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JF964: Do You Know About these LEGAL LOOPHOLES of Real Estate? #SkillsetSunday

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Rich Dad Advisor, Garrett Sutton, shares his powerful knowledge of legal loopholes in real estate. LLCs, C Corp.’s, S Corps, which do use and why would you use them? How do you keep more money yet be an upstanding citizen? Your real estate approach is about to change, don’t miss this one!

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Garrett Sutton Real Estate Background:

– Founder of two companies, Corporate Direct and Sutton Law Center
– Assists entrepreneurs and real estate investors to protect their assets and maximize their financial goals
– Author who has sold more than 850,000 books including, Loopholes of Real Estate
– Member of the elite group of “Rich Dad Advisors” for bestselling author Robert Kiyosaki
– Based in Reno, Nevada
– Say hi to him at http://www.sutlaw.com/

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legal real estate loopholes

 

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

I hope you’re having a best ever weekend. Because it is Sunday, we have a special segment called Skillset Sunday. By the end of our conversation, you’re going to have a specific skill that perhaps you didn’t have, and holy cow – we’ve got someone who is here to educate us on all sorts of legal loopholes we want to close in our real estate investing business. How are you doing, Garrett Sutton?

Garrett Sutton: Good, Joe. It’s a pleasure to be with you today!

Joe Fairless: Well, nice to have you on the show, my friend. A little bit about Garrett – he is the founder of two companies: Corporate Direct and Sutton Law Center. He is the author who has sold more than 850,000 books, including Loopholes of Real Estate. He’s a member of an elite group of Rich Dad advisors for the best-selling author, Robert Kiyosaki, who has been a guest on the show. He’s based in Reno, Nevada.

With that being said, Garrett, before we dive into legal loopholes we wanna close in our business, can you give the best ever listeners a little bit more about your background?

Garrett Sutton: Sure. I grew up in the San Francisco Bay Area, and I attended the University of California, Berkeley, then I went across the Bay to Hastings Law School, I got my law degree, practiced in San Francisco and Washington DC, and I always liked the mountains in Lake Tahoe and skiing, so I moved to Reno in 1989. It was a great move, I raised a family here; Nevada is a great state, along with Wyoming, for setting up corporations.

I’ve been happily practicing law in Reno, Nevada for several years now, and I enjoy traveling the world with Robert Kiyosaki and the other Rich Dad advisors and just talking about financial education and how people can take steps on their own – because they don’t teach this in school – to become financially aware and then financially free.

So it’s been a really great process to go through and it’s just very rewarding to help people. I’m glad there are people out there like you, Joe, that are providing education to people on a continuing basis. This is important for people to gain this knowledge so that they can move forward as well.

Joe Fairless: I completely agree. You mentioned that Nevada and Wyoming are great states for setting up corporations… What makes a state great for setting up a corporation?

Garrett Sutton: Well, it’s two things – one is the law. California, for example, has a very weak asset protection law with their corporations and LLCs. Nevada and Wyoming take the other side of things – they want to make their law as protective as possible, along with Delaware and South Dakota and some other states. They provide excellent laws to help people protect their assets.

Wyoming also offers privacy. When you set up an LLC in Wyoming, on the Secretary of State’s website they don’t list your name as being an owner or a manager or a member. So we like the privacy, we wanna keep a low profile, and Wyoming provides that. The annual fee for Wyoming is only $50/year, versus $800 for California, and other states are more expensive.

So we really like Wyoming, we also like Nevada, and you have the choice of what state to incorporate in. You’re not locked into incorporating in the state that you live in. You can choose which state has the best laws and do the best to take advantage of those laws.

Joe Fairless: What if you have already incorporated in New York, for example? Can you switch that to Wyoming?

Garrett Sutton: You can, and one of the strategies we do, Joe, is if you have property in New York, we would have it owned by a New York LLC, and then you would have the New York LLC owned by a Wyoming LLC. That’s the best strategy.

So if you have the property in New York, title is in the name of a New York LLC, you’re probably okay, and then you would just take the next step of having the New York LLC be owned by the Wyoming LLC, which if someone’s suing you personally – after a car wreck, for example – they would have to fight through the Wyoming LLC to even get at the New York LLC. Wyoming offers excellent asset protection through the charging order procedure. So that’s a way to do it.

Now, say you really want a Wyoming LLC for your New York property… You can take the New York LLC – it’s called a continuance – go to the Wyoming Secretary Of State and continue it into Wyoming, and all of a sudden your New York LLC becomes a Wyoming LLC, with the same incorporation date and the same EIN number. So it can be done.

Joe Fairless: And that’s called a continuance?

Garrett Sutton: Yes.

Joe Fairless: And you said you go to the Wyoming Secretary of State and request that?

Garrett Sutton: Yes.

Joe Fairless: Interesting.

Garrett Sutton: And our firm provides that service. We do it for a lot of people. So if you’re in a state where you don’t like the laws, you can move over to Wyoming and take advantage of their laws.

Joe Fairless: What is the downside? Living in a state and then having an LLC or an S-corp in Wyoming, but you’re not necessarily physically there…

Garrett Sutton: One downside would be say you have a business in New York and you have a Wyoming LLC doing business in New York. To do it right, you would have to qualify the Wyoming LLC to do business in New York, and you’re gonna pay the same fees as you would if you started in New York to begin with. So you’d just be paying two state filing fees instead of one. But as we said, Wyoming is only $50/year, and we serve as the resident agent there in Jackson for $125/year. So for $175/year, you’re paying a little bit more for better asset protection.

Joe Fairless: And that would be the fee that you all charge? $175?

Garrett Sutton: Well, the annual fee, yeah. The set up fee, if you mentioned Rich Dad, it’s $595, perennity, plus the state filing fees, which vary state to state. So it’s $595 plus, Wyoming for example is $100, so $695. Then on an annual basis after the first year, after everything’s set up, it’s $175/year, $50 to the state of Wyoming and $125 for us to be the resident agent. Not expensive.

Joe Fairless: Not expensive. After we get done talking, Garrett, I am going to talk to you offline… I messed up when I started one of my LLCs. I set it up in New York because I was living in New York, and I had to publish it in some newspaper for $2,000, and then in another newspaper… All in it was actually $2,000; one was $1,000, the other was $1,000, and I don’t know what’s going on with one of my LLCs, so I’m actually going to hire you and do this. Cool, well selfishly, thank you for that info. [laughs]

Garrett Sutton: Yeah, we provide a cleanup service, so if you haven’t done your minutes for a while or you haven’t kept up to date, we’ll clean it up for you. It’s not a problem.
The key thing is you wanna follow the formalities. You wanna make sure that you’re paying the annual fees, you’re doing your annual minutes… You’re following these pretty simple requirements. If you don’t follow them, then someone can pierce the veil and get at your personal assets. So it’s important to follow these formalities on an ongoing basis.

Joe Fairless: I’m taking notes, perhaps I missed this – I thought you said there are two things to consider: one is asset protection… Was there another, or did I miss that?

Garrett Sutton: No, the key thing for me is asset protection. Now, there are some tax issues involved, and you’ll work with your tax advisor, but for me, you’re gonna pay the same in taxes with an LLC (maybe you’ll save some) than you would personally, because you can get depreciation personally… But here’s the interesting thing, Joe – if you operate a business or run real estate in your individual name, you have a five times greater risk of being audited by the IRS than if you operate through an LLC or a corporation. That right there is a good reason to be incorporated; you’re gonna follow all the tax rules, you’re gonna follow all the corporate rules, but by doing that, you’re gonna be protected and you have a much lower risk of running into an IRS audit.

Joe Fairless: Let’s talk about other legal loopholes as real estate investors. Now that I selfishly got what I wanted to — no, I’m kidding. [laughs] Now that we’ve talked about some loopholes, what are some other loopholes…? You’ve written a book about it… What are some things that you have identified that we should talk about during today’s conversation?

Garrett Sutton: Well, with loopholes for the tax side – you wanna open those and take advantage of them, and on the legal side, you wanna close them and protect yourself. Certainly using LLCs to hold real estate – in some cases you’ll use LPs (Limited Partnerships). One of the things that happens, Joe, is people will set up the LLC for their real estate, and then they’ll forget to transfer title from their name into the LLC name, and you don’t have the asset protection unless you do that transfer, from your name into the LLC.

When someone’s looking to sue over the property at 123 Elm Street, and they go to the county recorder and it’s in your name, that’s an easy path for them to get at your personal assets. When the county recorder says 123 Elm Street is held by Joe’s LLC, an attorney is gonna think twice about suing, especially on a personal claim, against you… Because it’s in an LLC, and if we’ve structured it right, it’s gonna be difficult to get at that asset. So we wanna be sure and transfer title.

Now, what we talk about in the book Loopholes of Real Estate, some people are worried – “If I have a loan against the property and I transfer the property, isn’t that a sale of the asset?” Well, no, it’s not a sale. You’ve just transferred it from your name to your LLC, you haven’t sold the property. And in most cases, 999,000 out of a million, it’s just not gonna be an issue. The bank will not call the note. And here’s the magic language you use if it’s an issue (and the FHA buys this language)… It’s called continuity of obligation.

What that means is when you buy that duplex in your individual name, you had to sign a personal guarantee and you had to give the bank a first deed of trust against the property. Now, when you transfer from your name into the LLC, there’s a continuity of obligation. The bank still has your personal guarantee, they still have a first deed of trust against the property, so the obligation has not been diminished, so that’s the language you’ll used. But as I was mentioning, it’s rare when you see a bank actually call the note.

Banks are getting more understanding of people holding title to their real estate in an LLC. What my clients say and what I’ve had in my experience is the banker will say, “Well, I can’t tell you that you can do that, but if you do that, we’re not gonna bother you.” That’s what they’ll say. They’ll say “I’m not gonna advocate it. We want you to take title when you buy the property in your individual name, but you know, after you buy the property and you transfer it into an LLC, we’re not gonna bother you.”

So I would always recommend that people, even if they’re financing the property, take title eventually in the name of an LLC. We talk about those issues in the book.

Joe Fairless: What is the process that you would recommend in terms of doing that? Would you talk to the lender first, or would you do it and talk to them about continuity of obligation if they bring it up later?

Garrett Sutton: Well, is it better to ask permission or forgiveness?

Joe Fairless: Right…

Garrett Sutton: So I would do it, and as long as they keep receiving a check, and the check will be in the name of the LLC – as long as they keep receiving the mortgage check made out in the LLC account, they’re not gonna bother you with it. So I always recommend to do it. And if you have a good relationship with the banker, if the banker is a friend of yours, you could ask him, and 99% of the time they’re gonna say “Just do it, don’t tell us about it.”

Now, Joe, the one thing you have to do if you do that is you have to let the insurance company know the title is in the name of the LLC, because you’ll take title in your individual name and that’s who the policy will be with… Then when you transfer it to the LLC, the insurance company needs to know that.

We had a client, before they came to us they were in Los Angeles; they had a duplex, the insurance was in their individual name, they transferred title to the LLC, there was a fire, and the insurance company said, “Well, we’re not ensuring the LLC, we’re ensuring you”, and they denied coverage.

When you talk to the insurance company they’ll say “Well, if you put it into an LLC, that’s a business, and we have to charge you a higher premium”, which is, of course, nonsense; it’s the same risk. Here’s how you skin the cat: you tell the insurance company “I’m gonna keep the insurance in my individual name (so you get the lower premium), but I want you to list the LLC as an additional insured.” That’s how you do it.

Joe Fairless: I love that. That’s a real-world problem you just solved, because I guarantee a lot of people – myself included – who know it makes sense to transfer your real estate into LLCs did not think of also getting the insurance company to add that LLC as an additional insured. If you ask them to do so, do they ask why?

Garrett Sutton: Nowadays a lot of them know why… I’ve never had my agent ask why, but she knows that I’m holding properties in LLCs; the insurance is in my name, and it’s really easy for her to add the LLC as an additional insured.

Joe Fairless: Earlier you said to use LLCs to hold real estate and in some cases use LPs. When would we use Limited Partnerships, LPs?

Garrett Sutton: That’s a really good question. There are limited times when you would use the Limited Partnership. A couple things – first of all, in California there’s an extra franchise tax on LLCs based on gross receipts; not how profitable you are, but just money coming in the door. So in California, to avoid this kind of offensive franchise tax, you may look at using a Limited Partnership.

Now, the Limited Partnership requires that you set up two entities, right? You set up the Limited Partnership that’s chartered with the state, but then the general partner can either be an individual, or you as a corporation or LLC. The problem with you being the individual general partner is you have unlimited liability for that property, and so we have to have the general partnership interest be in the name of a corporation or LLC. Unlike the LLC where we only have to set up one entity to get everybody protected, in the LP you have to set up two. That’s a downside.

On the plus side, it’s really clear that if mom and dad own 2% as general partners of the LP through their corporation (LLC), they can gift 98% to the kids over time, and with that 2% general partnership interest, they have absolute control over the Limited Partnership. So the kids can’t come in and force mom and dad out. The kids would have to live with their 98%, while mom and dad were able to pay for various expenses, pay for medical, whatever they want, with that 2% interest and stay in control. That’s one of the big advantages of the LP.

I have another book called How To Use Limited Liability Companies and Limited Partnerships – I just came out with the fourth edition – and we talk about those issues… The use of the LP for estate planning and gifting to the kids, because that’s a great use for that entity.

Joe Fairless: Something happens and people sue us… It’s a litigious society, as you know in your line of work, and you do what you can with your clients to help protect stuff from happening. What are either entities or structures that we can employ — I’ve heard of land trust before, and I’ve interviewed people and they seem almost too good to be true. What are your thoughts on that, before I [unintelligible [00:19:32].15]

Garrett Sutton: Okay, I have a whole chapter in Loopholes Of Real Estate on land trust, just busting up the misconceptions about them. First of all, they offer no asset protection. You have a duplex in the name of a land trust and a tenant sues – they’re suing you personally, right? There’s no protection. This idea that you have privacy if someone’s gonna sue the land trust and they can’t find who the owner is is nonsense.

If they go and try and find who the owner is and they can’t, all they have to do is go to the court and get a court order to publish notice in the newspaper, of the lawsuit, and you’re never gonna see that notice. The plaintiff, the person bringing the case, is gonna win the case by default. That’s not a good position to be in. So this idea that the privacy of a land trust keeps you out of court is nonsense. It puts you further behind in the court system.

For example, if there’s a problem on the property and the tenant sues, and they can’t find out where you are, then you don’t have the opportunity to notify your insurance company of the claim, and then there’s a default judgment against you. Your insurance company could say, “Look, you didn’t notify us of this claim, we’re not gonna cover you”, and you’re in a worse position than if you’d used an LLC. So the land trust is not a very good way to go.

As well, they say “Well, there’s no asset protection with a land trust, so have three land trusts owned by one LLC, and that gives you the asset protection.” The problem with that is if the land trust gets sued, the LLC is the responsible party – well, you’ve just let someone into an LLC that owns three properties, so you have compounded the problem. Now the tenant can reach three properties instead of one, so you’re absolutely right, Joe… There’s way too much misinformation out there; it sounds too good to be true, and when that’s the case, it usually isn’t true, and that is certainly the case with land trusts.

I always recommend that people be very cautious about what they hear on these land trusts.

Joe Fairless: You say the word “land trust” with so much disdain… [laughs] It’s like poison, I can tell, from your mouth. Is there a time when it would be good to use one?

Garrett Sutton: There would be one case, and that would be where the bank says, “Absolutely not, you cannot put the property into an LLC. We’re gonna sue you, we’re gonna call the note” or whatever. So what you do is they can’t not let you put property into a living trust. For state planning purposes, we can put real estate into the name of the living trust. The land trust and the living trust are very similar. So you put it into the land trust, and then you have the beneficiary be an LLC. That would be the only case I would use the land trust.

This idea – and believe me, there are all these non-lawyers out there promoting these land trusts… They have no idea what the law is, but they have latched onto the idea that the land trust is something they can sell… You just have to be very cautious on who you take advice from.

Joe Fairless: Yes, that is true. Well, really quick as we wrap up, let’s talk about one other thing… First off, my overarching question earlier was “Is there something else that we haven’t talked about that you implement with your clients, that typically isn’t implemented already?”

Garrett Sutton: Yeah, I like — you have your New York duplex, owned by a New York LLC, and turn that as owned by a Wyoming LLC. You get a Connecticut property – we have a  Connecticut fourplex in a Connecticut LLC owned by that same Wyoming LLC. So we don’t need to set up a new Wyoming every time.

Now, the next step is you can have what’s called an asset protection trust on that Wyoming LLC, and that provides excellent asset protection. The problem is it’s an irrevocable trust. You can’t really change it around. When we talk through this with our clients, most don’t do it because there are expenses, and they’re irrevocable.

The Wyoming LLC gives you the flexibility to change things around if you want, and it gives you the good protection. So some of our clients, Joe, would consider a Nevada asset protection trust, for example… Most of them wouldn’t, knowing that they’re just as pretty well protected with that Wyoming LLC.

Joe Fairless: Where can the Best Ever listeners get in touch with you and your firm?

Garrett Sutton: Our website is CorporateDirect.com, and we have lots of information there. We offer a free 15-minute consult with an incorporating specialist, so you can call up and talk to someone on the phone about your situation. You can call 800 600 1760 and talk to a live body about what you should do in your situation and how we can help you.

As I said at the top of the show, it’s been great traveling around with Robert Kiyosaki and educating people. That’s how our firm has grown – by providing information to people, and if we can help you with these entities, we’re happy to do so.

Joe Fairless: Is there anything else that we haven’t talked about that you wanna briefly mention to the Best Ever listeners?

Garrett Sutton: I just think that we are a litigious society and that will never change. I just don’t see our system changing at all. So as you get started, you need to protect your wealth right at the start. If you wait and you get sued, it’s too late to set up your asset protection, so you have to do this when the seas are calm, when you have no problems… Then it’s okay to set up your asset protection structures.

Once you’ve even then threatened with a lawsuit – not received the summons, but actually been threatened by a lawsuit, it’s too late to set up these LLCs and other structures… So just do it right from the start.

Joe Fairless: Garrett, this has been an educational conversation. Thank you for being on the show, talking about overall asset protection. I love the one-two punch that you mentioned: tax loopholes – you want to open up, legal loopholes – you want to close. And talking through, if you’ve already created an LLC, then doing a continuance in a state like Wyoming… This is still relevant to basically everyone who has an LLC who didn’t start it in the state that they should have (myself included) and then also the difference between why we should own real estate in LLCs, which I think a lot of the Best Ever listeners know, but you went two levels deeper and talked about the importance of letting the insurance company know that it’s in the LLC’s name and add them as additional insured, and make sure that you transfer your title from your name to the LLC. So two things that perhaps people aren’t aware of.

Then lastly, the difference between LLCs and LPs, as well as overall asset protection, and your thoughts on land trusts – of course, I can’t forget that. So Garrett, thanks again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

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