How to Structure Real Estate

About the Video

In this episode of Wealthy & Wise, NCH’s Executive Corporate Analysts Adam Kintigh and David Vanlandingham will discuss How to Structure Real Estate. 

 In this conversation between Adam and David at the Real Estate Wealth Builders Conference, they discuss the best way to structure real estate for long-term rentals. While some suggest having one LLC for every property, David argues it’s financially draining and difficult to manage. Instead, he suggests taking advantage of the Garn Saint Germain Act law.

Prefer to read? A full transcript is provided below.

Adam: 

Welcome to another edition of Wealthy and Wise. I’m your host, Adam Kintigh, and I am here with the wonderful David Vanlandingham at the Real Estate Wealth Builders Conference in Saint Louis. We’re at the beautiful Railroad Pass Hotel near Union Station, Union Station Hotel. It’s a fun time. Lots of action is going on here.  

I figured while we’re here, not a better time for us to talk about how to structure real estate. And we have seen so many different strategies of people having one LLC for every property. Do I set up a Wyoming company to own another LLC that then holds title to the property? And we have seen it all. I think I’ve talked to about 30 people today who all have a different approach to how to hold the title to Real Estate. 

And David, one of the things that you are always reminding me of is that the structure needs to be manageable. Scalable and financial efficiency. Give me a little rundown of, in your view, the best way for us to structure residential rental properties as folks are building out their rental portfolio. 

David:  

Yeah, absolutely. Thanks, Adam. You’re right. A lot of people have different opinions on how to do it. They talk to different attorneys or other people that are doing the same thing. Doesn’t mean it’s the right way, doesn’t mean it’s the best way. When we look at this and we look at a client’s portfolio, if you will, whoever they are, whether they are brand new or they’re just getting in or they’ve been doing this for a while, we want to know what they’re looking to accomplish, what are their goals. 

When we talk about long-term rentals, you’re right. A lot of people talk about, well, you’re just going to get an LLC for every property. I can tell you that is very cumbersome because if you have 20 properties now, you have 20 LLCs, you have 20 renewal fees, 20 record book walkthroughs, 20, you know, checking accounts, you’ve got insurance. 

It’s very draining financially, and the ongoing maintenance cost is even higher. So, what we look at is how we can do this financially efficiently. That’s really the key. But we also want it from an asset protection standpoint, to make sure that these properties are separated. And that’s why a lot of people think, well, just one for everyone, because we know if we take an LLC and we put three or four properties in there, if a legal action happens and affects one property, well, it could affect the entire load of that LLC.  

What we want to do is still be able to segment, but at the same time, we need to avoid the do-on-sale. If there are properties that have mortgages on there, if you just stick that into an LLC, the chances are sooner or later your mortgage company is going to send you a letter and say, Hey Adam, not cool. 

Adam:  

Now hang on for one second. I’ve heard that banks really don’t care. After you close on the property, you put it into an LLC and most likely they’re not going to invoke the due on-sale clause. Have you ever had a bank actually, or any of your clients where a bank has invoked the due on sale?  

David: 

Absolutely. Many times. Many times. I won’t mention the bank, but it is a pretty popular one. And what happens is, so banks sell mortgages, right? So, here’s what happens. This is where they typically find out there’s been an unauthorized change of title and that usually is triggered by either an internal audit or if the bank sells the mortgage to another company, they’re going to see that and they’re going to send you a letter and say, hey, Adam not cool. 

We vetted you for the loan. We checked on your credit, we checked on your employment, we checked your DNA and everything. We gave the loan to you. We don’t know who this LLC is. So those are those are things that if you’re ever behind on payments now, they start scrutinizing to see what you’re doing, right? They don’t know who the LLC is. 

So, we take advantage of a law that was created in 1982, typically called the Garn Saint Germain Act. And what that act does is allow us to take an incumbent property, and place it into a qualified inter Vivos trust, which is a form of a living trust, but dealing specifically with real estate. And as long as it’s four doors and down so a quad, triplex, duplex, single family, we can do this on any federally backed mortgage. They cannot do the do-on-sell, but it also gets your name off of the title because now we’re going to retitle that property in the Trust. Typically, after the street that the property is listed on.  

Adam:  

The 123 Main Street Trust, 707 Oak Street Trust.  

David:  

Yeah. Now all by themselves, those trusts don’t provide any asset protection. So now we start connecting the dots. We take the lifetime beneficial interest of that trust in assign it to a disregarded LLC.  

Adam: 

Now, when you say disregarded for tax purposes, meaning it will not have to file a separate tax return. LLC collects the rent and pays the expenses. Whatever’s left over, get yourself a check. Tax time rolls around, you are not expected to file a separate return. Any profit or loss will be reported on your 1040 schedule E exactly the same as if you did not have the LLC, but you get the protection.  

David: 

Exactly. You’re not changing from an accounting standpoint. It doesn’t become a nightmare, right? So, then we look at the death time, and beneficial interest, and we assign that to a revocable living trust. 

The family trusts, the dynasty trust if you will. And the reason we do that is because we want to avoid probate. Right. Upon death, the membership certificates of the LLC are held by the revocable living trust. The death time beneficial interests of that real estate privacy trust are held by the revocable living trust. We’re going to bypass probate, yet we still get the step up in cost basis, which is that’s the wealth builder, the generational wealth builder that these trusts provide. 

So you buy a property for 200,000, it’s worth a million the day that you die. It passes to your 19 kids that you have. If they sell it for $1,000,000, they pay no capital gains on that. Now, if they hold it for a couple of years now, it’s worth 1.2 and they sell it for 1.2, then yes, they’ll be taxed on the 200,000. 

But it’s an amazing tool. It’s actually been around since the Civil War. Originally, these trusts recalled an Illinois land trust because that’s where they first started back in the Civil War. This is the type of trust that surreptitiously they used to grab land for the railroads. So, if I walked up and knocked on the door and said, hey, I’m from B&L railroad, I’m here to buy your land, prices just went up. 

But if it’s done through these trusts. Nobody knows. Walt Disney did the same thing in Florida to acquire all of that land for Magic Kingdom.  

Adam: 

The Land trust is a great way to hold title to the property and separate the liability. So, if I have one LLC and under that LLC, I have four rental properties, how are those trusts going to separate the liability if there is a problem with one? Can it affect the others?  

David:

Well, an attorney can come after anything they want. We know that. But what role do those other properties play in the accident, right? Nothing virtually. So they are in self-contained trusts, little bubbles, and we can reassign the beneficial interests from that LLC to another LLC. They may waive the flag of fraudulent conveyance, but again, if those other properties were not involved, and had nothing to do with the business accident, if you will, it’s going to be very hard-pressed to move forward with that. 

Adam: 

Beautiful. This is where becomes financially efficient. What are the ongoing costs of having a land trust? 

David: 

Zero. It’s a one-time fee you pay for. Now if you do take it out to refinance, to put it back in, it’s just a quick claim deed, minor cost, but yeah, that’s why it’s so financially efficient. You only have a renewal on that LLC. All the other trusts, including the Revocable trust no annual fee, no state fee, or anything to that.  

Adam: 

As I learned about this well, the thing that I was excited about is so many people are told that they should have one LLC for every property to separate the liability. Now we’ve got renewal fees and checking accounts and it really turns into a nightmare to manage. 

In this situation one LLC on public record owns nothing. There’s no evidence that shows that that LLC owns three other properties. On the public record, the LLC is an empty shell, money in, money out. Most lawyers, before they take a case, they’re going to do an asset search. Let’s figure out what these guys have that we can go after. 

And in this case, they’re going to do an asset search and they’re going to find one property in one trust and nothing else. So that really stems off those frivolous lawsuits, the professional tenants that move in, because in today’s world we live in, they’re not coming to look at your property. They’re not coming to rent your property or buy your property. 

They’re coming to slip and fall and file a lawsuit. This is, in my view, a great way to do it. Now, I want to shift gears and talk about how the Land Trust is going to hold title to the property. We hear all kinds of things about incorporating in Delaware, Nevada, Wyoming, or just in your home state. 

And what is your opinion when it comes to where to form the LLC? What is really the best?  

David: 

Well, Delaware has been in the news lately, haven’t they? I think that costs Elon [Musk] $55 billion and I think people are getting a little bit leery. So, more people are opening up their minds to Nevada and Wyoming. So, we look at Wyoming and we look at Nevada simply because of the laws that were built around, you know, formations of corporations in Nevada, particularly something I guess we’re not proud of, but we’re proud of. 

It was, you know, Mafia. Probably why when the Mafia rolled into, you know, Bugsy Siegel and Meyer Lansky rolled in Las Vegas, I’m sure they had every lawmaker in their pocket looking for the best protection. So, the corporate laws of Nevada have always been great. LLCs have not been around forever in the United States. 

They only started in 1977, in Wyoming. So, Wyoming had their laws. And what Nevada did very smartly is they started applying their corporate laws to those LLC laws. And for many, many years everybody was incorporated in Nevada for that very same reason. But the cost of ongoing fees and maintenance and a business license and things like that was creeping up year after year, whereas Wyoming has always been on the cheaper side as far as incorporating. 

You know when you have annual fees on an LLC that’s holding, you know, four or five real estate private interests, your annual cost is typically less than about $300. So not bad at all.  

Adam: 

Now, I just literally not 10 minutes ago talked with the gentleman who has three rental properties each in their own Minnesota LLC. He is an agent and lives in Wisconsin. 

And in his situation, he had one LLC for each property, and he had an LLC for his real estate agent income. So, understanding, we’re trying to keep your active income and passive income in separate entities. I know it causes all kinds of tax problems when you’re flipping houses or active income or even holding rentals and an S Corp, or an LLC taxed as an S Corp can be huge tax problems. 

But in this situation, I reminded this gentleman that he has children and they’re going to start driving soon. And if they get in a wreck, guess who’s getting sued? He will get sued. Lawyer, the first thing he’ll do is look on that ticket where his son got in a car accident, pull up his address, and say let’s see what this guy has. And within a matter of 5 minutes, he will know everything this guy owns.  

David: 

Welcome to the world of the Internet. 

Adam:
Which is, you know, crazy to think about. What if he gets sued personally? He gets drug into a lawsuit in a deposition. He’s got a list of everything he owns, his houses, cars and he own the Wisconsin LLC and the three Minnesota LLCs, talk to us about the special protections that we get in Nevada and Wyoming. If he would have set this up in Nevada or Wyoming, what would have happened?  

David:
Well, let us first address Minnesota and Wisconsin, because here’s the thing. They don’t have reverse pierce protection. 

We often talk about piercing the corporate veil. We know that’s where they’re looking to move that that shield of liability come out for you personally, in a lawsuit that starts at the personal level, they can actually reverse pierce up into the holdings of those Minnesota and Wisconsin LLCs so now they can go after those assets. So, it’s kind of like a reverse on charge protection. 

So, with Wyoming and Nevada, there is that reverse piercing protection. So, if you do something as an individual, you don’t have to worry about it, you know, being able to cross in and get into your LLC. So, the big thing here is with Wyoming and Nevada, we do what’s called top-up and bottom-down protection. So, you’re protected from your business, but more than likely your business is protected from you. 

I can tell you my 60 years of living, I’ve done a lot of dumb things as an individual, pretty smart as a business owner. But could there have been something you did as an individual that could have affected your business? So, we always have to consider both sides of that.  

Adam: 

When setting it up either in Nevada or Wyoming, you get reverse piercing protection. They can sue you, they can win, and they cannot touch your Nevada or Wyoming entity to satisfy your personal debts and obligations. 

David: 

Correct.  

Adam: 

Which is something that people need to know because you look at the parable in the Bible about building your house on sand. We know that it is going to fall, right? So, the smart man, the wise man, built his house on a rock. 

And in my view, as people are starting to get into investing oftentimes, I ask that same gentleman, so who formed this LLC for you? And his response, of course, was, I formed it myself. Spend a couple hundred dollars for him, and the company, and I’m good to go.  

Talk to us about what would happen in the event of a lawsuit. So, this guy has got these four LLC lawsuits happens, right? What is the first thing the attorney is going to do?  

David: 

Well, they’re going to go after anything and everything they can. That attorney represents their client. So, they’re going to try to get as much for them as they can. And that’s them doing their job. That’s not being a bad attorney. 

They’re actually being a good attorney. They’re trying to, you know for the best of their clients. A lot of people will throw in. Well, what about insurance? Right? I’ve got umbrella insurance. First of all, how many people have actually read their insurance policy to find out what’s included, and what’s not included? You know, the insurance company’s first responsibility is to themselves and the shareholders. 

There’s many incidents or accidents that can take place in that LLC that may not be covered by that policy. So once again, they’re putting themselves right back in the line of fire. And to a client that has those multiple LLCs in different states, guess what? I’m not going to get into the Corporate Transparency Act today. But now he has to file a beneficial ownership information report on every single one of those losses. So, it can be cumbersome just by doing that as well.  

Adam: 

We’re closing up here, David. We’ve got a lot of people here who are waiting to speak with us, but we appreciate your time. We appreciate you taking time out of your day to be here with us today. Thank you all so much for tuning into Wealthy and Wise. Have a fantastic rest of your day.  

David:

Take care.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.