Subscribe via:
Show Summary
In this episode of the Real Estate Pros Podcast, host Micah Johnson speaks with attorney Joel Kaufmann about the critical importance of asset protection for real estate investors. They discuss the foundational role of LLCs in safeguarding personal assets, the necessity of layered structures for managing properties, and the significance of estate planning to ensure continuity and reduce conflict. Joel emphasizes the need for proactive planning to mitigate risks associated with death, disability, and disagreements among partners. The conversation also touches on advanced strategies like irrevocable trusts and the importance of having a comprehensive legal framework in place to support long-term investment goals.
their skills to remain relevant in a changing market.
Resources and Links from this show:
-
Listen to the Audio Version of this Episode
Investor Fuel Show Transcript:
Joel Kaufmann (00:00)
Absolutely and every real estate investor out there should be thinking about the three biggest risks to their business which I believe are death disability and disagreement Nobody wants to think about what’s gonna happen when I die what’s gonna happen if I’m disabled then I can’t run this business anymore and nobody also wants to think about what’s gonna happen if I have a disagreement with You know my best friend who I’ve been investing in real estate with my whole lifeNobody wants to think about that. But when you’re in my position as the attorney and you see what happens and you see that, you know, without that proper legal structure, if there are, you know, those three big risks, death, disability, or disagreements, it can really cause a lot of risk to those assets.
Micah Johnson (00:31)
Right.Hey everyone. Welcome to the real estate pros podcast. I’m your host, Micah Johnson. And today I’m joined by Joel Kaufmann, who’s been helping investors protect their investments for the last 10 years now. Joel, welcome in man. How you been doing? I’m glad to have you. I think our listeners are really going to take great information away of how to protect yourself in this industry. You know, we all get in, we’re all super excited. We’re buying properties, we’re investing. And then there’s that one of the major sections of your business.
Joel Kaufmann (02:37)
Great, thanks for having me on.Micah Johnson (02:54)
the law one, having a good attorney in your corner, making sure that your things are set up well and how that protects you in the long run. I think you got some great things to share. So let’s dive in there. For people who may not know you yet, what’s your main focus right now and what markets do you operate in?Joel Kaufmann (03:10)
Yeah, so I’m anattorney licensed in California in Nevada, and I’m joined by my father, who’s also an attorney licensed in California in Nevada. And I primarily practice from our San Diego office, but
We also have an office in Northern Nevada and we help clients across the country structure their real estate holdings. And my focus right now has really been asset protection for real estate investors, both residential and commercial, and creating those durable legal structures that protect assets, manage them, and preserve that long-term value.
Micah Johnson (03:53)
which is what we were all getting into this for anyways, right? That long haul, that’s what you hear folks talking about. So take a step back. What led you to where you are today? How’d you get to this point where protecting these assets became so important to you?Joel Kaufmann (04:05)
You know, I’ve been involved in the family real estate business my entire life with a lot of exposure to residential and commercial real estate ownership and protection. Before practicing the law, I worked as a lobbyist for some real estate developers where the focus was on land use and zoning and permitting regulatory structure. Then I was in the corporate world working for some large energy companies in highly regulated environments.with asset ownership, asset ownership, compliance, and risk allocation. And this really all led me to
understand that the structure of it, whether you are a startup or a multi-billion dollar company is really essential. And these roles have shaped how I approach real estate today with that emphasis on big picture planning, stakeholder awareness and risk containment.
Micah Johnson (05:54)
Man, that’s good stuff. To start off with, let’s start with one of the smaller end of a company, either a newer company or they’ve been doing it for a little bit. What’s something they need to be thinking about that they might not already be doing or really need to consider in terms of how they’re protecting themselves and their business?Joel Kaufmann (06:14)
Absolutely. I think the initial interest for most people with real estate investing is of course the returns. We want to make some money. But the other side of it is managing and containing that risk and understanding that it’s not a one size fits all solution, but it’s about that asset protection.which really starts with not hiding those assets or avoiding responsibility, but rather it’s about legal separation, compliance, and that advanced planning.
Micah Johnson (06:51)
What is, like take us a little deeper into that process for someone to think, okay, I need to do this. What’s that next step? What do they need to be thinking about? Or is it time to book a call?Joel Kaufmann (07:00)
That first step is using LLCs to own real estate. And LLCs are really the foundation to separate your personal assets from that property level risk. And they have a lot of flexibility in management and taxation. And they’re also very widely accepted by lenders and investors.So a general rule of where to form them can often be the state where the property is located. And the purpose of that is to avoid foreign registration, extra fees, and litigation complications. Some common mistakes to avoid are using one LLC to own multiple unrelated properties.
Another mistake could be commingling those personal and entity funds. If you’re setting up an LLC to manage your rental property, well that LLC bank account can only be using funds that are related to that property.
Micah Johnson (08:02)
andJoel Kaufmann (08:03)
have to treat the LLC as a real business or um you know regulators and you know the courts can view that as an alter ego of yourself. So that first step to set up a property level LLC is absolutely recommended.Micah Johnson (08:26)
man, that’s fascinating. So someone can actually do it in a way where it still won’t get recognized if they’re not following what it looks like to have that LLC. So they can even get to court and ⁓ a judge say, that’s not gonna work.Joel Kaufmann (08:40)
Absolutely, yeah, and to make sure that all those requirements such as operating agreements or corporate bylaws depending on that structure are really key. And then as the portfolio grows, then layered structures become important.Micah Johnson (08:59)
take us there, what’s the next step? So they’re in, they’ve got it set up, they’re going along, what’s that next level and when do they really get to it where that needs to come to place?Joel Kaufmann (09:09)
So it could even be just with one property depending on the situation, but the typical model is that there’s a property level LLC that holds individual properties and then a holding company that holds those LLC interests. And that could be you know another LLC or corporation depending on the tax implications. And then…There’s also a management or an operating company to handle the day-to-day decisions. So these different layers help separate the operations from the assets, which helps limit the exposure and also supports scalability of it and exit planning.
Micah Johnson (10:30)
Now for that management company part, is that something they can do themselves or is that they need to hire folks to run that? How does that section work?Joel Kaufmann (10:37)
Yeah, so that can be both ways. If people want to do self-management, it’s best to set up a separate LLC that is responsible for management of properties. So that could just be one entity that is, you know, management company LLC that is then ⁓ responsible for the operations and management of those property level LLCs.Micah Johnson (11:07)
Okay, and so do all the property level LLCs end up underneath that management? So each one has its own and then they’re all under the one. Is that what I’m saying? right?Joel Kaufmann (11:17)
Yeah, yeah, yeah, all under the holding company and then the management company is responsible for those operations. So that could be within that, you know, typically owned by the holding company that then also owns those property level LLCs. And the purpose of that is that most of the liability for a rental ownerMicah Johnson (11:19)
Okay.Joel Kaufmann (11:44)
is going to be from the operations of it that they were supposed to mop up the floor and they didn’t and somebody slipped. Well now when they’re suing it is harder in most states to access.the assets ⁓ of the property owner because that LLC is just the property owner where the liability was in the management company and the management company has income that ⁓ can be gained from that lawsuit. However, ⁓ it’s insulated from the property ownership as a whole and the other assets that aren’t tied to the individual.
Micah Johnson (12:29)
Oh, that makes sense. Now you’ve been doing this a while. Are there any like stories you can share to help bring that point home from your time in this industry?Joel Kaufmann (12:38)
Absolutely. And one thing I’m seeing more and more is with Airbnb investors is buying an LLC in their name or investing in it with a family member.and understand that this is starting a business and to have an LLC that owns the property and to understand whether self-management is appropriate or whether a third party management company can handle the operations. And this is just becoming more more important as it becomes easier for people to purchase these properties, but it’s still important to understand that
you know, whether it’s a huge apartment building or a little tiny home, that ⁓ structuring that with LLC management is really key.
Micah Johnson (13:33)
Interesting, interesting. So what’s the level after that? So you help with the setup, but there’s also exit planning, estate planning, planning to scale. So all that factors into these other pieces. How does that connection occur? What happens next?Joel Kaufmann (13:50)
Yeah, and most people get into real estate investing because they want toleave something to their children or their grandchildren. And I like to say that you can have the best business plan in the world, but that is not going to do your children and grandchildren any good if you don’t have an adequate estate plan. And estate planning is really key for real estate investors because without planning properties can be tied up and probate. The management authority can be unclear.
Errors could be forced into premature sales and having that comprehensive estate plan can preserve continuity, reduce conflict and protect that long-term value. And even in the interim, you can have a situation where say I’m crossing the street and I get hit by a bus. Well, now I may be in a situation where
I’m incapacitated and to be able to have someone that has power of attorney to be able to make those decisions is really key. So that’s the most basic level and we could go into some more advanced techniques as well.
Micah Johnson (15:07)
Yeah, I’d love to dive in there, I mean, even that makes a lot of sense. think about, not many folks like to think about the way it’s going to end, but most don’t imagine it being some violent, unexpected thing where you can be going along without something like this. I mean, your whole business come grinding to a halt if there’s not the right things in place to make the day-to-day function, even beyond just making sure the properties get to the right person in the family. But let’s dig a little bit deeper on that. What are some other things that we need to be paying attention to?Joel Kaufmann (16:18)
So for certain investors, an irrevocable living trust can even further insulate assets. And in this situation, the trust, not the individual, owns the asset now. And when properly structured, this can help ⁓ separate that personal liability.But with the irrevocable trust, it’s important to keep in mind that that requires giving up some control. And it also has to be coordinated with the LLC structure and tax planning. But that can provide even another layer of protection.
Micah Johnson (16:58)
in. It’s interesting as we keep going along, these are all the things most don’t think about when they’re thinking about being a real estate investor, right? They’re reading Rich Dad Poor Dad, they’re pumped about it, they’re getting into the industry. And one of things I heard when I was getting early into business is there’s two departments you better have that are strong, your accounting department and your legal department.Cause those are two things that really stand your business up to get anywhere that you really want to go. And you even talked about how to plan to scale earlier a little bit in our pre-call of this all goes into that, where that proper planning upfront allows you to keep creating what you got into the business to create for. Is there a time too early to reach out and talk to an attorney? Do you think people should talk before they even buy their first property?
and how can they best educate themselves for that conversation? Like what do they need to be coming in?
Joel Kaufmann (17:52)
Yeah, mean, I would always with planning, it’s always best to start early. And I really appreciate when I can help startups when because I have we have people come in too and they’ve been doing this for a long time and it’s a whole cobweb to unravel.Micah Johnson (18:10)
Mmm.Joel Kaufmann (18:12)
So I think that if it’s not addressed in that planning and not everybody needs an attorney for that, I think there can be that knowledge. But I think to have someone with that big picture perspective can be really helpful. And it’s never too early.Micah Johnson (18:33)
I love that man. Because it’s, again, it’s protecting that overall vision you got in here to start it with. I nobody got into business to get sued or to lose and things happen, right? Like it’s thinking about friends of mine that have been sued. I remember the phone call, dude, I’m getting sued. And it’s over the stupidest thing, right? It’s like something that comes out of nowhere. You weren’t expecting it. And you know,Mostly all you see online for real estate are the highlight reels, the big deals, the big closings, the big paychecks. I enjoy seeing the ones that share like, okay, this just happened. Like this is what’s going on, the hard parts, because one, they’re always surprising by how hard they are when they show up. Like you’re like, dang, this is really hard. two, prepping yourself and having as many things in place for when it happens. Because when those hard things show up, knowing what to do next is a critical step.
And if you’ve taken this time to plan like you’re talking about, it doesn’t catch you quite as off guard.
Joel Kaufmann (19:33)
Absolutely and every real estate investor out there should be thinking about the three biggest risks to their business which I believe are death disability and disagreement Nobody wants to think about what’s gonna happen when I die what’s gonna happen if I’m disabled then I can’t run this business anymore and nobody also wants to think about what’s gonna happen if I have a disagreement with You know my best friend who I’ve been investing in real estate with my whole lifeNobody wants to think about that. But when you’re in my position as the attorney and you see what happens and you see that, you know, without that proper legal structure, if there are, you know, those three big risks, death, disability, or disagreements, it can really cause a lot of risk to those assets.
Micah Johnson (20:05)
Right.Especially that disagreements one man, I have seen the horror stories of partnerships that they never thought were going to fall apart that life naturally undoes them. So if you’re out there listening and you have that partnership, think of it like prenups, right? It’s very smart while you’re both in a good mood still to set some ground rules to the game of how you’re going to interact with each other, working with somebody like Joel, because when that moment comes,
things have happened that aren’t usually typically great that drive that business partnership apart. Sometimes you hear the peaceful ones, we just grew apart, but so often it’s not something not good happened. And now you’re at odds with each other. And when you’re at odds with each other trying to solve these problems, ugly. Now you got the quote unquote ugly divorce happening. So getting those things set up, people like don’t like doing it in marriages, but it does seem to make a lot of sense where
Hey, you’re tying yourself up for a long time with somebody. Knowing some rules to the game before you get started only seems a little more helpful, if anything.
Joel Kaufmann (21:32)
Yeah, yeah, always important. And I think, you know, with those partners too, it’s having that conversation deciding what’s going to happen if I pass on and, know, maybe a, the, the family member that would inherit the property, would it be in a position to manage that? And, or would it understand thethe compliance or the rent rolls and payroll and all of those little things that go into running a property and to have that conversation with your business partner to have a personal will but also a will of instructions of here’s what happens to the business and here where… ⁓
you know, where the bank account information is, and here are the key contacts, and to be able to pass that on ⁓ to your business partner and to decide. And there can be creative things that happen too of saying having the LLC that owns that investment property by life insurance policy that would, you know, buy out to the other partner in the event of a death or something like that.
So I would really encourage everyone to think about the hard decisions and the what ifs and the things that keep you up at night because it’s better to think about them now and get ahead of it so you can sleep at night.
Micah Johnson (22:44)
InterestingThat’s just it, man. It takes that stress off your plate. When it’s still just a question in your mind that lives in the mud and doesn’t have a real answer, that’s when it can stress this out. But once we have taken care of it and can set it on the shelf, you get way more energy back, actually. When you don’t have to worry about that, man, if that happens, I’m not prepared. Now it is prepared. It’s taken care of, and you can focus on the thing you were always wanting to focus on anyways, which was building your business.
And most likely the fact that something weird isn’t going to happen to you and things work out okay. But knowing that they are, man, I’ve heard a good term for it, productive paranoia, where it doesn’t need to eat at your life. You don’t need to worry about it all the time, but having a little bit of like, need to take care of this upfront. It is a game changer when things happen in the end, whether peacefully or not peacefully, whether it’s an easy thing or not easy thing. Those just, in my world, they button things up. They help me sleep better.
Well Joel Mann, I really appreciate your time on the show today. Appreciate your story, your perspective. For those that are out there listening and want to learn more about you, what you have going on, what’s the best way for them to find you?
Joel Kaufmann (24:08)
Best way to find me is kaufmannlaw.com. Reach out to us there.Micah Johnson (24:13)
Excellent. And if you’re listening or watching, we’ll make sure that Joel’s link for the website is in the show notes. So make sure you check that out there. Again, thanks for watching. Listen with us today. If you got value added today’s episode, please make sure to share it with somebody like the episode. Joel, I appreciate you being with us again today, Thanks everybody out there for joining us too. We’ve got more conversations coming up with operators, just like Joel out there building a real business in the industry.And as always, we appreciate every single one of you that follows along with us. So don’t forget to subscribe to our podcast. We’ll see you on the next episode.
