Episode Transcript:  

 Hey guys, today we're just gonna jump right in and talk about five ways that LPs protect themself in their real estate investments. Now, typically when it comes to real estate, once someone is confident about the sponsor that they're partnering with and the deal itself that they're getting into, the next big question investors will ask themself is how they want to participate.

And the reason why that's really important is because you wanna make sure. When you're looking at getting into a real estate investment, you're taking into consideration how to protect yourself. What type of tax implications are gonna come with that, and how well is it going to line up with your long-term goals?

So what are the five ways that people most commonly use? We're gonna get it into that in just a moment. Let's get REady2Scale.

Hey guys, my name is Jeannette Friedrich. I'm the director of Investor Relations here at Blue Lake Capital, where we specialize in multi-family investments across the us and because of that, I have the opportunity to observe how a lot of different people participate. In their real estate investments generally as an lp, which stands for limited partner.

Now, there's five main ways that people have gone about this in order to ensure that they are protecting themself, taking taxes into account. And making sure that it lines up with their long-term goals. So the first most common way that I'll see people participate in these investments is simply as an individual.

It's convenient and it's fast. It's directly tied to their own personal information, but it makes it, easy for them to participate and just get into the deals. Now, there's nothing per se wrong with that because the reality is that when you're coming into a real estate deal as an lp, a limited partner, there's already a lot of liability that's been reduced on you for being an lp as opposed to the gp, which is the general partner.

That takes on a lot more liability. However, it does not take into account anything like estate planning and so that's something that's really important to know. But the reason why people like to do it this way is because it does actually still help you capture one of the things that people consider most valuable, which is the tax benefits that come along with real estate investments.

So even though it's not separating their personal finances from their investments, and it's actually clumping it all into one. Most people don't mind because real estate tax benefits are so significant, they don't mind having it reflected on their personal income statements because it often helps them to actually defer taxes and capture losses.

Now, the second most common way that I often see people invest is through what's called A-J-T-R-O-S with is joint tenants with rights of survivorship. Now, this is most common when you see a either married couple or partners investing together into realist. State now, this is more about actually legacy planning than anything else because what this does is it ensures a continuity of ownership so that if one spouse or partner dies the other automatically receives ownership of that investment.

It does also have a little bit of a tax benefit in the fact that they can actually step up in basis when their spouse dies, helping them to actually reduce any potential capital gains tax. So it's good for continuity and a little bit of planning, but unfortunately it does not actually help to reduce any type of liabilities.

All right. Now, another very common way that I see investors participate and protect themselves in real estate investments is by coming in through an l. C Now this is really common for people that regularly invest into a lot of di different types of investments or real estate deals. They basically set it up and run it like a company.

So it's very common to see those that are professional real estate investors or even those that have a lot of a lot of capital deployed into different. Different investments to be coming in through this LLC structure. Now, the reason why people do this is because this is where liability actually is reduced.

It helps to separate your personal finances from your investments so that in the event that say you are personally sued by someone that actually cannot impact your investments or vice versa. That is one of the biggest reasons why a lot of people like to invest through an LLC. Now, in addition to that, another reason a lot of people like to do that is because while it doesn't necessarily reduce any tax implications or your tax burden, it does provide a bit of a sweep through account where you can have the company finance.

Separated from your own personal finances and that gives you a little bit more creative flexibility to be consolidating expenses, doing some write-offs and reporting. Now, last but not least, it does not actually touch legacy planning unless it's paired with something like a trust, which is what we're gonna get into next.

All right. Now, a trust is one of the other most popular ways that I see investors participating and protecting themselves in real estate investments. And this is because it is all about legacy planning. So when you set up a trust, you are ensuring that all of your investments will be handed over to your heirs, completely avoiding probate, which is one of the reasons why a lot of people prefer to put everything that they want to leave as part of their legacy and inheritance for their families.

Into their trust. Basically, it does provide some protection to an extent in a revocable trust. There's really not a lot of protection, but in an irrevocable trust, there is a separation between your personal finances and the finances of the trust. However, because it's irrevocable, that trust cannot be altered or changed.

So there is a loss of control. Now when it comes to tax implications, essentially revocable trust are taxed as if you personally own them. So it's still very similar to as individuals investing in a deal. But again, the benefits that you get from real estate when it comes to taxes is so significant. A lot of people don't mind that being directly associated with their social security number.

But if you are using an irrevocable trust, then you do have the benefit like the LL. Cs being able to separate those finances and then use one of them a little bit more creatively as a sweep through account for consolidation and write off. All right, and that leads me to number five, which is the most common way that LPs will protect themselves and their real estate investments is by using their retirement accounts.

So I'm talking about 401k Roth IRAs, things along those lines. Now, the reason why people like to do that is because it gives them more. Options for investments besides just the stock market. So if an investor is trying to make sure that they're not putting all of their eggs in one basket, hence the stock market, and they wanna have more of a diversified strategy, then they can look at alternative investments like real estate.

Or they can look into other options say for example, self storage or build to rent, things along those lines. But the point is it gives them more opportunities and more options to pick from, which is one of the reasons why a lot of people do like to use their retirement funds. Another reason why people like to use it is because if you're taking the funds out and directly placing it into an investment, then you're not being penalized for using those.

Funds because it's going directly into an investment and not straight into your pocket. And then of course, there's a lot of tax benefits associated with that as well, because if it's coming from say, your Roth IRA account, then you don't have to worry about any tax hits for pulling those funds from there.

And for those that are using it from, say, their 401k, as long as they return all of the investment in. Full, including any of the proceeds that were made on that investment that also will be tax deferred until the time that they decide to pull that from their account. So it does help to actually provide a lot of tax benefits, and it helps people put their little nest egg to work in some safer ways than maybe the stock market while they continue to grow their wealth.

Now, when it comes to protection, as far as liability, there's a little bit more protection simply because it's a retirement account as opposed to just directly under your own social security number. But that's limited to the provider that you're partnered with to get your 401k through. So I hope you guys found this helpful in understanding that it's not just about the deal, it's not just about the sponsor, it's also about how you participate in a real estate investment that can really determine if you are protected, if you are maximizing the potential tax benefits you can get from that investment and ultimately, if it lines up with your long-term goals.

So I hope you guys found this helpful, and I will see you on the next episode. Ready to Scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target Class B value add multifamily properties across the Sunbelt.

Our CEO Ellie Pearlman invest a substantial amount of capital into every deal. This means our interests are aligned with yours. If you're an accredited investor looking to. Span your portfolio and diversify sponsors. Be sure to visit us@bluelakecapital.com. Blue Lake Capital, be bold, be extraordinary, and keep moving forward.