BiggerPockets Money Podcast - The Ultimate Guide to Asset Protection: LLCs, Insurance & Partnerships

Episode Date: June 3, 2025

Do you really need an LLC for rentals? What kind of insurance should you get? With so many questions (and confusion) surrounding asset protection for real estate investors, we’ve brought on an expert to set the record straight so you can protect your assets—without going overboard or breaking the bank! Welcome back to the BiggerPockets Money podcast! Today, we’re chatting with real estate attorney and fellow investor Bonnie Galam about the nuances of asset protection. The truth is that there are two sides to this coin, but most investors only focus on the defensive or “reactive” side. Bonnie will show you the keys to 360-degree protection—like setting up strong legal structures before problems arise and the essential documentation you should have from day one. You’ll also learn about the potential pitfalls of equity partnerships, how personal events can put your properties at risk, and why car insurance and prenups matter more for your portfolio than you might think. Asset protection doesn’t have to be complicated, but it does need to be strategic, and this episode will help you prioritize what’s important now, what can wait, and how to create a legal framework that evolves as your real estate portfolio grows! In This Episode We Cover: Two sides of asset protection to focus on when starting a real estate business Three actionable steps new investors can take to protect their assets today Why you need to create an estate plan (even if you don’t have rentals yet!) How much you should expect to pay for different types of legal protection Debt versus equity partnerships (and why one is better for asset protection) And So Much More! Learn more about your ad choices. Visit megaphone.fm/adchoices

Protecting your assets means a lot more than just insurance policies. Today, we're excited to explore the critical world of risk management with a seasoned asset protection attorney. In an era of economic uncertainty and legal complexities, protecting your assets is more vital than ever, and it isn't just for the ultra-wealthy. From lawsuits to unforeseen financial pitfalls to partnership disputes, our guest, Bonnie Ghalam, will discuss the web of protection you need from LLCs to insurance policy. Whether you're a seasoned investor or just starting out, this conversation will equip you with practical tools to navigate risks and secure your financial future.

Oh, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen. And with me, as always, is my rebalanced co-host, Scott Trench. Mindy, you always come with a fresh portfolio of introductions. So thank you so much. Bigger Pockets has a goal of creating one million millionaires and keeping them in that millionaire status, maybe through a couple of generations. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. We are so excited to be joined today by Bonnie Galam. Bonnie is a real estate attorney investor who focuses on asset protection, estate planning, and real estate transactions tailored for investors. We are so excited to talk with her today. Bonnie, welcome to the Bigger Pockets Money podcast. Thanks. I'm so excited to be here.

Bonnie, let's start with the basics. How do you define asset allocation and why does it matter specifically for fire people? Sure. So when I think about asset allocation, now keep in mind, I'm thinking about this from the attorney perspective, not necessarily like a financial advisor perspective. I'm thinking about now money versus later money. What do we need to live off of now, but then also what future life events can we foresee in the future? Are we having children? Do we plan on moving? Do we, you know, when we get quite elderly? There's a lot of real. really big expenses, you know, in terms of long-term care and things like that, where it's like,

what do we need to have now, but also what do we need to project to have in the future? And perhaps even the next step beyond that is what do we want to be able to leave behind? And I think sometimes with the fire community, there's this kind of projection of dying with zero, which is fine. It's a philosophy of using it all, enjoying it all while we're alive and not so much worrying about what the financial legacy perhaps we leave behind us, or on the other hand, perhaps offsetting it with like a life insurance policy and just enjoying our cash that we actually have during our lifetime. I want to say that I think that the Daewa Zero people are of loud minority and a necessary one because fire people can be too overly frugal, maybe even to the point

of kind of extreme levels. And so that's needed as a counterbalance. But I think the vast majority of fire folks are going to have a lot of trouble ever spending the principle on their balances and are going to need to think through a lot of this stuff for the future generations. Which is a good problem we have. It doesn't hurt to, you know, leave something behind and leave a financial legacy for, you know, the next generation. I saw that happen with my family, where, you know, I had grandparents who were extremely frugal. I'm like, you want to believe what they left behind at the end. Everyone was kind of surprised in that respect. How can we get people to balance out saving enough for the future for the things that they don't

have now or the situations that they don't have now. Like maybe they don't have kids, but they are, you know, they're planning on kids. Obviously, we know that that cost, what is it like, what are they saying? $250,000 from birth to 18. I have an 18 year old. I did not spend $250,000 on her over the last 18 years. But there's some things that you can, you can count on or estimate. And there's other things that you really don't have much of an idea. Like, Scott, you're 35? I'll be 35 in a little bit, yeah. Yeah. So Scott's 35 years old.

How much is it going to cost for his long-term care when he's 97? We have no idea. So how do you- Well, it's going to be very little because I'm going to sweat for life, maintain my figure here on there. But yeah, yeah, absolutely. You've got to plan on all the, like, who knows what those things are going to look like in the future.

That's why Moore is always like, like, very few people actually retire on like the 4% rule or whatever. they're often going way beyond that because of this fear of the unknown in all of these areas. And that brings up the need for thinking about how to transfer it through the generations and how to protect it. Yeah. I mean, I think about the same thing. I'm also 35.

And not even just thinking about like long-term care, which some people in their 40s or 50s are purchasing insurances for that. Like there is insurance for that. You don't want to be thinking about those types of things when you're 75. But also for me as a parent, I'm also like, what the heck is college even going to cost, you know, in 18 years from now when my kids are, you know, moving out of the house. And so there's a lot of different variables to kind of have to project on. And I agree. I think that 4% amount is probably on the lower end of things in terms of being able to cost project that over decades and decades

and decades for people who are really looking to kind of retire on that earlier end of the spectrum. We're talking 30s, perhaps early 40s, things like that. I think that there's a couple of ways to approach this conversation. And it all depends on your goals, right? So if your goal is to die with zero, you're going to have a very different approach to asset allocation, asset protection strategies and how you think about intergenerational transfers of wealth. Let's start with the premise that few people have that goal to truly die with zero. And this is not the episode for that on there. Bonnie, there's a bunch of goals. Could you either state the most common ones that you see or start with the one that

you think people should have? In terms of goals for what? For how to think about asset allocation. And like if you're fire, what do you think some, if you're approaching fire, you're in your 30s and you think you're going to fire by 40 or in your late 30s, whatever, whatever in there, what do you think ought to be the way you approach the challenge of asset protection, asset allocation, and beginning to plan for intergenerational transfers of wealth? Sure. So the biggest thing I always think about when it comes to just asset protection across the board is where are the biggest risks that we're facing for most individuals. There's two risks in America that are most common. One is car accidents and second is divorce. So the first thing I always think, it's these very low-hanging fruit. Check your insurance policy is make sure that you're adequately insured to cover any sort of like incidental major surprise or accident, something like that.

That way you're not having to dip back into principle. When it comes to divorce, especially if you are approaching fire on your own and perhaps marrying later or marrying once you've accumulated substantial assets, I really think it's important to normalize having prenuptial agreements and be very open and, you know, having those discussions early on. A lot of people are, you know, whether they're investing in real estate or they're, you know, just maxing out retirement from an early age, they have plenty of clients who are younger than me and have millions and dollars of assets.

And they're single. And so you have to think about truly and having that conversation about having a prenuptial agreement. That way, you're not dividing all of this in half down the line. Those are awesome that you just labeled the two most important ones, the two most common risk factors. What do you think are some examples of like maybe the next five or next several on that list? And what are some examples of things that people way overthink that are super rare and that get too much attention in the context of planning for this stuff? So one thing that I see, I think, with the fire community, especially if people are like freelancing or having some sort of side hustle on the side to try to speed up.

this wealth accumulation is not tackling that appropriately from a legal standpoint. Running it truly like a business, if that means having an LLC, having the appropriate insurance policies, having the appropriate contracts. That way, like this activity that you're doing to try to speed up your wealth accumulation isn't something that's actually going to set you back. Another thing that I think a lot of people in the fire community kind of look past in a sense is, you know, the concepts, and this varies a lot from state to state, but like homestead and a lot of these little nuance tax, but also asset protection benefits that you get from living in different

types of states. Not only does it mean you have to go pick up and, you know, move to a different state, the state I live and doesn't have like a homestead exemption, really. But it is something to kind of keep in mind as you're like looking at the lay of the land as to how you can protect yourself over the long haul, because that is a big one. Give us more on that. What does that mean homestead and how does that protect me? So it really varies a lot from state to state. So I don't want to get too into the weeds of that, but in a lot of cases, say, for example, like you've had like a bankruptcy or a really catastrophic lawsuit put against you. In some states, like you can't touch your house, essentially. Your primary residence is protected maybe entirely. It may be up to a certain

value amount. But there may be benefits for that. And there may also be certain types of like death benefits, things like that associated with homestead type properties. In terms of a risk that I think is greatly over exaggerated, it's probably like these professional slip and fallers. I think a lot of asset protection attorneys like to kind of scare people if you are investing in real estate to be like, someone's going to slip and fall in your house every single day or it's going to burst into flames. And the reality is, these catastrophic types of incidences are usually quite rare.

And they end up being a situation your insurance covers anyway. And so I don't think that they're really the boogeyman that a lot of people make them out to be. Oh my gosh. I had like this one day of laps in one of my insurance policies and an umbrella in there. And it happened to coincide with a very cold, snowy day where there was ice. And I just had this enormous bucket of sand and salt from Home Depot. And I just kept putting it on the sidewalk. Yeah, for that reason there.

So, yeah, I think I'm in that camp of overstating that risk. You were going without insurance. I feel like I can rely. Like if there was ever that lapse, I'd probably be sweating it as well. Do you recommend LLC or umbrella policy? This is a conversation or a discussion that I hear a lot from people. Oh, I have one rental property or I even own my own property and I need to put it in an LLC so they can't sue me. And I see a lot of people saying, no, an umbrella policy is better. But what do you think as an attorney? I think it doesn't have to be either or. I think it can be yes and. I think that they both serve a similar function in that they're what I call defensive protection. They don't do anything to protect you in the first place, but they're there to kind of catch your back if things go wrong. Insurance is always nice because they'll pay for a lawyer and they'll pay for a judgment or a settlement if you reach one, whereas an LLC is really just kind of a cap on things. Now, of course,

it's nice to have a cap on things. But if I could pick one or the other, I would probably pick the insurance policy. I might get some hate from other attorneys saying that. But the big thing with insurance policies is you really just need to make sure they're covering for the actions that you're doing. I think a lot of investors, no matter whether it's real estate investing or they're doing other types of, you know, perhaps like I said, doing like freelance type of work, really kind of overestimate the coverage. And so you don't want to have an umbrella policy that, for example, excludes rental property activity. And those exist and that would be of no help. We have to take a quick ad break. But while we're away, we'd like to ask you to head on over to

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Audible has been indispensable for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Welcome back to the show. On the topic of LLCs, a lot of bigger pockets money listeners are going to be like probably about 35, 40% are going to be casual rental property investors in the sense that they have one, two, three, four at most rental properties. And that's a portion of their portfolio.

rest is going to be in stocks and other other types of things. I've long held the belief. On one extreme, you have the house hacker, right? I live in a duplex and I rent out the other half. I have long felt, and I did not when I was in this position, have that it's not good to have an, it's not necessary to have an LLC. It's not helpful to have an LLC in that circumstance. Because you're living in the property, because it's super, in the event that something were to happen, you'd almost certainly have ability for the opposing attorney to pierce the corporate veil, precludes that protection. It adds complexity and cost to the situation, and you incur a risk, probably a low risk, but a risk all the same of having a due on sale event happen. And that the

odds shift towards having, you know, it's almost certainly right to have an LLC when you have a paid off rental property with no debt on it and a lot of equity. Like then it's a no brainer to have an LLC, in my opinion, in that circumstance. And in between, you've got this sliding scale of, if you got 20% equity in the property and you self-manage it, it's hard, it was hard for me to justify putting the LLC in place. But when the asset value balloons into the mid-six figures or beyond, then it begins to make a lot more sense to think about putting that LLC in place. That's how I think about it on there. This is for entertainment purposes only, of course, in this discussion. But what is your, you know, for entertainment purposes only kind of reaction

to that philosophy in terms of approaching LLC as part of the asset protection policy? And by the way, that entire time, I absolutely had insurance in all of those cases on every property. And auto, when I finally bought a home, home and an umbrella policy bundled on top of that. Yeah. So I'm with you pretty much 100% on that. I don't think I have a single house hacker client who owns inside of an LLC. And I think the biggest reason beyond all those that you said is that they want the primary residence tax benefits. If they end up selling it, they want that to be capital gain free.

And so if you own it in an LLC, you would lose that ability. The other thing, I mean, you're not getting any perception of anonymity like you mentioned. Like everyone, there's no hiding the eight ball as to like who the owner of the property is. They know you're next door, upstairs, downstairs, whatever. And so I think it's one of those things where it's like, hey, if you are buying it, with some sort of financing that permits it, then like probably doesn't hurt if you plan on holding it for the long haul. but a lot of house hackers, they're kind of rolling between different house hacks and things. And so the tax benefit alone of keeping an interpersonal name and then, like you said,

just layering some insurance on top is, I don't know, has my blessing as not legal advice. In those situations, your insurance broker is probably going to be your first line of call before your attorney is. And we take no offense to that, or at least we shouldn't take offense to that. So I'd say that's the first thing. The second thing is keep it simple. There's a lot of information out there that promotes all these really convoluted structures and things like that. Just kind of put that out of your head and be like, that doesn't have to be for me and that's okay.

I think keeping things simple across the board is a lot easier. It's a lot easier to maintain. But just know that like the plans that you kind of hear drawn all over the boards, it doesn't have to be like that. Another thing I would keep in mind is estate planning. keeping a mind, like if you do want to facilitate, you know, smooth transfer of generational wealth, keeping your family out of court, out of conflict at the end of your life, and kind of maintaining that nut from one generation to the next, then having an estate plan, really, I mean, for anyone over the age of 18 can have an estate plan.

It's not something for, you know, the ultra wealthy or things like that. It sounds fancy like an estate, like I'm the King of England or something. But it's really something to help facilitate the legal transfer for. from you to the next generation or whoever you choose. Okay. At what point during your fire journey should you start thinking about asset protection? I don't think it's ever too early to think about that. I think as you are, you know, growing your portfolio or growing, whether that's a financial portfolio or a real estate portfolio, really, checking in with number one, I think your

insurance providers is probably going to be a number one. but also if you're doing something new, right, if you are starting a new business, if you are perhaps flipping or you're doing a freelance work or something like that, like that would be a time where it's like, hey, I'm kind of putting myself out there and doing something a little bit riskier than maxing out my 401k. And so that will be a time where I'd say, hey, let's pump the brakes a little bit and see if there's something that I can be doing to make sure that I'm not putting too much risk. Who is the person that we should start talking to first? I know there's attorneys, there's insurance brokers, there's the pre-in-up guy. Hopefully you've had that pre-up in place

if you had assets of any type to protect before you got married. But who are we talking to and who are we talking to first? I think the easiest thing to do to determine, because I don't think there's a right or wrong answer to this. I think that's a little bit person-specific would be to kind of map out what you have. I think, and I do this with my clients in like an asset protection on it, but it's like, what is the equity of everything I own? And then what is the insurance policies on that? And it's really just the math of looking out, what do I have and how is it covered? And is there a risk associated with it? No one's getting sued over a brokerage account. No one's getting sued over, you know, a retirement account. But the other things in our

lives is that appropriately covered. And that is just a numbers game, in my opinion. When it comes to, you know, the other areas, I think some of that just has to depend on what's going on in your life. You know, are you having kids? Do you have a business partner? Do you, you know, are you buying property in a way that is, you know, different than the way you have before? I think those are all different situations where maybe at that point it's worthwhile calling a lawyer. I think the reason that most people don't do this is because it costs money. What sort of, what sort of costs are we talking about with, you mentioned an asset protection audit? Is that like a $10 job or a $10,000 job?

I guess between those range, it's closer to $10. But it's, you know, I would say as a protection in the most, you know, most situations is ranging from a few hundred dollars to a few thousand dollars. Now, if you're looking at, you know, complex trust planning or, you know, multiple LLCs or things like that, that's going to run you a little bit more. But generally speaking, I think most people, you know, an insurance policy, a million dollar, you know, umbrella policy is probably a few hundred bucks a year. And so there's a lot of, you know, low-hanging fruit.

Even LLCs, yes, attorneys, you know, charged to form them. But if you were to do it for yourself, I mean, they run from about $100 to about $700 bucks out in California to create, you know, entities and things like that. So it's really not something that is extraordinarily expensive. And a lot of these fees can be just one-time fees as well. If I'm in this world of moving towards fire, I'm frugal, right? We're not using the word cheap. I'm frugal.

I want the best value on this stuff. And insurance and asset protection in general is a losing bet, right? You're just most likely not going to need it. And it's most likely cash out the door that it will never be needed. It's insurance. That's the point. The house always wins in the long run with these insurance companies, right? Except for those in rare events.

So how do I balance? Like, what are some tips you'd have in terms of someone pursuing this in terms of not going so far overboard with these things that they're able to keep those expenses, the premiums or the costs for this type of thing as low as reasonable in the context of ensuring quality coverage or quality asset protection. Well, number one would I say is tell your kids to pay their own insurance. If you've got teenagers, I have a cousin who just passed their driver's license and Mindy you might be able to relate to this.

Their policies are probably three X what like, you know, someone who's been on the road and driving free and clear for the last 10 years is because that will. cost a pretty penny. Another thing I would say is, you know, maybe, and a lot of this comes down to risk tolerance, right? Like, you have to balance your own personal risk tolerance with your budget as well. And so if you're saying, hey, that umbrella policy is an extra layer, I feel good without it, then go without it. There's a lot of things that, you know, my clients do that I wouldn't do, either because they have a higher or lower risk tolerance than I do. And so I hesitate to say, like, this is what you should cut. Because maybe.

someone says, instead of doing an umbrella policy, which costs me $1,000 a year, maybe I do an LLC, which costs me $125 a year. And so that could be a different way that you decide to balance things out as well, but it also depends on like, what are we trying to protect? We're not going to put a brokerage account into an LLC probably, right? But that may make sense from a rental standpoint if that's how you're approaching fire. Let me ask a question about that LLC versus umbrella then. I think that the majority of investors who own real estate, listening to this podcast, the majority of them, will have either lived in one of the properties in their portfolio prior to it becoming a rental, or will have self-managed that property for some period of time

prior to moving it into an LLC. So if I self-managed the property five years ago, and that a problem that I took care of there, something that I worked that I did, becomes the catalyst for some problem that creates a lawsuit against the business. Do I risk Pierce in the corporate veil, should most of these investors who have personally operated their portfolios think about also having these umbrella policies or personal asset protection on top of their LLCs, even after they've moved them in there? The important, the first thing you have to keep in mind is that asset protection doesn't work retroactively, right? And so if something happened five years ago and now you're thinking about moving your property into an LLC or putting the

insurance on top, it's not going to matter because it matters what was in place at the time of the incident, not at the time of the lawsuit. And so that will be number one. The second thing to think about is the, not necessarily for me at least, who's occupying it or who's managing it. Of course, if you have a property manager in theory, there's another pot that could pay out, right? The property manager has their own insurance. But you've got to think about financing, right? And I forget, I apologize, I forget the other half of your question. I think that most of the people listening to Bigger Pockets money who own real estate at some point or other had some type of involvement.

in one or more of their rental properties on a personal level. Like they personally managed it, right? Let's use an example. That person placed the tenant, and it's five years later, the property manager is now running the place. It's in an LLC, and that tenant does something off the rails that causes a problem for another tenant in that property or a neighbor in there. You placed the tenant.

So are you liable in that situation? Should I be thinking about not, like the LLC is not enough? Should I be worrying the LLC is not enough, and I need that umbrella on top of that because there is a possibility of that veil being pierced. I would be less concerned about the veil being pierced than I would be about the umbrella policy covering activity of an LLC. Usually umbrellas are a personal line of insurance and they won't cover what happens within an LLC. If you wanted to layer on top of your homeowners policy with like a general business liability policy, then that's what you would do. I also see investors who own multiple properties within a singular LLC.

They'll use kind of like a general liability policy to kind of act as a quote unquote umbrella within that particular LLC. And so when we think about like internal threats, like threats that arise from the business activity or the rental activity itself, yeah, I mean an LLC is not going to hurt because that means, in theory, it stays within the LLC. And I don't see an issue of self-management being something that will cause piercing the corporate fail. It's more not keeping corporate formalities or not keeping clean books, things like that. That would be more likely to lead to the situation where you're piercing

the corporate fail. Bunny, how many clients do you have that have rental properties? Oh, gosh, hundreds. Probably a rent-out. How many times have you seen a lawsuit get filed against the LLC? Against the LLC? Not infrequently. Okay. So this is a regular occurrence. You see that you see this happening one, two percent of the time? I mean, it'll be hard. to say like what one, two percent of the time is based off of like different size portfolios and things like that. But I would say the risk that I see most commonly, the lawsuits that I'm seeing arise are not ones where the LLC would be triggered. I'll give you probably the most common example I see among investors, and that's partnership disputes. The LLC is not going to

matter if you're fighting among yourselves. And so that is, you know, they didn't have clear splits or this person felt like the other person wasn't doing things fair. And so that's probably the most common situation. The other thing, and I kind of just see this, like, everyone's afraid of the flood, like the catastrophic injury or the catastrophic situation. But really a lot of, the biggest risk, I think most investors face is this like drip, drip, drip, drip, drip, drip. It's like, oh, I mishandled a security deposit. There's a fine there. Oh, I, you know, screwed something else up where I wasn't on top of a contractor and I had an extra month of holding cost. And so there's those types of things are like, their losses, but the LLC doesn't matter.

Your insurance doesn't matter. That's perfect. So let me ask you this then. In the context, we spent half the episode talking about rental property risk because I just think there's not like there's not that much too. It sounds like the other stuff, right? It's like get an estate plan, have your home auto, an umbrella policy set up. And if you're a W2 employee with a brokerage account in a home, like that's it. Don't do stupid stuff. Dot those eyes, cross those T's, spend a few thousand bucks getting it set, shop your insurance. But that's it. There's not really a lot to it. You don't have to overthink those things. And so it's really more the business and and rental property stuff is where you have to turn your brain on a little bit to that next level,

I think, for these things. Am I phrasing that right? Do you agree with what I've said for the most part here? Yeah, I would say because with those activities, you're kind of putting yourself out in the world in a way that creates risk, in a way that just like financial investment does not. So whether it's creating a business or owning rental properties or doing something else, that just kind of creates another universe of risk. Okay. And then so let me reframe the question I just asked you moments ago and say, How many times in all those companies that you, all those properties that your, your client's own, has there been a six figure lawsuit of the type that I'm clearly worried about here? The flood, the tenant problem, the foundation problem, the mole, whatever, like something like

that, that's a real claim from a, from a tenant or from a something like that, that's not a partnership dispute that is handled by this situation. I mean, I could tell you if two, that happened to me personally. But among fly-ins, I can think over the last few years, probably on one hand where that is. And my answer is calling your insurance company. Yeah. So it's not, these are rare events that we're talking about. Oh, for sure.

This is not something where you can expect, you know, an accident a year. I think you're probably more likely to have like a fire or something like that in a property than you are to have some sort of like catastrophic injury. Yeah. So out of, you know, 500 clients, you can count on one, I'm estimating 300, 500 clients. I would say, yeah, on one hand. So once every hundred years, you're going to have one of these types of problems on average, depending on how bigger portfolio is, right? I don't know if I would say once every hundred years.

But I would say it's rare. I think these, like, catastrophic things are very, very rare. I think the bigger issues are things that's like there's some sort of failure and due diligence. There's some sort of dispute among partners. There's, you know, something that you just can't really plan for, but it's not really something like an LLC or an insurance company would always. jump in for most of the time though when it is the catastrophic situations you know i've had the

client's call where there was a fire and the bigger issue for them is like where do i place the tenant as opposed to like somebody suing me over this let me ask you another question that's kind of cheeky on this front then suppose that i go i'm a newer investor and i don't have a lot of money and i don't think through all these things and i buy a subject to property um from a a distressed seller who's also unsophisticated and a wholesaler who's done less than five of these is intermediating this deal. And I've borrowed money from a fourth partner to help me fund the down payment on there, the earnest money.

What do you think, how do I reduce my risk in that situation? We can probably also. Don't do it. Don't, yeah. That's a terrible idea. Look, my rule of thumb and every other real estate attorney who I know, and it's not because we don't understand subject to and we don't understand the risk, we will not touch it.

I don't know an attorney who will touch it. Maybe someone's out there. But from my point of view, I will not knowingly put a seller in breach of their mortgage note. That doesn't mean that the due on sale clause is like a one in a thousand chance or whatever. You know, it's a little bit of a boogeyman. I have seen it called and I'm not going to be the monkey in the middle on it. Now, that's just like a professional line that I've kind of drawn in the sand.

There must be attorneys out there who are doing it. That's just where my risk tolerance falls. And I think that's where the vast majority of attorney's risk. tolerance falls on that. Okay, I think this is really telling. I'm a real estate agent and I just had somebody in one of my, in my agent company's Facebook group asking like, oh, can somebody tell me the pros and cons? I'm like, the pros are all for the buyer and the cons are all for the seller. That's at first. But one day, like if someone's selling their property subject to an unsophisticated buyer, that person is not in trouble, right? Like they're about to go bankrupt or get foreclosed

on. So what happens in seven years when that person is back in that same situation and goes bankrupt? How's that going to work out for that buyer? So it's not, the risk is all theoretically on the seller, but there's plenty of risk for the buyer too. Yeah. What I've told clients, because I do have a client who I represent on other things and also does subject to and just knows not to call me on it is what I say is if you're in and out of the property very fast, everybody's risk is reduced. If you're looking at this, you're doing a cosmetic flip and you plan on selling it in six months, the risk across the board goes really long. If you're planning on holding someone's 30-year note for the next 25 years,

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Right after this. Thanks for sticking with us. I just think that there's a lot of people who are hearing gurus talk about this and they're like, oh, I could totally do that. And then, oh, that didn't work out. I'm just going to stop paying the mortgage. And then the seller is left holding the bag. It's the seller who is still on the note. The buyer can just walk away if you're not getting a giant down payment from your buyer, if you're not doing a ton of other things. But what I think is so telling is you're an attorney and you said, I wouldn't touch that.

She presumably knows more than you do about subject two and has decided not to touch it. That should say, if you're thinking about doing it, it's not the right choice. I mean, yes, I'm sure there are. are people who will be able to do it. In fact, as I say this, I am actually contemplating selling my house to a friend in a subject to deal that would be, you know, I trust him and it would be very, you know, all spelled out and all of that. But that's the only person I would do that to. I wouldn't just let some random person come and buy my house subject too. I just think that's that's setting yourself up for so much liability with very little control over the property. Look, there's a whole

spectrum of it. It's a controversial topic. People like to talk about it with there. There's ways to do it, ways to get yourself in trouble, right? Two multi-millionaire real estate investors doing a subject to deal between themselves is a completely different story than for broke people doing subject to deal as the parties to the deal, right? There's like the whole spectrum. So one is extraordinarily level of risk. One is extraordinarily low level of risk. It's like any power tool, right? Power tool can be very powerful and moving a journey forward or advancing a position. and it can be very dangerous, depending on who's using it and the skill and the ability for those folks to execute it. On a more practical level, you said partnerships, but what is the biggest thing that you have to deal with

where money actually starts flowing your way in a really horrible way because you're dealing with the problems of a client in there, like these partnership disputes, for example, what are the common things that you see in practice? This may sound crazy, but it's people going into business with people, they don't really know. But the way that, like, banks do underwriting, you really have to do underwriting on your partners. Like, to the point now where I'm like, have you seen each other's credit scores? Do you, like, know if this person has a load of debt? Like, if it's your brother or something, like, yeah, maybe you have this deeper, you know, innate sense of, like, what's going on with their life and things like that. But for a lot of people, I mean, I can't probably, there's people

who go into business with each other off of, like, Instagram and they've never seen each other. They don't know, you know, lick about each other, but they both, you know, want to go in and, you know, invest on a property together. They want to do something together. And I think that's just extraordinarily, extraordinarily risky. Are these people coming to you before? Like, do you help them draft the agreement and then it blows up? Or is this, is this like, oh, we don't have much in place. Like what?

Oh, it's always like a handshake agreement or a DM or a, yeah, Mindy, exactly. It's never, it's never before. It is never before. So if it have you, how often do you see somebody who's gone through six, seven, eight pages of a pre-partnership checklist that talks through exit clauses, that talks through rules and responsibilities? How often do those partnerships with a good documentation blow up and come to you for dispute? I think it's a lot rare. I mean, the example I'm thinking of my head is unfortunately a situation where one of the partners developed an addiction. And so there was, you know, it was something that was just kind of outside the bounds of really what like an operating agreement or a problem.

partnership agreement or a JV agreement would cover. And it just became something where there became financial mismanagement. And so I think in those types of situations, the only thing I could say, like, you know, hindsight is always 2020 is, you know, having some sort of mechanism to remove somebody in the event of some sort of personal like defect going on in their lives where they're not able to or they are mismanaging their role in responsibility. I think this is a great practical topic to end on for the last like four, three, four minutes here on this. Because I think that a lot of Bigger Pockets money listeners may at some point contemplate a partnership as part of their portfolio, whether it's a big one or a small one on there. And so what I would say is if I'm

approaching a partnership, what I want to do is I want to be super clear up front about who's doing what and what the roles and responsibilities are, where compensation lies in there, what the profit split percentages looks like, what the capital inflows and outflows will look like there, and what the termination looks like. And I always use that. the example. I use this with a friend I did a partnership with 10 years ago on this. It's like you're not negotiating against me. Like forget that. Right. Like let's say let's like we trust each other right now. You're negotiating against my estate. I'm here. My unborn children, you know, people you've never met in your life who have grown up and you don't know what they're going to look like.

What's that going to situation going to play out as and how do we want to handle, you know, my death or incapacitation in that sense? How do we want to handle decision making rights, all those kinds of things? how am I doing? Give me some feedback on that and tell me what else you would you would add to that discussion element. Yeah, I think that's huge. And I think that the piece of kind of just like slipped in there from taking it from the point of view of the estate is really, really important because membership interest or partnership interest is inheritable. And so most people don't go into business with a partner to ultimately business partners with their spouse or that person's children. And so you got to make sure that the agreement says if that's truly what you want, that like the other person inherits your interest.

maybe you have a buy-sell with life insurance policies. There's a lot of succession planning that goes into owning a business with a partner. The other things that I think are important to think about is who's kind of going to be the go-to? I think if it's one person or another, like do we want this where one person's taking the lead and the other persons maybe, I hate using the word money partner because then all the security lawyers will come and yell at me, but someone who's a little bit more hands off. I'll put it that way. And so what is the expectation? And then you also mentioned money in and money out. I think everybody

forgets the money in portion of it. You never want to have a capital call, but it happens. It happens, whether it's a business that has to meet payroll or everyone hears about the cash out refi, but there could be a cash in refi. And the way interest rates have gone over the last five years, I wouldn't be surprised if we see an influx of those types of situations where you don't have enough equity. And so you've got to put money in to keep a property afloat if it's got to. like a balloon mortgage on it. And so being really clear that like businesses are not all, you know, rainbows and unicorns that there is risk inherent with it. And are we prepared and what is our plan for when things go bad? Along those lines, I mean, this is not necessarily what I do as the attorney. I mean, I form the entity and, you know, work through this partnership

agreement conversations. But having like a business plan, you know, like that's, it's not really like a legal document, but like what is our plan? Now, if it's just holding on to a rental property, that may be very different than, you know, a more formal type of business. But having a sense of, like, whose, you know, roles and responsibilities, do we plan on using a property manager or not? Like, those are all really important. Even just discussions about, like, are we using a CPA of TurboTax? Like, there can be expectations about, like, what the expenses will or won't be based off of each person's, you know, I'll say financial priorities. where someone would say, hey, why do we need to spend $1,000 on a CPA,

when we can do it for turbo tax for $97, whatever it costs? And so making sure that you're on like the same page in terms of like financial priorities and investments for that business as well. Yeah. So look, I've run a business for the last 10 years, the last eight years, run it here at Bigger Pockets. And I don't have a list of all of these items. Like we've covered, I'm sure, all of these items in various documents over the years.

and there. But suppose you're starting in a new business, like you can't possibly know, most people can't possibly know all of these things. Is there a checklist? Is there like a resource? How do you get started when you're entering into a partnership with someone to make sure that this exhaustive list of things is done ahead of time so that you're not hiring Bonnie three years later to go after your partner for some problem that could have easily been avoided? So I think, Scott, the important, important thing that you kind of noticed that, like, you didn't write all these things down, but they were never an issue, so it was never a problem. When there's not a lot of money involved, we did write all of those things down. Like, right, there's professional investors behind bigger pockets.

Like, all those things were there. And I wrote them down with my partner. I just, like, couldn't tell you what they were now if I'm starting a new partnership or going into a new renter property. So if there's a way to avoid a partnership, I try to do that. If someone just has money, can they just be your lender? If someone has time, can you just hire them for their time? And so partnerships is really something where it's like both people bring something to the table in a really meaningful way as opposed to something that is just a matter of like convenience, in which case it's a lot easier and a lot cleaner and a lot less risky if you just structure it in another way without giving a person equity. I love that too. I can't tell you how many times I saw in the bigger

pockets forums, hey, I need a partner. Does anybody want to be my partner? And I'm like, whoa, you don't just partner with anybody. What are they bringing to the table? Oh, they're bringing deals. Well, that's what you have. You have no money, but you have deals, and they have deals. That doesn't solve any of your problems. Your partner should be solving your problems.

And like you said, bringing something to the table that's really worthwhile. And it should be somebody that you know or somebody that you have done a ton of research on. You mentioned, have you seen their credit score? That tells you a lot about a person. and their ability to keep their word. There used to be a saying on bigger pockets that like 10% of a good deal is better than 100% of no deal on there,

but 100% of a deal is way better than 10% of a deal all else things equal in my experience on there. So 100%. The more you can avoid partnerships and keep things simple, I love that advice. That just obviates the problem in the first place. And the cure for that, unfortunately,

is years of grinding, saving and living below your means and hustling and earning extra dollars. So you have the cash generally to pull off these deals and then financing them with owner occupied or full recourse mortgages in the conventional state. Like that's how you avoid a lot of these situations. And that's that's, I think generally the right approach for a lot of folks. So love it. Is that, are you agreeing with that? Bonnie, did I phrase that? Oh, yeah. I'm with you 100%. Yeah. I mean, I personally don't partner with anybody. I mean, we get approached for it a good bit, whereas like, hey, will you comp your legal services? I'll do the G.C. work. And I'm just like, I don't need to do that.

Like, I'd be happy to pay for your G.C. services. You can pay me for my legal services and you can keep the deal, something like that. Yet all these law firms are partnerships. So go figure. That's the whole thing. You make partner at the law firm. So the lawyers actually seem to have it worked out a lot of them on there. So interesting. Now that's a legal document I would not want to read what where all these partners are throwing their names together also yeah you can just use AI now and ignore Bonnie entirely uh just get to sorry okay what I mean I just go to chat all right well Bonnie this has been absolutely fantastic thank you for sharing your knowledge with us and contributing to a great discussion here we really appreciate it where can people find

out more about you and these resources that you have oh my Instagram handle is at Bonnie Gallum ESQ and my law firm is the gallum firm.com. Bonnie, this was super fun. I really appreciate you sharing your knowledge with us and our listeners. I want to remind our listeners that Bonnie is an attorney, but she's not your attorney. So none of this was legal advice. There you go. I'm attorneying for you. Thanks, Mindy for the fine print. All this was for entertainment and educational purposes only. Thank you again so much for your time. And we'll talk to you soon. All right. That was Bonnie Galam. an awesome episode, Scott. I really appreciated her, uh, her asset protection commentary. The, the risks that you don't even think about. Car accidents and divorce. And I was thinking like,

oh, a car accident. No, when you hit somebody, they can sue you in such a litigious society that we live in right now. You do need to protect what's yours from these sometimes frivolous lawsuits. I think we're all aware of the car, the, the car accident piece. And I certainly have been and have insurance and try to be a careful driver with all those types of things. The divorce item is a good reminder, super uncomfortable thing to talk about in a general sense, but it's a good reminder of something,

you know, if you are, if you're not married and you're contemplating getting married, that's a great thing to bring up. It's 2025. It's probably time, it's probably that day and age to dot those eyes and cross those T's and all those situations because there's, you never know. No one thinks they're going to get divorced, right?

On there. And I think that the partnerships one was the biggest eye opener for me, right? She didn't mention that as one of the top two things, but I took that away as probably the third biggest thing that investors like those on bigger pockets could potentially deal with, right? A partnership gone awry is a huge problem. And everyone, it's like marriage, right?

Everyone thinks that their partnership's going to be great when you start out. Otherwise, you wouldn't enter in the partnership. But you've really got to do that work up front and make sure that everyone knows who's making what decisions, where the money's going, what the business plan looks like. Love that, the concept of the business plan there. And I would bet you, I don't know, but I bet you, that the people who bother to do those things, we know she's already mentioned that.

The people who bother to do those things probably have much lower odds of ever having a problematic partnership event unfold where they then need to hire money. Yeah. And if you're going through those, like you mentioned, Scott, six, seven, eight pages of all of the different ideas

and all the different, oh, what ifs that could pop up, you get a good sense, oh, this guy doesn't have any good answers. Maybe he wouldn't be a good partner. Or if your partner, I say he, I shouldn't say he, if your partner says, oh, we'll worry about that later. We'll worry about that later. That's not going to be a problem. Maybe it's not going to be a problem.

Or maybe it's something that they don't know how to handle right now. The absolute best time to hammer all of this stuff out is before you have partnered because then you're still friends. No big thing has blown up where you have to then try and navigate this. This is like the rulebook for your partnership. So you want to take your time and spend it in the beginning, getting this together while everybody's still buddy, buddy and lovey-dovey. I just can't imagine ever partnering with somebody.

I meet on Instagram. Like it's just like how, how is that going through people's heads? You know, if that's your strategy, maybe there's another podcast out there for you, the bigger pockets money. I don't think we'll ever, we'll ever get behind that here. You got, it's got to be somebody you trust ultimate, you know, you trust their competence, integrity and and and competence and integrity. I think those are the two most important things in there without question.

And you still get your pre-up for your partnership, your partnership agreement in place. There you go. Now, Scott, I will say I have partnered on deals with people that I met on bigger pockets. But I didn't partner with them by saying, hey, I need a partner. Does anybody have a partner? I got to know them first outside of the context of maybe I will be a partner with this person. at some point in my life. I just, I got to know them.

Oh, there's a lot of people I got to know that I have never done a deal with. And there's a lot of people that I have gotten to know that I won't ever do a deal with. But there are a couple of people that I have partnered with. And it's turned out well. So, you know, getting to know somebody. I have two. By the way, I've lent them money. And I have a lien against the asset and a full recourse loan against those things.

And they've been paid back. And there it is, right? So there's different, you know, there's different ways to structure partnerships and those kinds of things, and I've certainly partnered with people I've met up bigger pockets in that regard. Yes, and I'm talking like full partnerships, but, yeah, it's, it's, it's, I did the work over the course of years getting to know them. I didn't, you know, you have to do the due diligence on your person.

It's, I mean, you don't have to. You could just chance it, but I, the probability of that being successful is, what, zero percent of this guy? And you'll be helping Bonnie reach. financial independent. Somebody wins. In every partnership, somebody wins. It might not be anybody in the partnership.

All right, Scott, should we get out of here? Let's do it. All right, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen saying cheerio, dingo.