Hey guys, Toby Mathis here, and today we're going to talk about how you should hold real estate, specifically investment real estate. So let's jump in, in number one.
The typical response to most people when they're buying real estate is they're going to buy it in their individual name. So if I'm just putting up choices for real estate, I'm going to own it in my personal name, right? And then you're going to hear a bunch of people start freaking out, saying you should never own investment real estate in your individual name. And they're going to say, "Well, why? Why would that matter?" It's because you should be asking yourself every time you look at these things, "What's the worst thing that could happen?" And if I invest in a piece of real estate, I don't care how inexpensive I buy a $50,000 property that I saw that was great and it's making a thousand bucks a month, I can't believe I got it so cheap; that thing could follow me around until I'm gone and then take even my estate if I have a liability occurrence on it. So you don't want to have that exposure. So at a minimum, we want to make sure that we're isolating that liability off of you.
So you're going to say, "Well, wait a second, if I don't own things, then what's the next best thing?" And I'm going to put it into a category called trusts. I use land trusts, but some people, they're going to call them different things. At the end of the day, it's an intervivos revocable trust that is designed specifically to hold real estate. And you're going to say, "Well, geez Toby, why would I do that? Why would I put trust, you know, a property in a trust? Is it going to protect me from liability?" In some cases, yes, but in most cases, no. But what it is really good at is obscuring who owns all your properties. Like if I use a trust, it's great for things like, "Hey, I have debt on the property, and I don't want to screw up my loan." Or like if I'm in Florida, for example, you have dock stamp fees that could be due if I put it directly into a different type of entity like an LLC. Or hey, if I use that trust in California in a specific type of trust called a statutory trust, I could avoid the franchise tax, 800 bucks a year tax savings, and I get the asset protection. Hmm, maybe I'm going to do that, but I'm just using a broad category, and I'm just going to use a green box to delineate using that trust, and I'm just going to put a big old T in it because I want it to hold my real estate.
Now some of you guys have heard about living trusts, and they work great for estate planning. And so if we're looking at you and you're going to own your own property, and let's say it's a home, and I'll use Texas and Florida as an example because you have an unlimited homestead exclusion, so they can never take your house away.
But if that's you, you may end up using a trust called a living trust because no matter what, you die at some point, and you're going to end up having to probate that property.
Whereas if the trust owns it, you could avoid probating and avoid all that time and expense and do your family a solid if you're leaving things behind for them.
But for our purposes, this is one of our objects right here, is a trust. And I'm going to specifically say a land trust. And before you get out ahead of me and say, "But I heard we don't have those in my state." Every state has trusts, every single one, everywhere. They accept living trusts everywhere except land trusts. You just might not have a statute on it, but they're absolutely usable and they work in all 50 states. You don't have to listen to some people that don't know and that aren't real estate investors; they just look up for a, "Yeah, there's no statute here." Okay, there's like 14 states that might have a statute, right? And it's not going to be in every state, but every state recognizes trusts. So yes, they work in all 50 states.
Here's the next flavor, and this is the one that gets all the press. Everybody talks about it because this is the most effective tool, bar none universally for real estate.
And that is something called a limited liability company. And the reason it's so effective is because it's a creature of state law, but it doesn't have a tax designation. You get to choose. So it's a Swiss army entity. In other words, you get to pick, do I want the spoon, do I want the corkscrew, do I want the knife, right? I get to choose, is it going to be disregarded? Is it just going to flow onto my tax return? Is it going to be a partnership for tax purposes? Should I do that because I want that 1065? Maybe it's commercial or maybe that I'm worried about I'm qualifying for more loans and I want to be on page two of my scheduling and qualify for more loans because it's going to use more of that income. Do I want it to be a corporation because I'm flipping, I'm a dealer, maybe I'm doing rehabs and I want to isolate my exposure, but I also know there's some tax implications. So those LLCs work great from that standpoint.
Number two, they are an asset protection vehicle bar none. Just like any filed entity that you're paying a state will give you protections that you put around it. Limited partnership corporations, LLCs they isolate the liability to what's inside. So I'm going to use a red box because that's delineate risky asset. When you have real estate or if you have a business or anything, you want to put it inside that risky asset box, because it's going to keep that risk away from you and me, right? We want to be able to sleep at night and not worry that someone's going to come try to take away all of our stuff because it's something that's outside my control, right? So I want to make sure that I'm isolating liability. And what you'll oftentimes see is we'll take that trust and we'll make the beneficiary that LLC, and now all of a sudden the liability is trapped.
Number three, the reason that LLCs are so great is because you can create outside liabilities personally that you can protect your real estate from. What did I just say? I'm driving down the street and I hit a busload of nuns and I get sued like crazy, went to Catholic school so I got a little vendetta, right? So I caused an accident and I get sued and they're looking for things to take.
That LLC can create a shield between the real estate and you as well.
In fact, I'm going to say you and me, me and you. It creates a liability shield between us both.
Now, not all states are created equal. So sometimes we are using a state where there's something called charging order protections. And I'm just going to say our favorite is Wyoming. 'Cause it's inexpensive and it works really well. And even more importantly, it's anonymous.
Now I'm not saying it's anonymous like we're going to be money laundering or we're trying to hide anything. What we want anonymity for is that if somebody is in a rental that you own, we don't want them to be able to see everything you own. They don't get to know what you have. There's nothing that says everybody should know everything you own. I don't get to see what's in your bank account. I don't get to see everything you own unless you choose to show me. Well, I'm going to choose not to show you. And we put that, we call that a holding entity. And what we like to do is put our LLCs that hold the risk assets right in there. And that creates a nice shield between you and any of the assets that are in that line. And by the way, we could stack that we only need one holding entity, but you might have multiple properties, right? We may have multiple trusts and boy does this work well from a liability standpoint, from a usability standpoint. We can get it to where there's zero or one tax return for that whole structure. And it works fantastic, but it requires the use of an LLC. They're fantastic, in your state, we may be able to get by with just the trust, in Florida, sometimes in California believe it or not, we'll use a Wyoming statutory trust and register it there to avoid the franchise tax. But anyway, we're using these series of vehicles.
Now what don't you see up there? You're going to say, "Hey Toby, you're missing out on the corporation. Why are there no corporations?" The answer is really easy. 'Cause there's adverse tax consequences. If I own investment real estate inside of a corporation. If I have to refi that property and I have to take it out of the corporation, that's a taxable event.
So we never, almost never, I say 99.9% never do we put investment real estate inside of a corporation without some really, really compelling reason about what's going on.
Otherwise, corporations are for active businesses and if there's an active business then I have no problem using it. I might call that an orange box. And I'm just going to put an A for active. You're going to use the corporation for active businesses like property management or I run my plumbing company or whatever. You know, I'm an active business it's my side gig, management doing internet, whatever. It's going to be my active business. Maybe that's my family corporation.
And then the last one, last but not least, used to be in the replace of that LLC and its time has passed for the most part there's still some use and that's called an LP which stands for limited partnership.
And we used to use those quite a bit back in the '90s and I haven't since 2003, it's almost always been LLCs. You'll see LPs still using syndications or when they want a strong delineation that the limited partner has no management authority whatsoever. But in our typical day-to-day, you almost never see 'em. It's rare. You'll see 'em pop up once in a while, somebody will try to resurrect the family limited partnership as though it's something special. And you get the same protections in almost all the states with that LLC. So you don't need to do an LP you just use that LLC and tax it as a partnership.
Anyway, I just laid out quite a bit. You get something to think about so you can determine what's the best entity for you when you're setting up and owning real estate. And remember, we always start by looking at what's the worst that could happen from a liability standpoint. We look at how is it going to be taxed and then we look at how is it going to be that we could lever up. And then we look at how is it that I can make it a part of my legacy? And in every one of those answers you're going to see one of the things I just drew up there. And it's never going to be just you. I hope you got something out of this. If you know anybody who's getting involved in real estate investing, share it with them, like and subscribe, and I'll see you later.
https://www.youtube.com/watch?v=6oCHYvPxZc0
5️⃣How to Use a Land Trust for Real Estate Investments
https://www.youtube.com/watch?v=esH-Nrp9EQk
This guide is an exhaustive exploration of land trusts, tailored for real estate professionals and investors. It draws upon the expertise of Toby Mathis and Amanda Wynalda, delving into the intricacies of land trusts and their applications in real estate.
This guide offers a profound and detailed perspective on land trusts in real estate, covering every aspect from basic concepts to advanced strategies. It serves as an indispensable resource for real estate professionals seeking to leverage land trusts for investment success and asset protection.