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Real Estate Rookie
The Rookie Guide to Asset Protection: LLCs, Insurance, Partnerships, & Trusts
00:43:37
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- [00:00]
Host 1
If you're a new investor wondering when to set up an LLC or how you should protect your assets before you even close on your first deal, or if you are a couple deals in, this episode is for you.
- [00:13]
Host 2
So this is what you can expect to learn today as a rookie investor. First, what asset protection actually means, why it's super important, even if you only have one property. Some simple beginner friendly steps to protect yourself legally and what to do now and what can wait until later. Today's guest is Bonnie Galam, real estate attorney, investor and educator who helps investors protect their portfolios before problems ever even arise. So Bonnie, welcome to the Real Estate Rookie Podcast.
- [00:47]
Bonnie Galam
Thanks. I'm excited to be here.
- [00:48]
Host 1
So, before we get into it, if you're just getting started and want to avoid the common legal headaches and new investors face, make sure you hit subscribe so you don't miss any future episodes. So Bonnie, before we get into anything else, what is asset protection?
- [01:06]
Bonnie Galam
I actually think asset protection is a little bit of a misnomer because if you think about asset protection, the goal is to protect assets. But there's a lot of things that we as real estate investors want to protect. Our time, but also our income, right? Like we're not doing this as a hobby. And so if the work and the income that is being spun off of our assets isn't also being protected, then we're kind of just spinning our wheels, right? And so when I think about asset protection, I think of two different forms. I think of proactive asset protection and reactive or offense and defense. Defense is usually what you hear most attorneys or people in forums talking about. It's things like LLC is insurance. Those types of asset protection are there for you when something goes wrong, but they're kind of just floating around in the background unless something goes wrong. Right. Whereas on the other hand, there's a lot of proactive steps that real estate investors can take to protect their bottom line, to protect their relationships with their partners, their tenants, and all the people that they're interacting with as real estate investors along the way. And I really love that piece of it because in my experience as an investor, that's really where I've seen the most bang for my buck on the legal stuff.
- [02:18]
Host 1
For a rookie investor that doesn't even have their first deal, why is it important that they're starting to think about this now?
- [02:26]
Bonnie Galam
So the important thing from the perspective of a lawyer is that it's a lot easier to start from the ground up than it is to clean up messes down the line. Also, in some states, there may be transfer taxes if we move properties into LLC or we change the title down the line. And so it's important to be thinking about these steps from the get go, even if it doesn't make sense. And as long as you have that informed decision in the back of your head, like, hey, an LLC might not be ready right, for me now, but at least I know that when I do, like this is what the cost and the expense is going to look like. And the big thing is that you also just don't want to be kicking that can too far down the road. A lot of people will come to me when they're like, oh crap, I actually feel like I've got something to lose. Whereas maybe that sense of urgency isn't always there when you're just deal hunting for the first time, but there's actually. The risks are really the same. Yes. Maybe the frequency of your exposure to that risk changes over time the more deals that you're doing or the more people who you're interacting with. But those risks from, you know, doing due diligence, going under contract, forming partnerships like that doesn't change whether it's your first deal or your 10th deal.
- [03:29]
Host 2
So if you think about the journey, Bonnie, of a, of a rookie investor who's on the hunt for their first deal, at what point in that journey should they start planning for asset protection? Is it once they're under contract on that deal? Is it, you know, after they've closed? Is it, you know, when they decided on a market? At what point should they actually start this process of thinking about and planning for asset protection?
- [03:53]
Bonnie Galam
Well, if you're talking about asset protection from the perspective of like, what's the holding structure be, Should I have an llc? Should I be using something else to hold the title? It's always best to do that, at least in the contract period, if not before. But ideally you want to be thinking about this decision beforehand because oftentimes it affects the type of financing you're able to have and it can also affect title and things like that that you don't want to be fiddling with, especially as it gets really close to the closing date. But the other pieces of asset protection, right, like, am I doing due diligence? Right? Am I forming partnerships? Right? What is the lease going to look like with the tenant the day after I close? Like all of those pieces are also asset protection too, right? I don't think that there's a period where it's, it's too soon to Be thinking about it. I mean, maybe if this is like the first time you've ever thought of, you know, real estate, but if you're actively on the hunt for it, then I think think your holding strategy, the same way that you're thinking about your exit strategy needs to be kind of formulated from the outset.
- [04:50]
Host 2
I think one of the challenges that a rookie investor faces is that they're bombarded on social media with all of these super experienced investors who are on the whiteboard talking about their complicated LLC structures and they all think that they need to do the same thing. Right. So how can a rookie approach both from the offense side and the defense side? How can a rookie approach asset protection in a way that's actually not overcomplicated and suits the size of their portfolio?
- [05:17]
Bonnie Galam
Yeah, that's a really huge issue that I see, I think a lot of. And it's not just people in forums, it's other attorneys. They're really scaring people into thinking like, unless you've got, you know, multiple layers of LLCs and Wyoming or Nevada and all these other states, then like, you're not doing it right. And that's absolutely not the case. Because if you think about it from the most fundamental standpoint, that LLC is on the defensive side. And what else is on the defensive side? Insurance. And so from my point of view, you don't need an llc. I would hate for someone to not jump into real estate investing and not be able to, you know, create the generational wealth, build the roi, get the tax benefits, all that type of stuff, because they feel like they need to have some sort of convoluted entity structure. Those can be nice. But like, this is also sometimes like planning for like people who have nine figures of wealth, billionaires. And when you're, you know, buying your first level property, like you have to do what makes sense for right now. We can always adjust and improve and do those types of things. Or not. LLC is an insurance, more or less are kind of on that same defensive side. And so lawyers, we can only sell LLC is right. And so most lawyers are going to say, you need an llc. We have a hammer. Everything looks like a nail. Whereas like insurance, it can also do the same thing. And so if someone's not ready for an llc, usually for like a financing reason, either they don't have, you know, 25% down for a commercial loan, or they just want to do like a house hack and get the benefits of like an FHA type of purchase, have it be a primary, get those tax benefits and that's totally fine. I would never tell someone not to do that. Just say, okay, you got to go call your insurance broker and make sure you're properly insured on that side as well.
- [06:47]
Host 1
Bunny, you literally hit the question that every rookie asks that we see all the time in the BiggerPockets forums, in the real estate rookie Facebook group, on our YouTube comments, as Do I need an LLC? So, just to kind of clarify what you said there was, you basically have two options where you can get the property in your personal name and get insurance to cover you, or you can go ahead and put the property into an llc. Could you maybe talk a little bit more about that insurance piece as to what insurance should we get on the property? So it is comparable to an llc. On the defensive side, when we think.
- [07:23]
Bonnie Galam
About holding a property in our personal name, it's basically commingled. Right. That risk is commingled with everything in our life. And so when I think about insurance, yes, we want to think about, you know, the property, casual insurance for that particular property as well. But I also tell my clients, what's your car insurance policy? Right. The most common personal injury lawsuits in America are not people tripping and falling on rental properties. It's people getting hurt in car accidents. And so if you want to protect your rental property, well, then you better make sure that you don't have, like, the state minimum car insurance policy. Right. And so we got to make sure that all of those things are all being covered.
- [08:01]
Host 2
That is a super interesting take. I've never even thought about that before.
- [08:05]
Host 1
Me either.
- [08:06]
Host 2
Now I'm terrified.
- [08:07]
Host 1
Everybody always thinks about losing their personal assets because of the rental, not losing the rental because of something else that happened. Yeah.
- [08:15]
Bonnie Galam
And it's totally the opposite that I've seen, like, in my experience, like, the most common things, like 50% of marriages end in divorce. Like, how many investors have a prenup if they started investing? Like, all. All of these things are different ways that we can implement asset protection in very approachable ways that are not affecting our financing per se. Right. Like, they don't care what the car insurance is, but that is really adding a strong layer of asset protection to protect that rental property. Right.
- [08:40]
Host 1
So we have to take a quick break, but while we are gone, take a minute to Download the new BiggerPockets app in the Apple Store. You can check out forum posts, chat with other investors, and quickly use the tools and resources that are available to BiggerPockets listeners. We will be right back with more from Bonnie on what actionable steps you can take today to stay protected.
- [09:03]
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- [09:48]
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- [10:55]
Host 1
We are back with Bonnie talking about asset protection. We've talked a little bit about LLC is having it in your personal name. What are the two to three actionable things that rookie investors should be doing right now?
- [11:09]
Bonnie Galam
The number one thing is keep calm and put it in writing. When in doubt, put it in writing. If you have a call With a tenant. If you're working on a deal or a partnership with somebody, put, put it in writing. If you're dealing with a contractor, have a writing, not just like a, an invoice on like carbon copy paper. All of those things are evidence, right? And so if any part of that deal ever goes sideways, you have something to show in court all too often. This is something I experienced as an investor early on in my career was ending up in legal hot water and it being a he said, she said. And this is such an easy thing to do. Whether it's an email paper trail. I don't like text just because they're often hard to move into evidence. But besides the fact emails send a letter if things are getting really nasty, it's not that hard to just document your communications or have contracts with the people who you're interacting with. Another thing that I would say is invest in your foundational documents, Invest in a good lease, Invest in if you're doing some sort of creative financing or if you're doing wholesale, like whatever your entry level first property is going to be, whatever your exit strategy is going to be, make sure those documents are rock solid. I see a lot of newbie investors coming to me saying, hey, my coach gave me these, you know, contracts. How do they look? And I'm like, they're for like North Carolina, this is Jersey, like that. That's not going to float here for a myriad of reasons. And so you have to be really careful with the information that is being provided to you and making sure that it's state specific, because so much of real estate is state specific. And so that's great that somebody who, you know, may be successful with a particular exit strategy in their state. You just want to double check that with a local attorney to make sure that everything is up to snuff, where you're looking to actually do the investing. And the other thing that I see with early investors is partnerships, whether it's for money reasons or you're partnering with someone who just has more experience than you. I've often seen these partnerships go sideways for either for experience reasons or just for ethical reasons, like someone just, you know, wasn't living up to their end of the deal. And so you just really want to make sure whenever you're going into business with anyone and real estate investing is a business that you are properly memorializing what everyone's responsibilities are supposed to be, who's responsible for what, and what happens if things go sideways.
- [13:31]
Host 1
Funny, when I bought my first rental property was a Duplex. And the guy that did the home inspection was like asking me, he's like, about the property. He's like, wow, that's so great. He's like, you know, I used to be a real estate investor too. I had 10 properties with my partner and he said, we don't have any anymore because my partner got divorced and he didn't have the money to buy his wife out. And we had to sell all our properties because I didn't have the money either to buy him out. And it just reminded me of those two things that you mentioned as divorce and you know, partnerships as to those can be something to wipe out your properties.
- [14:08]
Bonnie Galam
Yeah, it can. It can totally wipe things out. And it's something really easy just to set up in the get go when you're creating or forming these things.
- [14:15]
Host 2
So if you are investing with the partner body, I guess what, what are maybe some specific things you should be including to make sure that you're, you're protecting yourself appropriately?
- [14:25]
Bonnie Galam
That's such a great question. My first thing is like, does it have to be a partnership? I am always pushing back on my clients, like, is there another way we can structure this? Because it's like a legal marriage, right? You're filing tax returns with this person, you are sharing money with this person. If they don't do it, then you might have to pony up, you know, in a capital call. And so that's step number one is I'm always thinking, can we make this alone? If we can just make this a promissory note, because that's often probably 50, 60% of partnerships is someone just giving money. And so instead of giving equity, can we just make this debt?
- [14:57]
Host 2
So just really quick on that point because I think it's an interesting one. What are the different legal or just ramifications of partnering with someone on an equity basis versus partnering with someone on, on a strictly debt basis?
- [15:12]
Bonnie Galam
A debt basis is a lot simpler. It's a lot cleaner, I think from a legal standpoint, because you just have a contract with this person that you owe them money, basically. Maybe there's security where we're putting a mortgage or some sort of deed and trust, depending on what state you're in, to be able to have security on that note. But it's just a lot simpler, right? They don't have decision making power they're not involved in. From a financial standpoint, they're not having, you know, too many cooks in the kitchen. Like when it comes to budgeting, when it comes to what contractors are we picking who's the realtor going to be if we go to flip this or find a tenant for? And so there's so many decisions that have to be made where, like, if someone just has money and they have nothing else to offer you, can we just make this debt? Whereas on the equity side, it really is a legal marriage, right? Like, we're going to be sharing bank accounts. There could be credit involved. If something goes sideways, who's going to be the one to pony up to be able to close that issue? And so it's. It's really, you have to do due diligence on your partner, like, what is everybody's track records? And be able to ask those uncomfortable questions, right? That almost like, what a mortgage company would be asking you, like, what is your financial history? Like, have you ever filed bankruptcy? Like, if you're not comfortable asking your partner, your business partner those types of questions, like, should you really be able to go into business with them? And their answers to that don't have to be deal breakers, but you at least need to have the honest conversations around the tough stuff that can come up.
- [16:37]
Host 1
Now, Bonnie, I've also seen on Instagram that, you know, investors are talking about, you need a trust, you need a family trust. What is a trust and when do you actually need one as a real estate investor?
- [16:50]
Bonnie Galam
Yeah, this is another one where there's a lot of really terrible misinformation kind of going around there. Trusts are a box that you put assets in and you can put rules around the use of that box. There are probably hundreds of different types of trust that you can have. And so when someone says, you need a trust, my first question is, like, what kind are you talking about? The second thing is, like, what is your intention? There's some trusts that are designed more for asset protection. There's some that are more for estate planning purposes. I love the ones that are for estate planning purposes. I love creating trust fund babies. I love creating, you know, really simplified ways for people to create generational wealth through trust planning. And I think that that is really important if you've got properties in multiple states, because you actually have to do probate in every single state where you own real estate. And so that's a huge expense that we shouldn't have to liquidate a property to pay for, right? Like, let's just consolidate everything into one trust and we don't have to deal with that. There's actually also a lot of trust that I've seen floated around on social media and other places that are just straight up illegal. Like the IRS has come down saying like we do not believe these trusts are valid forms. They're trying to be tax loopholes in ways that are not enforceable. And so like you don't want to be banking on things to do things that are like on the edge because the IRS doesn't like that. So certain types of trust are fantastic. I would use them all the time. But certain other ones I'm just like, oh God, where did you hear about that from?
- [18:17]
Host 1
Out of curiosity, I have a question as to like sub 2 deals where people put the property into a trust. Is that something that you should be doing or.
- [18:27]
Bonnie Galam
No, this is a tough one. I actually like DM'd a big sub 2 person. You probably know who I'm talking about about this issue because here's the thing. I and pretty much every other attorney I personally know will not touch sub 2. That doesn't mean that there's not to be money and made in it. But it does mean that we are knowingly putting the investor, buyer and that seller in breach of someone's mortgage note, right? Like that mortgage that that person took out says they're not to transfer the property and if they do, there's going to be a due on sale clause. Now we can use trusts to make that transfer hidden from the mortgage company. But guess who's going to get, you know, the finger pointed at if someone finds out, right, it's going to be the lawyer. And like that is just not worth the malpractice risk to me personally. There are obviously attorneys out there who are fine doing that and that just comes down to their risk tolerance. I don't judge them for that. It's just that's the line that I've put in the sand. I think it is risky and ultimately the person who is going to be hurt the most is going to be the previous owner, you'll call it the previous owner, the seller of the property should something go sideways, right. I have some clients who don't use me who do do this using templates from I don't know where. They've asked me about it and I said look, if it's something where it's like really short term, like you're holding it for three to six months in sub two, like the risk is probably pretty low for everyone. But if this is something where you're like going to do sub 2 for the rest of someone's 30 year mortgage, then I would be really, really, you know, antsy about that personally. But one thing about me I never want to impose my risk tolerance onto my clients. Like that is their prerogative. There's a million ways to make money. I just don't need to be a part of it.
- [20:05]
Host 1
Yeah, thank you so much for sharing that and your honesty on the subject. I was just very curious because if you go into the Bigger Pockets forums, there's so much debate over sub 2 and the trust that you're putting the property in and things like that. So, you know, thank you for sharing. When should a rookie investor think about getting a trust? Is that should you have X amount of properties? Should you have X amount of net worth? When's the right time to actually consider a trust?
- [20:31]
Bonnie Galam
Sure. So we're thinking about it from just like purely an estate planning perspective, which is probably the simplest. When you're thinking about like revocable living trust, trust for your kids or grandkids, things like that, then there's really no time to wait. I mean, I have people who are not investors at all who have trust because they, you know, they want to avoid probate or they've got, you know, a, they're snowbirds and they've got a house in the north, they've got a house in Florida or something like that. And so there's a lot of different reasons why people have trust that have nothing at all to do with real estate. Some people do it because they're trying to protect assets from nursing home and be able to be eligible for Medicaid and things like that. And so I would not wait for any of that stuff. Number of assets, number of, you know, states that you own properties in or net worth or anything like that. Because everyone should have an estate plan if you're over the age of 18, because that's when you become a legal person to be able to make those types of decisions for yourself as opposed to your parents. And so if you don't have an estate plan, go get one that's a easy asset protection fix that is available no matter what stage of investing you're in.
- [21:30]
Host 2
You kind of defined trust earlier, Bonnie, like what it is, but I guess specifically from like a. And you, you kind of touched on it right now, but specifically as a real estate investor. What are some of the maybe benefits, advantages and disadvantages of a trust?
- [21:46]
Bonnie Galam
Sure. So the big thing, I'll say there's two real big buckets of types of trust. The first is revocable, meaning you can change the terms of the trust. And that's probably the most common one that is used just for people generally it's used very commonly for estate planning purposes. And that is, there's really no downside to it. It doesn't trigger due on sale clause. It's just a bucket that we put everything in to simplify your estate and avoid probate, which is often a big benefit in many states, not all states. And it's also private. Right. Like, I don't know if any investors have used probate list or work with wholesalers who screen probate list, but that's what they do. They're screening people's wills to see what assets are there now available to target. The other type of trust is irrevocable. And the downside to those types of trust is that they're just, that they're irrevocable. And so in order to get usually some form of tax benefit or asset protection benefit in return, you have to give up control of that asset. And that's a big piece that I think of a lot of investors are missing, especially younger ones. Right. Like as we're growing or if you're in your 30s or 40s, like, you probably don't want to be giving up control of your assets. When people start getting older and they're thinking about like, well, I'm probably not going to be around, you know, in 20, 30 years, or I don't necessarily need this asset for my income right now, or things like that, then perhaps giving up control is a conversation worth having. But generally speaking, the irrevocable trusts are not the baseline of what people should be thinking about. And, but it is a lot of what people hear about because they're like asset protection trusts or, you know, get these tax benefits through these trusts, which is true, but you're giving up something in order to make that happen, and that is control what you're giving up. And for a lot of people like that, when they hear that part of it, it's like, okay, let's pump the brakes a little bit because that may not make sense for the way we're running our businesses and the way that we expect to receive income off of these assets.
- [23:40]
Host 1
Who are you giving up control to? Is it the executor of the trust?
- [23:44]
Bonnie Galam
It could be a trustee, it could be a third party, like trust protector or manager, things like that. And you can't control them. If you, if there's like any inkling of like you actually being the puppet master, then any court would be like, this trust doesn't count. You don't get the benefits of it.
- [24:00]
Host 1
Yeah, that's so interesting because I Have a friend who has an irrevocable trust and he's like involved in this lawsuit right now where it's like, makes me scared of ever going into irrevocable trust ever.
- [24:12]
Bonnie Galam
Well, because they're really hard to like change. Like it's not a, a thing that you tread into lightly, especially on like the younger gen, I'll say like younger people.
- [24:21]
Host 2
The main benefit then of the trust is just how the assets within that trust are handled after, after you pass away. Or are there actual benefits today of like, hey, I can reap better tax advantages of using this trust than if it were in some other type of asset protection category.
- [24:42]
Bonnie Galam
So revocable trust, the benefit really comes when someone passes away. Irrevocable trusts, they can have definite lifetime benefits. There's things that you can do to like shift wealth and income to other people. And sometimes they come up even in the instances of like divorces where someone needs to create a trust for their spouse during their lifetime or their children from a former marriage during their lifetime. So there's definite uses of trusts during people's lifetime. I don't want to say that that's not the case. But there comes a cost to that. Right? They're usually irrevocable in order to be able to get those assets because what you're doing is permanently retitling these assets to be not yours anymore. And so once that happens, then yes, we might get a tax benefit, but there's kind of no take backs either.
- [25:26]
Host 2
Let me ask one final question. Just because there's a lot of different options that rookies have when they think about, you know, asset protection. You have the trusts, you have llc, you have your insurance, your landlord insurance, you have umbrella policies. So how like, is there a decision tree that one should follow so they know when to add one of these elements to their asset protection game plan? Like should everyone just. Obviously insurance, everyone should just always start with. And then is like the, is the next layer an umbrella policy? Or is the next layer the llc? Or is the next layer the trust? Like, what is the kind of incremental steps folks should be taking as they're adding on to this asset protection plan?
- [26:11]
Bonnie Galam
I wish I could say that there was like a definite like ladder of asset protection that people follow. I do think, like you said, that insurance is probably the baseline and then from there it is usually some sort of conversation about umbrella policies and or LLC is the reason to say. Or is that LLC is. There's still usually some sort of financing component. So we have to say does this make sense? I mean I literally, when I do my asset protection audience with clients, I will say, what is your mortgage payment? And we'll compare it like say you had to refi this property into a commercial loan product. What does that do to your cash flow? Is that cash flow better use somewhere else? Right. And so these decisions can't be made in just like the pure abstract. Another thing I just want to bring up as it regards to trusts and LLCs and things like that is that there, there's this concept of land trusts and I didn't really talk about that. Land trusts are statutory in most instances, meaning Florida, for example, people don't use single member LLC is in Florida. They're kind of useless. And so people use land trusts down there. Illinois has a land trust. They may have been even the first state to have one. But if you're not in one of those states where there's a statute along the book saying we have a land trust and this is the asset protection it provides you, there's no real guarantee it's going to work outside of that state. And a lot of states, there's increasing case law out there where states don't like people going outside of their state to get some sort of asset protection conundrum in place and then coming back and doing business in this state in an entity that they don't recognize and trying to be like, well, you can't get me now. And states are just, they're, they're catching up on this, right? The courts are saying this is not just doesn't feel right that you can go and do all this, you know, stuff that we wouldn't permit as legal in our state and then do business in our state and then try to get away with, you know, not being subject to lawsuits. The. And so to, you know, think about that latter, I also say, just say I'm like, what feels good, right? I have some clients who only feel good if they've got one property per llc. That is what makes them sleep good at night. I have other people who have $1 million, give or take, because right. Properties appreciate per LLC and that makes them feel good at night. And so I never want to subject that because also I think a piece, especially if you're not in a state that has like serious LLC is if you're truly doing one property per LLC, that's a lot of QuickBooks, that's a lot of bank accounts. It's a lot of things to manage. Like it's really fun and dandy when you've got like three LLC but like when you've got like a hundred LLC is that is not, that's not fun. That's like 100,000 in like tax returns just for the CPA filings. Like it's just at some point you have to figure out a structure that consolidates that in some way. And so it's an evolving discussion. I don't think on day one you need to figure out what steps need to look like on in year five or year ten, but you do need to decide like what makes the most sense right now for your exit strategy and your financing and your risk tolerance.
- [29:11]
Host 2
Bonnie, so much good information here and I feel like every time I talk to an attorney learned something new about asset protection. So thank you for, for even educating me on here. We've definitely got some more we want to get to with you, but we're going to take a quick break first and then we'll be back with Bonnie after this break.
- [29:26]
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- [30:04]
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- [32:32]
Host 2
All right guys, welcome back from our break. Bonnie, we've gone over a lot but I think one lingering question and you you kind of touched on this before our last break, but what exactly does the team look like to to help you fully set up your asset protection? I know for me personally I've seen that sometimes your your lender, your CPA and your attorney can all be at odds about what they think is like the the best path forward for you. So who who all should be on the team and how do you kind of coordinate those folks to make sure they're rowing in the same direction?
- [33:05]
Bonnie Galam
Lawyer, cpa, Insurance broker. Don't forget about the insurance broker should be on the Team lender to an extent. But I feel like enough different financing options that like, whatever you decide works for you. From an asset protection standpoint, you can just go find a different letter lender who will match that. Sometimes lenders are constrained by their own boxes of like, what products they're offering. And that doesn't necessarily have to match up with whatever legal strategy that you have. And when it comes to lawyers, it's not uncommon. And I don't take any offense to it myself, for people to have multiple lawyers. Like, it is okay to have a business lawyer, to have someone who helps with the transactional stuff, maybe a different lawyer who does zoning or evictions or things like that. Like, we are specialists and you want to hunt us down and it is okay. We don't take offense when you say, I did this with this lawyer, now can you help me with this part of the project? Or something like that. So kind of the same thing with lenders, right? Like, if one lender is not the right fan, then you move on to the next one.
- [34:04]
Host 1
Another thing with this is I see like online websites like Legal Zoom, things like that. Should you be using any of these online resources for your contracts or lease agreements, different things like that, or should you be hiring an attorney?
- [34:18]
Bonnie Galam
I feel like, particularly when it comes to leases, you want to be working with a local attorney. Though the laws around that stuff are really evolving quite a lot. Especially post Covid, there's been a ton of like tenant protections that have been put in place. Especially here in the Northeast where I'm at that. You just want to make sure that whatever you're dealing with is up to date. I and every lawyer, we kind of say we have a love hate relationship with Legal Zoom. The from a user standpoint, the output is only as good as the input. And so if you don't understand the decision making process that goes into like, what's being generated, then it may not be great. I've had, I've used it for like a trademark myself, but like, I don't know that I would use it to do my estate plan. I definitely wouldn't do that. The reason that sometimes lawyers joke that we actually love these things is that people screw them up all the time and then we get to paid to clean up the mess. And so like, that's the, you know, the honest truth from, you know, being on the lawyer side of things. I mean, I sell, you know, some legal templates on my end, but I'm very, very curated in what they are offered because I do Think some templates can do more harm than good. And it's really these like state specific ones like leases and agreements of purchases of sale and things like that where people really end up in hot water. Another thing that I would not DIY at all is partnership agreements. They're so customized. There's a lot of important like tax and legal decision making that goes into that process that you really want the guidance. I mean that's really what it comes down to. It's like when do you want like paperwork and when do you want like guidance and process through, through those decision making?
- [35:49]
Host 2
Bonnie, what about artificial intelligence? You know, Chat GPT, you know, Claude Sonnet, there's so many tools out there now. What about leveraging some of those to build out some of these, you know, legal documents and templates that you'll need?
- [36:02]
Bonnie Galam
I haven't gotten great output from them. Look, I'm playing with as much as anybody. If I can make my life easier as a lawyer, like I'm all for it, that would be great. But like I have, you know, created tons and tons of different types of proms for ChatGPT and Grok and like all these things. I mean, I joke that like ChatGPT is like my boyfriend and my therapist and like everything. I talk to it all the time, but it's, it's not there yet. I will say it's not bad on legal research if you can make sense of what it is. Like I've done deep research on ChatGPT a few times to kind of help with like a really nuanced situation where I'm like, give me the case loan, give me this and that way I can go and check and you know, put all the pieces together. And it took, you know, 20 minutes to populate this. It wasn't bad, but I don't know how many like non lawyers would know what to make of that. And it's one of those things where it's like don't be pennywise and pound cheap when it comes to some of like the legal stuff. I totally get that all day, almost every day, like we as investors are making important legal decisions and we're not calling our attorney to like check on that and that's totally fine. But when it comes to like the big stuff where it's like if this goes wrong, it's not going to cost me like a month of rent, it's going to cost me like a property or a lawsuit or something like that, then like it's worth having at least consulting with an attorney to See what they think.
- [37:13]
Host 2
And that's why I think your point, Bonnie, earlier, of having your foundational document done correctly. And like you said, whatever that is. And for me, like one of the ones that I spent a good amount of money on was our partnership agreement, because we've done a lot of partnerships in real estate and you know, we spend a lot of money with our attorney to kind of draft and make improvements. But it was, it was a worthwhile investment to us for all the reasons you mentioned earlier. And now we've got a really rock solid document that we can just kind of, you know, plug and play as we step into, into new partnerships. So I think that's, that's really, really phenomenal advice. I think the million dollar question, though, Bonnie, for a lot of rookies that are listening, is how much does it actually cost to set up a lot of these asset protection measures? And what should a rookie expect? Kind of stepping into this, putting aside.
- [38:01]
Bonnie Galam
Like all the insurance things, like, if we're talking about this from like an LLC or trust, like the lawyer involved perspective, you can form an LLC on your own, probably a single member LLC for 100 bucks or so, give or take in most states on your own, the, you know, trust work, things like that. Yeah, you're going into the thousands. But I strongly believe, like, you should not need asset protection from your asset protection and that it comes down to math, right? Like, we shouldn't be spending more than like the underlying problem itself. And I've seen a lot of really early stage investors get kind of swindled by some other, you know, asset protection attorneys who sell them like, you know, the moon of asset protection. I'm like, you've got like $100,000 property. Why are you spending $25,000 on asset protection? Like, the math isn't mapping. And a lot of times also these out of state asset protection firms, whether they're law firms, some of them are more like financial advisory firms, like with lawyers on staff. Like there's a lot of different variations that they come in to be, but they don't understand like the state law specifics, right? They're like, oh yeah, we'll move things all around. And like, well, they didn't tell you about the transfer tax and then tell you that every time you have to do a refinance, you have to move it in and out of this and you have to call your lawyer and pay them an hourly fee in order to, you know, them act as trustee in order for you to do a closing. Like there's all these other little pieces to it that when it comes down to the operational side of being a real estate investor, I think kind of get brushed over, you know, in this pursuit of like some sort of perfect form of bulletproof asset protection, which in my opinion, just doesn't really exist.
- [39:34]
Host 1
I think that's such a great point as to one of the really important pieces is getting an attorney that knows your local and state laws to really help you through any of this process. And I just bought a property in another county that I've never purchased from before. And I close on the property and I get a notice from the county thing that I'm not getting the deed. And because there was $400 short for the clerk fee is to actually file the deed. And my attorney had paid those out of closing. And it was just that little tiny thing because they didn't know what that county does for closing. And it was different from the county that we are in. Just kind of shows you just one little thing can happen that, you know, and now my refinance is delayed because I don't have the deed yet. And so I can't even imagine, you know, on a higher level, an attorney not knowing the state or local laws that, you know, could have an impact on you.
- [40:31]
Bonnie Galam
I hear those types of stories not infrequently, where it's just like, oh, you lost, you know, a few, few thousand dollars here, a few hundred dollars here. I'm like, none of this stuff needed to happen that way.
- [40:40]
Host 1
Well, Bonnie, thank you so much for joining us today. We really appreciated you coming on and sharing your knowledge. Can you tell everyone where they can reach out to you and get some more information?
- [40:50]
Bonnie Galam
Sure. So I spend too much time on Instagram at Bonnie Gallom, esq. And I also can be found at my website. On my website, my law firm, galliumfirm.com or my online legal education and template shop, the Salad Foundation. Shop.
- [41:05]
Host 1
Well, Bonnie, thank you so much for joining us today. And thank you to everyone listening. If you like this podcast, make sure you're subscribed to the Real Estate Rookie Channel. We'll be back with another episode soon. And in the meantime, if you want to learn more about LLC is head on over to biggerpockets.com blog to read our new article to help you walk through that decision if you need an LLC or not. I'll also put the link in the description for you guys. Thanks so much for joining and we'll see you next time.
- [41:35]
Sponsor 5
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