The Corporate Veil And The Importance Of An LLC With David Chafkar

by Brandcasting You

A corporate veil is a structure that separates your personal assets from your business assets. It shields the people behind the corporation from any personal liability. This is why when you start a business, getting an LLC is very important. Think of it as life insurance for your company. To talk more about asset protection, LLCs, S-selections, and more is David Chafkar. David is an executive and corporate analyst of Nevada Corporate Headquarters. David has a lot of experience when it comes to real estate investing and how to pierce the corporate veil. Join in as he shares important information on the show with Jeff Rutkowski.

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The Corporate Veil And The Importance Of An LLC With David Chafkar

We have an incredible guest, Mr. David Chafkar, coming on this episode. Before I give him the introduction he deserves, I want to go to the Word of the Week Segment. The Word of the Week segment that you’re going to hear throughout this episode is the corporate veil. One way I always like to define the corporate veil is it’s the structure that separates the personality of a corporation or business from the personality of the shareholders or owners of the business.

Think of it like a wall. When you go into business and become a real estate investor, you want a separation between everything you own personally versus everything the business is going to own personally. That protects you from any debts, any liabilities, and the obligations of the business. It becomes a separate entity or personality in the eyes of the government and the IRS. That’s the Word of the Week Segment, the corporate veil. You’ll read how we leverage that when we decide to start our business with an LLC, a corporation, a sole proprietorship or whatever it may be.

In this episode, we have Mr. David Chafkar here. David has been an Executive Corporate Analyst for over twenty years with a company called Nevada Corporate Headquarters or referred to as NCH. He’s an expert and the person that I go to for any asset protection needs and tax planning needs. His team has worked with over 100,000 real estate investors in starting their business and structuring it as that business grows. David Chafkar, welcome to the show. Let’s get into it.

I have a good friend here, Mr. David Chafkar from Nevada Corporate Headquarters. He’s an incredible guest. It’s going to be a great show. I feel like I’ve been saying that every week. Every week, we’re bringing you quality guests and great shows. David is a little bit of a different guest here. We’re going to focus on a different area of real estate investing, and focus on asset protection and tax planning.

David is an executive corporate analyst with NCH, Nevada Corporate Headquarters. He has over twenty years of experience there. He’s probably one of the most intelligent people I know in the area of asset protection and tax planning. He and his team have helped over 100,000 real estate investors structure and launch their business, myself included. He has done a lot of work with his team for me and pretty much every area of my business. Let’s get into it. Welcome to the show.

Thanks, Jeff. It’s always a pleasure.

I’m excited. It’s funny, when I got into the business, tax planning and asset protection were not something I was too excited about. Over the years, as you start investing, as you start making some money, it gets pretty exciting. You always taught me that it’s not how much you make, it’s how much you keep.

I asked David, “We always deal together on a business level. What’s something I could say about you personally that’s fun and exciting?” He said, “Nothing. I’m boring.” It’s because you’re so focused on asset protection and tax planning. I don’t think that’s boring. First of all, I gave you the intro, over twenty years and all of that. Take a minute to introduce yourself to the audience. Why do you do what you do? Anything else you’d want to share?

Jeff, I absolutely love the field that I’m in with asset protection, tax savings and tax mitigation. These are things that business owners across the US find themselves in situations where they need a lot of help. We get to be a part of that. We get to be a part of their success. Our organization has done an outstanding job for decades being involved with helping not only real estate investors but any business owner across the US put themselves in a position of finding a lot of success in protecting themselves, building legacies, finding more capital and funding for their business. It’s things like that that make a big difference in today’s day and age.

Keep in mind why you got into the business. It’s about making money and protecting your investments.

Let’s jump right into it, David. One of the top questions that I get in our live Q&A on Facebook, there’s a lot of questions around, “I’m getting started in real estate. How should I structure? Can I do a few deals in my name? Should I be a sole proprietorship? I have a partner. How does this work?” What advice would you give to the reader saying, “I’m starting a business, how do I structure myself?”

There are many different models that individuals can use. I know it can get a little confusing, sometimes even intimidating trying to figure out, “What’s the best for me?” I know in the beginning, sometimes we fear the thought of, “I have all this paperwork with all the resolutions, amendments, meeting minutes and things that sometimes feel almost overwhelming.” Keep in mind why we’re going into business. It’s all about making money and protecting our investments and ourselves in the future along the way.

The challenge with being a sole proprietorship, and yes, they can start that way. That’s an option. In fact, I always tell folks, “If you have an opportunity to make money, do it.” We come behind you and try to fix that. If you have a little time to make sure you get proper structure and planning done first and upfront, it’s always best to do it that way. LLCs, corporations and limited partnerships, I know there are a lot of different types out there, but they provide amazing protection and benefits. We live in a country already referred to as Corporate America. Big business has already set the stage for business owners.

If you follow after those that have already been successful, you find yourself in a situation where you get the same benefits. From dollar one, it’s important to put as much money in your pocket per deal to increase your profitable margins, and we do that by reducing the largest bills we will ever pay in our lifetime like taxes. LLCs, corporations and all these different models out there bring to the forefront corporate deductions, write-offs and tax benefits.

Because of all the lobbying in Washington being done, we as investors get that too as well. We get those benefits from day one, and especially when you’re going through the process of trying to recoup the investment and get to the point of profitability. It’s important to put as much money in your pocket per deal versus what you give off to those tax boards.

If I’m hearing you correctly, you’re saying that LLC and corporation. Which one? Why?

Sometimes you have to put a little thought into it. The best and basic rule of thumb would be to use an LLC. LLCs are more commonly used in corporations in this day and age. There are some true benefits with LLC. One, in particular, is referred to as Charging Order Protection. It’s a way to give a lot of separation for a business owner even further than what US corporations provide.

Corporations are good but LLCs have that additional feature that’s important. The good thing is LLCs can also be taxed like a corporation. They can choose any tax election from disregarded individuals. There are definitely some benefits when using an S-election. Depending on what type of real estate investing you’re going to do, that’s going to be important to know that going in.

I do want to go in the tax benefits and definitely the elections. Setting up an LLC, you’ve taught me over the years, basically it brings me a corporate veil. It separates my personal assets from business assets. Talk to me about that and why that’s important and how that works.

The corporate veil is an important feature because the number one goal of any business entity is to provide legal separation. How do you get separation, especially if I’m operating as a sole proprietor? What do sole proprietors look like? I go down to the state and file a DBA. It’s David Chafkar doing business as ABC professional, and now I operate the business. In that format, the business is me and I’m the business.

FBL 11 | Corporate Veil

Corporate Veil: The corporate veil is the structure that separates the personality of a corporation from the personality of the shareholders of the business.

 

When utilizing an LLC, an LLC is under Federal Law, and corporations as well are classified as citizens or individuals. When I create a business entity, I’m creating another person to essentially do my bidding or take on the liability. Now in the same setting, liability faces us, now the LLC was created to contain the liability within its four walls so it doesn’t spill back into our personal life, therefore, keeping us free of risk.

There are many benefits that we’re going to get into, but what David said right there is the number one reason. You have to remember that when you’re going to look to flip a couple of houses, you want to do it as a business. I know some people that say, “I’m going to do 1 or 2 homes a year. I don’t need to set up a full-blown business around that.” We live in a litigious country. You told me one time that 93% of the world’s lawsuits happen in the US. Is that true? It’s something to that effect.

Yes, we’re definitely the most litigious country in the entire world, which is pretty scary when you consider there are hundreds of millions of lawsuits filed yearly. We’re definitely in the country that faces most of those. Business owners and investors are probably the largest group out of those lawsuits that people go after individuals with wealth or individuals with businesses. We’ve got to be watching out.

I remember reading this survey, and a few thousand Millennials were interviewed on how they plan on retiring. These were the top ten reasons. I don’t remember the order but I remember the top three was win the lottery, inherit from a family member or sue somebody. Go after somebody else’s stuff. It’s crazy.

As investors, we market ourselves as cash buyers. We buy and enclose cash. People don’t know if it’s hard cash, hard money lenders, private money lenders. A lot of times, we could be seen as targets. That idea of the corporate veil is everything that I own personally is over here, it’s protected. It gets a little tricky because depending on what state you’re investing in, there are different ways to pierce the corporate veil to get through. Talk to me about that.

It’s interesting because every state has the right of governance. Every state creates its own entity. I can go to the state I’m in, go to the Secretary of State and file an LLC or corporation. You receive something called the Articles of Organization and a charter. Charter is the birth certificate of the company. That does mean I am incorporated.

The challenge is the documents you get from the state, it does mean you’re incorporated but it doesn’t meet all the Federal requirements. That’s something that you always want to remember because, God forbid, in the event of a liability, if you get pulled into any courtroom in the US, one of the first things that the court will do is to subpoena your corporate record book. If you don’t have one, there’s no defense of, “I didn’t know I needed it.” The judge goes, “You’re a business owner, you’re an investor, you should have known going into it.”

How strong is the corporate veil? It depends on the state it’s created in. I’ll give an example. Some states will have 30 to 40 different ways to pierce the corporate veil. It’s amazing. Some simple ones such as, “I don’t have a record book. I didn’t issue shares of stock. Even though I’m 100% the owner of my own company, I didn’t notate that in my stock ledger. I am not maintaining mini-meeting minutes. I didn’t create amendments for the funding I got that the Board of Directors approved for me to happen.” I named off a few.

Undercapitalization too is a big one. It affects most business owners. Even professionals many times don’t realize that in every single state there is a capital requirement. When I created the company, did I meet the capital requirement of my state? Did I put enough money in my bank account? Did I put enough assets in the company to cover that? Courts like to know that because they want to know when you went into business, did you plan on being successful? That’s a big deal for them. They look for those ways.

There are a few states in the US referred to as Statutory Law States, and Nevada being the premier one. They don’t follow the alter ego rulings like all the other states. All the ones I’ve listed are not part of ways to pierce the corporate veil in the State of Nevada. In fact, interesting enough, Nevada has limited it to one way and one way only, and that is intentional fraud.

If you have the opportunity to make money, do it.

It’s probably one of the most difficult things to prove in any courtroom. If I’m suing or going after accusing someone of fraud, intentional fraud, I’d have to prove beyond a reasonable doubt when they open that company, when they took ownership of that company, that they set that company up not to be a business owner, not to hold real estate, not to be an investor, but they set that company up with a sole intent to defraud mom and pop public.

In other words, I’m creating a Ponzi scheme and I knew that going into it. I’m selling swampland in Florida to somebody. How do you prove that? I’d have to be a mind reader to prove that. Nevada has leveraged that to be the only way to pierce the corporate veil, which is why it’s difficult when using a Nevada entity file to do business properly in your state. It makes it virtually impossible to find you as an owner personally liable for that.

That’s a huge benefit. As you know, Than, Paul & Konrad created FortuneBuilders. Students would come to us for help around how to set up and things like that, and they spent a lot of time researching first for themselves, “Where’s the best place?” We do teach and recommend to all of our students that they originate their business in Nevada.

That’s what I find a lot of business owners don’t understand. They’re like, “I’m operating in Texas and I’m operating in Florida, so I need to incorporate in Texas or Florida.” It makes sense in a way but you guys teach as business owners, we have the ability to browse the menu of all 50 states and say, “I like Nevada the best. I like this the best, so I’m going to originate my business there. I simply foreign file in the state that I’m going to operate in.”

That foreign file process can be done in all 50 states. As an investor, as you’re growing, expanding your business, and scaling the business up as you go through your core training, start recognizing success, it’s common to start investing in other states. You don’t need to necessarily keep creating new entities. If you have a strong created entity already in place operating properly, just register into as many states as you need to buy and flip, buy and hold properties.

The nice thing is, in fact, there’s a Federal Law referred to as the Internal Affairs Doctrine. The Internal Affairs Doctrine is a Federal statute that was passed that all 50 states are mandated to follow. It was created for the sole purpose of arguments as to what state law would be used in the event of a liability. If I have a corporation or LLC created in one state, now holding property in another state, the liability originates in the other state, will that state law govern that liability? Where would that law come from?

In the event of them challenging the corporate veil, the laws that separate me as an owner from the actual business, if that is challenged, the Internal Affairs Doctrine states that the law that will be used will always go back to the state of creation. In other words, the law will go back to the state where the corporation was incorporated. It’s not where you live, not where you operate and conduct business. It goes back to the state of creation. Understanding the benefits of using Nevada, now I know that by creating it in Nevada and securing that benefit, I can place it in all 50 states, and those states that I plan on operating my business in.

What David is talking about there is huge. It’s bringing that to life a little bit more. If I originate my business in Nevada and hold properties or flipping properties in Texas and somebody tries to sue me, then that lawsuit is going to be tried under Nevada law, not Texas law is what you’re saying. You’ve worked with hundreds and thousands of students. Do any stories come to mind where you saved somebody’s butt or they weren’t set up properly and you say, “I wish you talked to me sooner?”

There are many that pop up. We have individual clients that have gone through situations starting out like what we were discussing before as a sole proprietorship. In fact, one in particular I was thinking of, they were wholesaling and there were some allegations there that it wasn’t done properly. They were sued and they got a judgment placed against them for $200,000. Unfortunately, they were operating as a sole proprietorship. They had a lot of debt already in the company from prior deals that they have done in about $200,000 of debt.

When they opened their company, they originally only had put $50,000 of their own money in the company to get started but had accumulated a couple of hundred thousand of debt in the first year flipping other properties and such. When the judgment was passed, it was for a couple of hundred thousand dollars.

FBL 11 | Corporate Veil

Corporate Veil: LLCs under federal law are actually classified as citizens or individuals. So when you create a business entity, you’re creating another person to do your bidding and take on the liability.

 

Because they were a sole proprietor, it wasn’t limited to only the $50,000 they put into the business, it’s not only limited to the $50,000 the business had, it opened the door for them to now go after the remaining $150,000 from their personal assets because there was no legal separation. If they would have been an LLC in place instead, the term-limited liability means limited liability to you, me and every other business owner. That same liability might have resulted in only the loss of the first $50,000. The rest of it would have been pushed away because you’re not held personally liable as an individual. It would have saved him a tremendous amount of money and headache.

We’d never go into business planning on things not working out or dropping the ball somewhere, but you want to know if stuff happens, you’re protected properly. I’ve shared with the readers my story and I’ve shared it with you. In 2007, the deal went bad and a lot of things went wrong. I had a Connecticut LLC, and they were able to pierce that corporate veil like it was nothing.

Undercapitalization was one of the things that was used because I started my business with $300 in my bank account and you’re investing in $500,000 properties. You were undercapitalized. It got me in a lot of trouble. It’s what David is talking about that gives me the confidence to invest in multiple states, own properties in multiple states, and sleep good at night.

Asset protection number one. I do want to get into the tax benefits because that’s a huge piece. Before we do that, I want to take a moment for reading right now to invite you to a free training with Mr. Than Merrill, real estate investing expert. It’s a one-day free class. Than has been a personal mentor of mine, as I’ve shared many times, for over ten years now. If you heard my story, I started in real estate after reading a few books, watching some videos, and it didn’t work out too well.

After learning Than’s systems, resources, and many of the things that you will learn in the free class, it accelerated my success. To me, that’s the number one thing that can come from a mentor or a coach. It gets you to where you want to go quicker but he’s going to share the systems, the tools, and the resources that he and his team use in CT Homes to acquire and sell over 100 properties like clockwork, every single year, year-over-year.

It will cut down your learning curve, answer a lot of the basic questions that you probably have right now in terms of, “How do I go from where I am now to being a full-time investor?” Let’s get back into it here, David. Asset protection, it’s a no-brainer. We want our personal assets separate from our business in case something goes wrong. We talked about how Nevada even takes that to a whole other level to where we do mess up. I don’t know any business owners that haven’t messed up personally, so it happens over time so it’s good to know.

There are extreme tax benefits to having this structure in place. We talk a lot in this show about how we break investing into two big categories: active income and passive income. In active income, we always talk about wholesaling properties and rehabbing as the two primary methods. That’s where an LLC with the S-election that you referenced would be important. If you’re holding rental properties, that’s a different structure. Let’s focus right now on the active side. Explain a little bit more what that S-election is, and what does it equate to taxes paid or not paid through the course of the business?

The S-election is a valuable election to have. The S-election is no different than creating an S corporation. The same tax benefits you get with an S corporation bring in a plethora of deductions, write-offs, better ways to reduce self-employment taxes, overall reduction of taxes. When placing the S-election on your LLC, so I’m an active investor and I’m flipping properties, I have the S-election assigned. Tax rates on the active side when you factor state and federal can literally start out as low as 22% to 23% in most cases, but it can increase many times to well over 40% to 45%. It can get high.

If I hit the higher tax bracket, it means I did well. I made a lot of money but it doesn’t matter how much money I made. Nobody wants to pay 40% tax. That’s extremely crazy and high. The question is, at the end of the year, once I hit that level, is that what I’m stuck paying? Or is there a way to take that same tax rate and bring it down to a more manageable rate, maybe 25%, 28%? That way, I’m putting that 10%, 15% difference back in my pocket versus what the state and the IRS are trying to get from me.

That’s important. That way you’re putting more money in your pocket per deal versus what the tax boards are taking from you. That’s what the S-election provides. Because of the deductions and write-offs that it qualifies for, that opens the door to help mitigate that high tax bill. It’s allowing us as investors to keep money in our pocket. Without question, I would recommend that if you’re using an LLC, you want to make sure you have the S-election assigned to that, especially as an active income earner in real estate. That way, in regards to how many deals I do, how successful I am, and how much money I make, I now have a way to bring that tax rate down severely.

The number one goal of any business entity is to provide legal separation.

What are the few the benefits of the write-offs? I opened up an LLC with an S-election. What are the types of write-offs that I can take advantage of in year one that I couldn’t have had I done business under a sole proprietorship or something like that?

There are a lot of benefits. It’s not only the write-offs that you get, it’s also the percentages of write-offs, insurance, health insurance and sole proprietorships. I might not be able to write off any of that because as a sole proprietor, I’m an individual more than a business whereas a corporation may be able to write that entire cost off. Vehicle expenses, overhead expenses, those are things that corporations qualify for that we as individuals cannot.

There are also additional sections that the IRS has passed in years like Section 199 and different sections that allow you to also start to limit how much tax you pay in the beginning. I might be able to take the first $25,000 to $30,000 of income in many ways, almost tax-free without having to worry about tax liability. Whereas if I’m an individual doing that, I don’t qualify for those additional benefits. It almost feels like the Feds have been pushing us towards corporations and LLCs for years. It becomes up to us to decide, “That’s the format I want. I want to make sure that I have something properly to help mitigate that liability.”

It is absolutely amazing. I remember learning this for the first time. Correct me if I’m wrong, but potentially there are over 400 different ways of reducing taxable income versus the average person. In many ways, the more money you make, the more access you have to different ways of bringing down your income like captive insurance companies, and all of these different strategies that could get to a high-level there.

Talk to me on the passive income side. We talked about S-election and you’re on the active side. In an S-election, we would be any piece of real estate you’re going to be in and out of in under a year. We’re huge advocates of holding real estate long-term as well. How does the structure differ on that side of the business?

In fact, you hit it perfectly as far as the timeframe goes. You talk to investors like yourself who are a little bit more seasoned. They understand that a one-year timeframe is what determines whether a property is active versus whether it falls under the passive game. If you call the IRS and ask the IRS what that timeframe is, they’re more specific. They’ll tell you, “One year in one day.” That’s how specific they get.

As an investor, all that means to us is simply this. If I buy a property today and I sell that property before that one year one day window or timeframe is up, that’s short-term or active income. If I buy that same property and hold it beyond that year and day, that now converts that to long-term or passive income. Going back to the question, you asked about the passive. We use LLCs for active clearly, and we also use LLCs to hold rentals.

We want the separation and the liability. However, with the passive side, we do not use the S-election. What we use is something referred to as a disregarded LLC. The primary reason for that is to make sure that the passive long-term capital gains tax rate is recognized. In most cases, it caps at a flat 15% federally. There may be a few points on the stateside, but it’s on a roll of 15%.

The challenge is in order to qualify for the 15% tax rate, you have to run that income through an entity that was created to identify and recognize passive income. What you find is most of your corporate elections were never created for that purpose. I’m making all this money on the active side, let’s say my tax rates go up to 40%-plus, fortunately, I have the S-election to bring it down.

In the same year, I did so well, I made so much money, I ended up investing into a handful of rental properties. If I take those rental properties and I title it in the same company, now that 15% tax rate that I’m hoping to get on the positive cashflow that I’m recognizing, if thrown in with the active earnings, because that corporate status doesn’t know how to recognize that it’s passive income, it takes all that income from the passive side and throws it in with the active earnings.

FBL 11 | Corporate Veil

Corporate Veil: The internal affairs doctrine was created for the sole purpose of arguments on what state law would be used in the event of a liability.

 

My 15% increases to 45%, forcing me to pay 25% to 30% more on real income tax than I ever should. It’s something we never want to happen. The basic rule of thumb for most investors commonly is it’s going to be to LLC. I have the S-elected for all my wholesale rehabbing flips, and I have at least one LLC to start holding my rentals so all income coming from it for a lifetime caps at that 15% tax rate.

I want to reiterate a point here, and it is a question I get a lot from students, “I’ve owned a rental property in my own name for the past eight years. Everything has been fine.” What would you say to that person?

Congratulations, it’s a good thing it has been fine. You’ve got to imagine we’re dealing with the general public. As you talked about in the beginning, liabilities and lawsuits are ways people utilize to gain income, gain wealth, especially through challenging times like COVID. People are losing jobs. They’re losing hours at work.

I’m still needing to feed my family. My bills are still up there. How much does it cost me to file a lawsuit against somebody? Nothing. Many attorneys will take a lawsuit on contingency. If you’ve heard that, you don’t pay a dime unless we win. For the individual wanting to sue cost him $0. That’s why you see many liabilities out there. You’re completely exposed. You want to make sure you’re aware of that going into.

How would the taxes shake out? If we set up under a passive entity, we cap around 15%. What are the tax repercussions of owning a property in your personal name? Does that fall into your regular tax bracket or something along those lines?

Yes, it falls into your regular tax. That income is reported with your W-2, but it’s going to be a similar tax rate, but you’re not going to have as many deductions because those LLCs will qualify for because now I fall into the individual. I lose a lot of the write-offs that I could have used to mitigate how much I was going to keep that money at the end of the year.

No deductions and you’re at risk to get those properties out of your own name. I do want to bring in a little bit of a higher level of topic and talk about self-directed retirement counseling. Before we do, I didn’t prepare you for this, but we’re going to move to a segment of this show called The Fear Factor. I always want to ask every guest because I meet many students that are like, “I want to invest in real estate but I’m afraid. I want to start marketing but I’m afraid.” It’s not just in business, but the fear right now is gripping our country in many ways. It’s bigger than business. Any tips or tricks on how you personally deal with fear? Any recommendations for the business owners out there?

Fear can cripple you without question. It’s the one thing that will hold us back from recognizing our dreams. Personally, anytime there’s something I want to accomplish. I know you guys talk a lot about it at your events is creating a good why. Understanding why I’m doing it many times will push me beyond that. Not only that, the understanding of what I’m going into. Education is huge in giving me the confidence to move forward. Getting a good mentor and coach because they can help. They see things that we don’t see.

Mentors are not those people who dust you off and tell you everything is okay even though they care. Mentors are there to push you beyond your comfort level because they recognize what you have the potential of becoming. They help you see that. Those are how I mitigate. I make sure I align myself with good professionals and mentors that guide me. I do education a lot, so I’m familiar with what I’m going to go into. That way, that monster is not as scary anymore. If I understand the steps that I’m going to be taking, and make sure that I have a good why behind it because if I’m doing it for someone else, not only myself, that strength comes in to give me that power to push forward.

There you have it, folks. Those are tips for overcoming fear from David Chafkar. This topic excites me. When I learned this, I felt this whole other world opened up to me that I didn’t know existed. That’s self-directed retirement accounts to invest in real estate, wholesale, rehab, buy and hold rental properties. How do we do it? How do you make that happen?

An LLC is the greatest insurance policy you can have when starting a business.

Those are amazing because for any investor or business owner that has access retirement, maybe I’m working for someone else, I have an old 401(k), I’ve got an IRA sitting out there and I’ve got this capital that I’ve been working for years developing as retirement. As you know, in this day and age, retirement accounts in the general market are not growing at rates that were even comfortable with, which is why you see people working to 80 to 90 years old because they don’t have enough to retire.

Many of those accounts are sitting there. If you happen to be an investor that has those there, number one, you want to use it responsibly. That’s critical. Number two, you also want to make sure you’re able to use it in a way where you’re not first having to pay a bunch of taxes and penalties on it before using it because that can get expensive at the end of the day.

Fortunately, there are some amazing vehicles out there. The one you touched on was self-directed. One of my favorites is a Solo (k), which is essentially an individual 401(k) plan that gives you the advantage of not only utilizing funds that are considered retirement that I can direct myself so I can direct it into buying rentals and getting a higher rate of return on my investment.

I can be a private lender in between properties. I have a way to continue to make money by supporting and investing in other projects from other investors. I can even use it to borrow money personally. Whereas, IRAs, I’m not allowed to borrow money, but in a Self-directed Solo (k) I can borrow money. A lot of the investors I’ve worked with will use it in that manner.

As an example, maybe I’m flipping a property, I need $200,000 to buy and renovate a property. Commonly, I might go to a hard money lender to cover the lion’s share, 75% or 80% of that overall costs so they might write me a check for $160,000, which is 80% of that cost, but then I’m still responsible for coming up with 20% gap, maybe the $40,000 difference. Maybe I’ve got $100,000 sitting in my Self-directed Solo (k). The beautiful thing is I can now elect as the power trustee to allow myself to borrow the $40,000 difference.

I took out a personal loan for myself for $40,000. Now I have the $40,000 and the hard money lender’s money. Put it together, there’s the $200,000 that I need to do the project. I buy, renovate, list and sell the property. From the proceeds of the sale, I pay off my lender and the $40,000 to my retirement account. Let’s say there’s $50,000, $60,000, and $70,000 profit leftover, now I can determine what I want to do with that profit. I can keep that profit even for myself as income. What I’m doing is I’m leveraging my retirement account, almost like a personal line of credit without taxes without penalties. That is huge.

That is a beautiful thing. I get a little bit excited. I’ve been using this for over seven years now and that’s exactly what it is. It’s everything from setting aside a portion of it to use as a line of credit, as David explained, to even holding rental properties and buying properties in that capacity. You have to be a business owner to do this.

You should be a business owner and investor in real estate. Commonly, when you create a self-directed account, you have a host of a company. There are certain ways to do it as an individual. I haven’t hosted myself or I use my company to do that. Are there going to be some advantages of using my LLC? I have an LLC that I’m rehabbing with. Maybe I take that LLC, I have my Solo (k), I named my LLC as the host. That opens up additional benefits because when you’re making an excess of money, maybe I’m making $150,000 in my business this year. I also have a full-time career. I haven’t made the transition into real estate full-time, so I have other income coming in.

It’s great that I made $150,000 but if I take it all personally out of my business, that’s considered income. It means I’d have to pay state and federal taxes on. I’m thinking, “I don’t need the money. It’s going to be horrible to have to pay state and federal taxes.” If you have a good CPA, they’re probably screaming in your ear, “Defer. Take as much of that as you can and put it away in a retirement account.” Whatever you contribute that year, it’s less taxes. You don’t have to pay taxes on that.

When you compare a Solo (k) with maybe an IRA, in most cases, an IRA only allows you to contribute between roughly $6,000 to $7,000 a year based on age. Whereas a Solo (k) based on age can go up to $70,000 a year. Imagine, I made $150,000. Imagine taking $60,000, $70,000 of that and making it as an annual contribution towards my retirement account. This is money I made but now, instead of $150,000 of tax liability that I’m passing and paying money on, I’ve reduced it down to maybe $70,000 or $80,000 of tax liability.

That tax savings, if you factor 25% and 30% state and federal to tax that could be another $20,000 to $25,000 of tax dollars that you were saved from taxes that you would have paid money on no matter what, that you now get to keep. Where did that money go? It went to a self-directed account that you now know that if you want to, you can turn around and borrow most of that back out and use it to renovate another property to make more money continually without still having to pay any taxes or penalties. That’s a big deal.

FBL 11 | Corporate Veil

Corporate Veil: If you’re using an LLC, you want to make sure you have the S-selection assigned to that. As an active income earner in real estate, you’ll be able to know how successful you are.

 

It’s a huge deal, a game-changer for any real estate investor. It’s important to understand even if you’re reading and going, “I don’t have a retirement account. I don’t have anything to roll over.” To understand how it works and to be able to convert friends and family members into private lenders. I have a nice retirement going now, but in the beginning, I didn’t have a whole lot.

In understanding it, I was able to walk friends and families into converting so they can loan money to my deals for a higher rate of return of whatever they’re getting in the market at that time. David, we’re going to close the show here with the question I asked every single guest. What are the top three tips you want to leave to our audience and real estate investors of all shapes and sizes out there?

Number one, follow the systems. The systems are absolutely incredible. They’re absolutely amazing. It’s funny because I looked at the program.

You’re talking about the FortuneBuilders.

It’s the only program I refer to as a flawless system. In my experience, what I found is that the students that follow the program will always recognize so much more success than those that don’t. Secondly, work on buying power. Buying power is critical as an investor. There are ways to make money without too much capital. If you’re an investor that plans on doing more than one deal a year, or 1 or 2 deals a year, it’s good to align yourself with hard money lenders, private money lenders, conventional lending sources, building credit for your income.

Access to capital is huge.

When you’re putting offers out there, and you know where that money is coming from, even before that offer gets accepted, it’s a comforting feeling to know. They align themselves and stay positive, focused, and true to their mission. Always remember their whys, stay true to that mission. If they follow those steps, you’re about as close to that as you can in recognizing success quickly.

It’s all in what you put into it. You can make a ton and lose a ton of money in real estate. It’s all on you. I appreciate your time. It’s such valuable information. David has worked with over a hundred thousand students and tens of thousands of hours. You guys have done so much for me for my living trust, my active entity, and my passive entity, my self-directed stuff, to real estate privacy trust. These are the guys that I go to. These are the guys that we go here for. If you need help in any of these areas, you can contact David and his team by going to FortuneBuilders.com/podcast. I want to thank everyone for reading. As always, like our show, subscribe, set the reminders, so you’re notified when our next show is coming up. Share it with somebody that you know needs this education. This stuff is not being taught in schools but can change your life if you let it. Thanks a lot. See you next time.

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About David Chafkar

FBL 11 | Corporate VeilDavid Chafkar is currently serving as Vice President of Business Development with Nevada Corporate Headquarters.

For over a decade, his experience and in-depth, working knowledge of Estate Planning tools and strategies, combined with his creativity in applying these strategies to complex estates, has elevated David to be considered one of the best in the field of Asset Protection, Wealth Preservation and Estate Planning.

David is also a Nationally recognized speaker and Seminar Leader in these fields and is respected and recognized as one of the foremost experts in the field of Building Business Credit all while showing owners how to access capital in this tough financial environment.

David is dedicated to providing valuable, relevant and actionable education to all entrepreneurs. It is his mission to bring awareness to all Business owners of the importance of proper entity selection and Business credit to help support their future growth.