3 WAYS TO HOLD REAL ESTATE FOR LANDLORDS

Hey guys, Toby Mathis here. And today we're going to go over how landlords should hold their properties. In fact, we're just going to call it three ways landlords should hold property.

and we're going to use some very basic adages that are extremely powerful. But for landlords could be the difference between success and failure. so they do hold true.

And the number one is to own nothing and control everything. You do not want to have real estate in your personal name. And here's why I could be.

Let's just say I'm a doctor and I'm making good money, but I realize I don't want to be a surgeon forever. Or maybe I'd like to retire and live a little more leisure life. And I want to have assets that pay me to cover and bring in a lot more income so that I can retire, because I get used to a certain lifestyle.

So I start buying rental properties and let's say that I go to Indiana, and I go to Indianapolis, where I've had a lot of success with real estate, and I find a $100,000 piece of property. So let's just say, here's my $100,000 rental. What's the worst thing that could happen to me on that rental?

And you say like, oh, you know, maybe a tenant sues, you slip and fall, and I lose that property if I own that in my individual name. The worst thing that could happen to me is I get garnished literally for the rest of my life, and they take everything that I make or a good chunk of what I make. And then if it's not enough, they come after my estate, when I go, when I pass away, and they try to take that too, that's the worst thing that could happen.

Or I end up in bankruptcy as a result. And before you poopoo that and before you say like, oh, you just get some insurance, it doesn't work that way. And I'll give you a real life situation where somebody who is very successful, they were an engineer and they bought their what they thought was their dream home and where they were going to retire.

And they said, hey, you know what? I'll rent it out and I'll rent it out. I'll be real particular and we'll rent it to a really nice family.

And, and I'm going to move into it in a few years when I'm ready to retire. And those folks that they rented it to, destroyed the basement, they ended up flooding the house. They had a shower downstairs that apparently that somebody clogged probably one of their kids, put a towel over it and flooded the entire downstairs, filled it completely with water, and you'd think, okay, so the insurance will cover that.

Well, if they had been told, that might have been a possibility. But of course they didn't. And they let the mold infestation occur.

And then they sued the landlord for mold infestation that the tenant caused. Before you say, oh my gosh, that's no way the insurance is going to cover that for sure. No assurance doesn't cover toxic events or those types of issues.

In nine times out of ten, you're going to find your policy is going to have lots of exclusions, and the exclusions are the big hits. So this individual got the joy of having their house destroyed and getting saddled with about a four year lawsuit that ended up going in and having to go through a jury trial. And the good news is, it only cost them a quarter million dollars out of pocket.

Out of pocket. That's what it cost them dollars out to cover this thing. They ended up prevailing.

And of course, they can't collect against the tenant because the tenant just went into bankruptcy. So it was four years of their time, a lot of aggravation and a quarter million dollars. Now that was a self caused mold incident.

What if the landlord was at fault for something and instead of having a jury verdict in their favor, they had a jury verdict against them. And I'm just going to point you to go Google Ed McMahon. $7 million for mold, right?

These policies aren't going to cover those things. And Ed McMahon, if you remember, The Tonight Show got I think was $7. 2 million, for mold in his home in California.

There's a ton of those. There's there's multimillion dollar cases not covered by insurance. And the landlord is looking right at it.

And then we also have all sorts of other things that can occur in a property that just come along. You have environmental issues, you have discrimination accusations. You have managers who do stuff.

You have people that are invitees doing stuff. We had one where an invitee was in a wheelchair and they ran over a nail, and it caused them an infection in their foot. Multi-million dollar litigation again exceeded insurance by far, and the landlord ended up having to deal with that one as well.

Right. You just want to be able to isolate that risk. So how do you do it?

We call that inside risk. Inside means the property itself is creating the risk. And we are going to isolate it through the use of a limited liability entity.

So we're just going to put a box around it so that if something happens in here that ricochets back and stays boom, boom, boom, it never comes out here to you. That never happens. Right?

It cannot come outside that now that's inside risk. There's also outside risk. And what that means is what if I have a liability?

What if like one of my kids gets into a car accident or something? Or if I get into a car accident or I get a breach of contract or defamation suit or whatever, somebody sues me and my profession, the doctor again, what if they have a malpractice claim and somebody is looking at that asset? We want to have outside liability protection as well so that if somebody is coming after this that they can't as well.

And so the way that we generally structure things when you're structuring things is you're going to create a limited liability entity. Almost always it's going to be some form of limited liability company. If you're in California, maybe a statutory trust, if it's in Florida, we may be using a land trust, but we're going to be using some sort of limited liability entity for inside liability and outside liability.

So at its most basic, we are going to set up an LLC to hold and isolate that property. So let's go back to the landlord again. Who's the doctor now.

Worst case scenario is they lose that one property. Now I know some of you guys are going to say, but wait a second, I don't want to just have one property. What if I have 3 or 4 properties?

Right? We still want to isolate that liability. Maybe I have house house house house.

And instead of 100,000 they're worth 400,000. Now we have risks to each other. And there was a day when a lot of practitioners would say, yeah, just throw them all in there.

And as long as it's not a substantial portion of your net worth, we don't really care. And I'm going to say no because we want to like, especially if you only have four properties, we want to make sure that one property doesn't cause you to lose all four. We want to isolate those by breaking it out.

So if there was first way to hold it is to have one LLC that holds your properties. The better way is to have multiple LLCs that on those properties. And here I'm going to throw a monkey wrench at you again we want to make it to where they cannot take that LLC.

I'm actually going to create an entity to hold my Elks, and that's called a Wyoming LLC. And some of you guys are going, why the heck what? I create an entity to hold my entities.

And that is because outside liability, depending on your state, I could take your LLC in a lawsuit. So if I sue you individually and come after you, I could take your LLC, for example, California. I could take your LLC fairly easily.

I could foreclose on it. State like Texas. Much more difficult.

Wyoming and Nevada impossible. The only remedy you have is a charging order. So what we do is we create it so that the properties flow this way.

They go from the LLCs in the state where the property is located. Let's say that we're using Indiana. So we have four Indiana LLCs that hold that are owned by a Wyoming LLC.

So who's the owner of the LLC is the Wyoming LLC who owns the Wyoming LLC, the landlord. You do? Generally speaking, it's going to be your living trust.

And then depending on what type of arrangements you have here, it could be an LLC, or it could be a land trust in an LLC, depending on your scenario. there's always nuances in every jurisdiction and there's always nuances depending on whether you have debt on a property or not. If you own these cash and you have for make sure I make that obvious.

So we have $400,000 worth of real estate. We spent 100 grand on each one and we bought them cash. Then we wouldn't necessarily need the LLCs or the land trust.

If you have debt, we may want to use those land trust. And there's reason number one, we can get names off of it. We don't even see the LLC on a public record.

I could actually own the real estate. And instead of saying like in this case, maybe I have LLC one, two, three, four different names on them. If I don't want them to see the LLCs, I could have them owned and land trusts where there's nothing listed in the public record.

I could actually use a throw away LLC from Wyoming or an anonymous LLC from Wyoming. Or I could use a nominee such as an attorney. One of my partner sons acts in that capacity for our clients, where they'll literally put their name on the properties as trustee for those land trusts so that nobody sees your involvement, period.

We call that security through obscurity. So there's the adage, own nothing, control everything. We don't own any of the real estate.

We control it. It's all controlled. And I'm using a living trust.

To hold everything right. Everything flows into that living trust. There's also security through obscurity.

I use the Wyoming LLC to hold those LLCs so nobody can even see that I have. LLC is in Indiana, and I know some of you guys are like, well, you have to foreign file. No, you have a member managed LLC single owner in the state of Indiana who's the member?

It's Wyoming LLC. No public record filings whatsoever. It doesn't say who the managers are, doesn't say who the members are.

All it says is that Wyoming LLC. And that's what's going to show up in Indiana. Nobody can see that.

You own it. You have complete invisibility. Nobody could see that.

If you use the land trust, nobody could see that you are on that property. Nobody could see that it leads back to you. And that way somebody is not seeing you and targeting you.

One thing I did not tell you about that lawsuit with the mold is one of the comments from the attorney was they could see where the client lived. They could look them up in a public record. And this particular client lived in a nice area in California.

And they said, we know those houses are really expensive. So we know your client has money. That's what they used as their logic.

Their case was crud from the beginning. It was a shakedown suit. It was somebody who panicked when they destroyed the house.

And instead of being responsible for it, they tried to turn it around and turn it into a situation where they could bilk some money. Not nice, not good people, but it happens quite often. Unfortunately, in this day and age where people try to take advantage of a situation.

But what seemed to exacerbate it most was they could see exactly what this person had. They could see that they did not have this structure. They would have been fine.

They owned it in their individual name, and as a result, they were able to look up that individual, see where they live, see what they owned, could do a search public record and see all the properties this person owned. And they kept saying, you're well off, you should be settling, you're well off, you should be settling the client to their credit, didn't buckle in and didn't just give the money. You know the money was dumb.

Anyway, it was in seven figures. It was constantly a barrage, but the attorney was willing to roll the dice because they know that oftentimes juries will go ahead and side with the tenant on those, and they'll actually punish you for being wealthy. We want to take that and make you completely invisible.

We want to use the idea of creating a privacy shield around it so that they cannot take, what they see. They don't see it in the first place, so they don't even try to take it. Now I'm going to add one more wrinkle, and this is the third way we hold it.

So the first way is just to have an LLC. The second way is to have an LLC held by a privacy and create a privacy shield. The third way.

Is to create a management company. And or or I call it a family office. And what we're using here is we're using an LLC taxed as a corp.

And it could be an S or a C corp. Generally speaking we do a C corp because that C Corp has a 21% flat tax bracket. We're going to try to zero it out.

We're not going to have a whole bunch of money sitting in there. What we're using it for is to have unified management of the assets, and it gives us an accountable plan so that we can get some tax relief and we get some extra tax deductions. One of the things that happens when you own rental real estate, if you go into this category of being an investor, where you're entitled to certain types of deductions and certain types of things are not deductible, when you can roll yourself into a management organization, then certain types of education, for example, are deductible.

You get better treatment for things like an administrative office in your home. You could do something called 280 A. It's called the Augusta Rule where you're renting your home, and you don't have to pay tax on the income that comes from the corporation to have its meetings.

It's under a, tax code, ERC 280, a subsection G2. We've we've covered it in a lot of the videos, but, or if you go to our tax and asset protection workshop that we hold on weekends, you can also find that I'll put a link, by the way, if you want to go to the tax and asset protection type in tax and asset protection or just type in workshop down below and we'll send you the link or I'll post the link in the show notes. But we go over all of this in great detail.

And a one day event is from 9 to 3, 9 to 4, usually because we are long winded. but we go over the different types of LLC series, LLCs, land trust corporations, when to use them, how to wrap it into a legacy plan, using a living trust or other types of trusts. How to create a privacy shield around your assets.

We go over all of that during that event, so just type in workshop in the comments below and I'll send you that link. or you can find it in the show notes. But anyway, we're using this.

And when we're talking about in a cannibal plan, you got to understand that there are certain types of things. Let me use my cell phone as an example. If I am a investor and I'm just a regular old landlord, I have plan A or plan B, or plan 1 or 2, and I just have the LLC and I do not have an accountable plan.

I have to track which of my calls are for business, which are for personal, and I can only reimburse myself the business expense, just the ones. And the fact of the matter is hardly anybody actually does accurate tracking. So when the IRS audits people, the experience and what their stats show us is like for sole proprietors, they're their most susceptible to this.

They lose 94 to 95% of the time, depending on whether it's a field audit or correspondence audit. Nowadays, they lose almost 100% of the time because nobody actually tracks the personal use versus the businesses by using that management company right there. Guess what?

We no longer have to track, because if it's for the benefit of that business, under an accountable plan, it can reimburse 100% of the expense. So there's two in here. There's the cell phone.

It works for equipment. You can use an administrative in your office for your homework. Instead of doing this $5 a square foot for the for the the home office, we can actually use a room methodology and write off about 20% on typically about 20% of all the expenses associated with the house.

I'm talking about utilities. If you get it cleaned, if you, if you have a mortgage interest, if you have rent, if you're if you're renting a home, the property taxes, all those things, even depreciation. There's a calculation that the IRS gives us to do when we're figuring out that administrative office in the home where we can actually get tax free money.

So how does it work? I make my rents from here. It goes in here, I pay it over here.

That's a deductible expense, which means the amount that flows down over here is less. And then this comes back out to me in the form of reimbursement. But it's tax free.

I still end up with the money in my pocket. I just don't have to pay tax on it. And that's the that's the power of an of an accountable plan.

And why we try to incorporate those, especially when we have profitable real estate. We want to incorporate that with our clients so that they're integrating their family and and they're getting that actual benefit. So it actually looks kind of like this.

It's you're sitting there, I got my real estate. And this could be in any state like I could have property in Florida, Georgia, Indiana. And each state has LLCs that are holding those properties.

It might be an LLC with a land trust if there's debt. So I'll use it as example, Florida, Florida. If I have a mortgage on a property and I put it in an LLC, I have to pay doc stamp fees.

If I put it into a land trust and stead, which has the same benefits as an LLC in a state like Florida, that's the only state where it actually has that protection. I avoid the dock stamps if I want to use it in conjunction with an LLC, I still can. I could create a land trust and have its beneficial interest held by that Wyoming LLC, or have that beneficial held by the Florida LLC.

If I want to create that layer of protection, I can do that. And I can have multiple states where I have those properties held in that manner, all flowing into that Wyoming LLC, all giving me that huge benefit. And then I could still have my management company pushing money out to the side.

I can even get this even more fun where let's say that I have my stocks and I have my non risk assets. I can actually create a scenario there to where it's isolated. I could use I'm going to use that same Wyoming LLC.

Keep it private. But I could have a portion of that money going into that corporation and getting deductions against that too, or sheltering some of that income. Now that's a topic for another day.

I did plenty of videos on how to set your business up, your trading business as a, as a, as a formal business, trading as a business. but all of this works together when you're actually creating, a, a wealth blueprint or an asset protection plan, it should all go cohesively together. So we just went over three, right?

I'll just reiterate them verbally for you so you don't get confused by looking at the screen. Right. if just basic, if I'm buying real estate, do not own it in your name.

Make sure that you're using at least a limited liability entity. In most states. That's going to be a limited liability company.

There are exceptions. So you want to talk to somebody who knows. Feel free to reach out to us.

Better yet, go to the the Tax and asset protection event and learn more. again, it's absolutely free. Just type in workshop and we'll send you the link.

so that's number one is I can isolate it in a simple entity by isolating that inside liability from that property from me. Number two, I create a great inside liability protection by using in-state LLCs or land trusts or combination. But I also add a Wyoming LLC on there that creates invisibility and also protects you or your real estate from you.

It creates outside protection and inside protection. And then that's number two. And then number three is I add a tax component on it by using that management family office.

And I create a corporation that gets me even more tax benefits for owning my real estate. Now, generally speaking, people are going to fall into one of those three categories, depending on how complex their situation is, what their tax appetite is. Hey, are you getting these things?

Do you already have another business? Is there other places where you're getting tax relief? So we don't have to worry about it?

Or are you somebody that's just getting smashed in taxes and we have a strong appetite, in which case it's always, is the juice worth the squeeze? Are we getting enough benefit out of it to cover its cost? And then make sure that it's a multiple that you're getting a multiple as far as benefit all of this fairly easy to map out, fairly easy to structure.

When you talk to somebody who knows what they're doing, feel free to again to reach out to us if you like this type of content. By the way, guys, please like and subscribe. And more importantly, if there's something you want to hear about or you want us to dive into, put it in the comments below.

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