or not he wanted to come work for me when they when he got out of me he passed the bar and one of the things that he’d said to her is that he’s not sure because when he was younger he remembers how much I had to travel and you know I did miss a lot of family time and I would make up for it as I thought you know in the summer we’d take three weeks and go to Hawaii and spend it together but that’s something that you miss and it’s a sacrifice but it’s a sacrifice that I was willing to make because what I’ve done and what I’m doing is with this stated goal and my wife has the same goal as well as I want to build a legacy of wealth for my family that when I’m no longer here, Tracey’s no longer here, there’s going to be something that’s going to continue to generate income for my kids and their kids and so on down the line and somebody has to make that sacrifice and you know I hear people say things like oh you know you was easy for you. Nothing’s easy no. It’s getting up at four o’clock in the morning every day going through looking for opportunities and when you know even with my business I’m always reading trying to figure out what you’re what I should be doing saying again yeah and it just it is what it is and some people are you know they’re like oh well we can’t do what you do everyone can do what I do they just have to be willing to sacrifice and have the drive and the desire to do it. There’s nothing magical about it
Rod: You have to get uncomfortable. You have to get uncomfortable to build a life of your dreams. Clint, thanks so much my friend you’ve added a ton of value today. Remember guys you can reach him at Andersonbusinessadvisers.com . I really appreciate you being on the show buddy
Clint: Rod thanks for having me on I appreciate it
Rod: You bet take care now
Clint: Take care
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