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 Galam will discuss the web of protection you need from LLCs to insurance policies. 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.
Hello, 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 1 million millionaires and keeping them in the million with in that millionaire status, maybe through a couple 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. So 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 really big expenses, uh, 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 is 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 die with zero people, um, are a loud minority. Um, 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 principal on their balances and are going to need to think through a lot of this stuff, um, for the future generations. Which is a good problem to have. It 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 and like you wouldn’t 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 the search 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 costs, 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. Um, 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 to maintain my my uh, my figure here on there. But yeah, yeah, I absolutely. You got to plan on all the like, who knows what those things are going to look like in the future. That’s why more is always like like very few people actually retire on like the 4% rule or whatever. They they they’re often going way beyond that because of this fear of the unknown and all of these areas. Um 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. 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 I agree, I think that 4% um, 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 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. Um, and this is not the episode for them 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, for how to think about asset allocation and like if you’re FIRE… Yeah. What do you think some if you’re approaching FIRE, you’re you’re you’re in your 30s and you think you’re going to fire by 40 or in your late 30s whatever whatever um 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 would think about, it’s these very low-hanging fruit. Check your insurance policies, 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 principal. 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 um open and you know, having those discussions early on. Um, 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 I 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 um risk factors. Um, what do you think are some what 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, um, and that that that get too much attention in the context of Sure. 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, you know, 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, you know, 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 um, 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 new once um tax but also asset protection benefits that you get from living in different types of states. Not that it means you have to go pick up and, you know, move to a different state. The state I live in doesn’t have like a homestead exemption really. Um, 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 give us more on that. What does it 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. Um, 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. Um, in terms of a risk that I think is greatly over exaggerated, it’s probably like these like 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 on your house every single day or it’s going to burst into flames. And the reality is is like 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 boogie man that a lot of people make them out to be. Oh my gosh, I had like this one day of lapse in one of my insurance policies in a in 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 um and and the salt from Home Depot and I just kept putting it on the sidewalk. Yeah, for that that reason there. So yeah, I think I’m in that camp of overstating that risk. Oh, you were going without insurance. I feel like I can relate like if there was ever that lapse, I’d probably be sweating it as well. Do you recommend LLC or umbrella policy? Uh, this is a a conversation or a discussion that I had, I, 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, um, 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, um, I the 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, um, no matter whether it’s real estate investing or they’re doing other types of, um, 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 YouTube to subscribe to our channel. That’s youtube.com/biggerpocketsmoney. When spring hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized. Whether or not that hits you, Monarch will do your financial spring cleaning for you. One dashboard gets your entire financial life organized. No more clutter, no more mess, no more scattered logins, just accounts, investments, property, and more, all in one place. One of my favorite parts is the Sankey diagram. Every month, I open it up and literally watch the flow of money. It shows exactly where every dollar is going from income to all of my spending categories. It makes it so much easier to spot what’s working and what needs tweaking. 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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 uh have that it’s not good to have an L 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 it in the event that something were to happen, you’d almost certainly have an ability for the opposing attorney to pierce the corporate veil which 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 odd 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 to think about putting that LLC in place. That’s how I think about it. Um, on there, this is for entertainment purposes only, of course, um, in this discussion. But what is your, you know, for entertainment purposes only, kind of reaction to that philosophy in terms of approaching LLCs as part of the asset protection policy. And by the way, that entire time, I absolutely had insurance in all of those in all of those cases on every property. And auto, when I have a when I when I finally bought a home, home and an umbrella policy bundled on top of that. Yeah. So I’d say 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. Um, the 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 conventionally, you know, with some sort of financing that permits it, then like probably doesn’t hurt. Um, 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 it in your personal name and then like you said, just layering some insurance on top is I I don’t know, it 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. Um, and we take no offense to that, or at least we shouldn’t take offense to that. Um, so I’d say that’s the first thing. The second thing is keep it simple. There’s a lot of, you know, information out there that promotes all these really convoluted structures and things like that. Like just kind of put that out of your head and be like, that doesn’t have to be for me and that’s okay. Um, I think keeping things simple across the board is a lot easier, it’s a lot easier to maintain. Um, 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. Um, another thing I would, you know, keep in mind is estate planning. Keeping in 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. Um, 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 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 I think as you are, you know, growing your portfolio or growing whether that’s a financial portfolio or a real estate portfolio really. Um, 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 would be a time where I’d say, hey, let’s pump the brakes a little bit and see if there’s something um 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 prenup guy. Uh hopefully you’ve had that prenup in place if you had assets of any type to protect before you got married. Um, 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 it’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 audit, but it’s like, what is the equity of everything I own? And then what is the insurance policies on that? And it’s 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. Um, 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 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 uh, it’s, you know, I would say asset protection in the most, you know, most situations is ranging from a few hundred to a few thousand dollars. Now if you’re looking at, you know, complex trust planning or, you know, multiple LLCs or something 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, charge to form them, but if you were to do it for yourself, I mean, they run from about 100 bucks to about $700 bucks out in California to create, you know, entities and things like that. So it’s really not something that is um 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, um 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 will never be needed. It’s insurance. That’s that’s the point. It’s all the house always wins in the long run with these insurance companies, right? Except for those the the the in in rare events. So how do I balance like what what are some tips you’d have in terms of someone pursuing this in terms of not going so far overboard um with these things that they’re able to to keep those expense that that 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, what I’ve been say is tell your kids to pay their own insurance. If you 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 3x 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. Um, 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 there I I hesitate to say like this is what you should cut um 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 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 looking listening to this podcast, the majority of them will have either lived in one of the properties in their portfolio um 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, uh something that I work that I did becomes the catalyst for some problem that creates a lawsuit against the business. Do I risk piercing the corporate veil should 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 their LLCs even even after they’ve moved them in there. The important the 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 would 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 um 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 have 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? Um, let let’s use an example. That person placed the tenant and it’s five years later, the property manager’s 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 like, should I be worrying the LLC is not enough and I need that umbrella on top of that because there is a there is a possibility of that 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 like homeowner’s policy with like a general business liability policy, then that’s what you would do. I also see investors who do that 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 would cause piercing the corporate fail. It’s more not keeping corporate formalities or um not keeping clean books, things like that that would be more likely to lead to the situation where you’re piercing the corporate fail. Bonnie, how how many uh clients do you have that have rental properties? Oh gosh, hundreds. Probably. How many times how many times have you seen a lawsuit get filed against the LLC? Against the LLC? Not infrequently. Okay, so this is this is a regular occurrence. You see you see the you see these this happening one, two percent of the time? I mean, it would 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 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, um, that is, you know, they didn’t have clear splits or this person felt like that 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. It’s like, oh, I mishandled a security deposit. There’s a fine there. Oh, I, you know, screwed something else up, or 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 they’re 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’ve spent half the episode talking about rental property risk because I just think there’s not there’s not that much to it it sounds like the other stuff, right? It’s like get an estate plan, have your home, auto and umbrella policy set up. And if you’re a W-2 employee with a brokerage account and a home, like that’s it. Don’t do stupid stuff. dot those I’s, cross those T’s, spend a few thousand bucks getting it set, shop your insurance, but there 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 is where you have to turn your brain on a little bit to that next level, I think for these things. Am am I phrasing that right? Do you agree with what I what I’ve said for the most part here? Yeah, I would say because with those activities, you’re kind of putting yourself in the out in the world in a way that creates risk in a way that just like financial investment does not. So whether that’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 so let me rephrase the question I just asked you a moments ago and say, how many how how many times in all those all those companies that you all those properties that your your clients own, has there been a six-figure lawsuit of the type that I’m clearly worried about here, the flood, the the tenant problem, the the foundation problem, the the mold, what whatever like something like that that’s a real claim from a from a tenant or from a uh a something like that that’s not a partnership dispute that would that that is handled by this situation. I mean, I can tell you of two that happened to me personally. But, um, among clients, I can think over the last few years, probably on one hand where that is. And my my answer is call your insurance company. Yeah. So, it’s not these are rare events that we’re talking about with this. 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 out of, you know, 500 clients, you can count them on one if I’m estimating 300, 500 clients, you can. I I would come on yeah. Yo on one hand. So once every 100 years, you’re going to have one of these types of problems on average depending on how big your portfolio is, right? I don’t know that I would say once every 100 years. But I would I would say it’s it’s rare. I 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 in 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 clients come in with there was a fire, and the bigger issue for them is like, where do I place the tenant as opposed to like somebody’s 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 um on there or the earnest money. What what do you think the how do how do I reduce my risk in that situation? We can clearly ask. Don’t do it. 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 risks, we will not touch it. I don’t know an attorney who will touch it and 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 do on sale clause is like a one in a thousand chance or whatever, you know, it’s an a little bit of a boogey man. I have seen it called and I’m not going to be the monkey in the middle on it. Um, now, that’s just like a professional line that I’ve kind of drawn in the sand. I’m there must be attorneys out there who’s doing who are doing it. That’s just a where my risk tolerance falls and I think that’s where the vast majority of attorneys 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 uh companies Facebook group asking like, “Oh, can somebody tell me the pros and cons?” And 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 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 the it’s not the risk is all theoretically on the seller, but there’s there’s plenty of risk for the buyer, too. So, 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, right? 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And then, oh, oh, that didn’t work out. I’m just going to stop paying the mortgage. And then the seller is left holding the bag. That’s it’s the seller who is uh 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 to and has decided not to touch it. That should say if you’re thinking about doing it, it’s not the it’s not the right choice. I mean, yes, there are I’m sure there 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 to. 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 ways to get yourself in trouble, right? To two multi-millionaire real estate investors doing a subject to deal between themselves is a completely different story than four broke people doing a subject to deal um uh as the as the parties to the deal, right? There’s like a whole spectrum. So one one is extraordinarily low level of risk, one is extraordinarily low level of risk. It’s like any power tool, right? A power tool can be very powerful and moving a journey forward or or advancing a position and it can be very dangerous um uh depending on who’s using it and the skill of and the 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 the problems of a client? Um, and there, like a part like these partnership disputes for example. What are 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. Um, I bet 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, a 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 if 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 roles and responsibilities. How often do those partnerships with good documentation blow up and come to you for for a dispute? I think it’s a lot rarer. I mean, the example I’m thinking of in 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 partnership agreement or a JV agreement would cover and it just became something where there became like financial mismanagement. And so I think in those types of situations, the only thing I could say like hindsight is always 2020 is, you know, having some sort of mechanism to remove somebody in 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 and 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 um, in in 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 upfront 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 the example, I used this with a friend, um, I did a, 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, um, 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 what’s that going to situation going to 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 rates, uh all those kinds of things? How am I doing? Give me give me some give me some feedback on that and tell me what what else you would you would add to that discussion element? Yeah, I think that’s 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 become ultimately business partners with their spouse or those 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 a life insurance policy. There’s a lot of, you know, succession planning that goes into owning a business with a partner. Um, 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 person’s 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. We’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, you know, 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 got to put money in to keep a property afloat if it’s got like a balloon mortgage on it. And so, um, 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? Um, along those lines, I mean, this is not necessarily what I do as the attorney. I mean, I help 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 who’s, you know, roles and responsibilities? Do we plan on using a property manager or not? Like those are all really important. Um, 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 um based off of each person’s, you know, I’ll say financial priorities where someone be to say, hey, we can why do we need to spend $1,000 on a CPA when we can do it for TurboTax for $97 whatever it costs. Um, 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 I’ve run a business for the last 10 years, the last eight years run it, um, uh 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 in there. But but you know, if suppose you’re starting 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 uh 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 they’re you’re not hiring Bonnie three years later to go after your partner for, you know, some problem that could have easily been avoided. So, I think Scott, the important thing that you kind of noticed is 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. But we did write all of those things down. Like right there’s there’s professional investors behind Bigger Pockets. Like all those things are 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 rental property. Yeah. So, if there’s a way to avoid a partnership, I tried 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, what 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 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? Um, that tells you a lot about a person and their their like their ability to keep their word. They used to be a saying, uh, on bigger pockets that like 10% of a good deal is better than 100% of no deal, um, on there. But 100% of a deal is way better than 10% of a deal all else things equal, uh, in my experience on there. So 100%, I like like the the more you can avoid partnerships and keep things simple, I love that advice. Like, that just obviates the problem in the first place, and the cure for that, unfortunately, is years of grinding and saving and living below your means and hustling and earning extra dollars, so you have the cash generally to 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 um a lot of these situations and that’s that’s I think generally the right approach for a lot of folks. So, love it. Was that are you agreeing with that Bonnie? Did I did I phrase that Oh yeah, I’m with you, 100%. Yeah. I I mean, I personally don’t partner with anybody. I mean, I we get approached for it a good bit where it’s like, hey, will you comp your legal services, I’ll do the GC work. And I’m just like, I don’t need to do that. Like I’d be happy to pay for your GC services. You can pay me for my legal services and you can keep the deal something like that. Yet, all of these law firms are partnerships, so go figure. I really like 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. When where all these partners are throwing their throwing their names together. Also, yeah, you can just use AI now and ignore Bonnie entirely. just get sorry. Okay. Go to chat. Okay.. 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 um and these uh resources that you have. Uh, my Instagram handle is @bonnygalamESQ and my law firm is thegalamfirm.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. Uh, there you go. I’m 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 and that was 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 the 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. Um, 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 if you are it’s 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 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 then I think that the partnership 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 as probably the third biggest thing that investors like those on bigger pockets could potentially deal with, right? A a partnership gone arr is a huge problem and everyone, it’s like marriage, right? Everyone thinks that their partnership is going to be great when you start out, otherwise you wouldn’t enter into the partnership, but you really got to do that work up front and make sure that you everyone knows who’s making what decisions, where the money’s going, what the business plan looks like. I love that, the concept of the business plan there. And I would bet you, I don’t know, but I’d bet you that the people who bother to do those things, we know, she kind of she’s already 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 Bonnie. 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, uh you get a good sense, oh, this guy doesn’t have any good answers. Maybe he wouldn’t be a good partner. Or if he’s 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 the rule book 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 andyy. I I just can’t imagine ever partnering with somebody I meet on Instagram. Like it’s just like how, how how is that going through people’s heads? You know, if that’s if that’s your strategy, maybe there’s another podcast out there for you um than 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 the competence and integrity. I think those are the two most important things uh in there um without question and you still get your prenup for your partnership, your 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 too by the way. I’ve lent them money. And I have a lean against the asset and a full recourse loan against those things and they’ve been paid back. And there it is, right? So but there’s there’s different, you know, there’s different ways to structure partnerships in those kinds of things and I’ve certainly partnered with people I’ve met at bigger pockets in that regard. Yes, and I I’m talking like full partnerships, but uh, 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 can just chance it, but I the probability of that being successful is what 0% Scott? Well, then you’ll be helping Bonnie reach financial independence. 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. When you’re ready to start your business, Northwest registered agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest registered agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. 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