Land Trusts for Real Estate Investing

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Hey it’s Mike Hambright with flipnerd.com, welcome back for another exciting episode. Today I have with me Randy Hughes, who is Mr. Land trust. He is a master at land trust and using real estate investment to protect your assets. Before we get started with Randy, and learning more about land trusts, let’s take a moment to recognize our featured sponsors.

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Hey Randy, welcome to the show.

Randy: Hey Mike, glad to be here.

Mike: Yeah, yeah. So we just found out that you’re from Illinois, just a few hours from where I grew up, but I don’t really interview a lot of folks, or really meet a lot of folks, from Illinois. At least outside of Chicago I should say.

Randy: Well there’s not many of us left. There’s a big exodus going on here.

Mike: Yeah, one of those blue states. We don’t want to get too political, but anyway. Well hey thanks so much for being on the show. You operate in a very interesting area that I think there’s a lot of misconceptions and a lot of lack of knowledge is to how land trusts work, but why don’t you tell us a little bit about yourself, kind of introduce yourself and tell us how you got into being focused on land trusts.

Randy: Well I’ve been a real estate investor for the last 42 years. I started buying single family houses when I was in college, and I probably owned 10 or 15 single family houses before I woke up one morning and thought, “Oh my gosh, anybody on the planet could go down to the courthouse records and look up that I’m the owner of these properties.” Not only total strangers, but the tenants in the properties, and I started investigating of holding title other than in my own personal name.

Certainly all your listeners know that there are corporations and LLC’s. There are many ways of holding title, but I zeroed in on the land trust as the ideal way to hold title. That’s not to say I don’t use those other entities, but to hold title I only use a land trust.

Mike: Okay. Why don’t you talk a little bit about the, I’d like to get into the pros and cons, but just to clarify. So your properties are still owned by another legal entity from a tax perspective?

Randy: Well let’s get into that. From a tax perspective a land trust is a pass though entity. The IRS, they close their eyes and say “We don’t recognize a land trust. The beneficiary of the land trust will report all tax benefits.”

Mike: Okay.

Randy: Good or bad benefits. So from an IRS standpoint you own the property, and you deduct all the standard deductions, but from a legal standpoint you do not own the property. The trustee of your trust owns the property, and you own the trust.

Mike: Individually or do you have an entity that owns the trust, or it could be either?

Randy: Well it could be either, and just because you put your property in the land trust doesn’t mean you don’t have liability anymore. The liability on the property held in the land trust flows through to the beneficiary. That’s why most real estate investors make the beneficiary to their land trust an LLC or corporation, to get more asset protection.

Mike: Okay. At a high level, the benefits of doing all that is to, obviously to hide who the owner is.

Randy: Exactly.

Mike: And that’s the primary thing you’re trying to avoid there?

Randy: That’s the primary goal, is anonymity if ownership, because as you know you’re very active in real estate business Mike, and you know that real estate investors are perceived as right or wrong. They’re perceived by the general public as wealthy. Therefore we are at a greater risk of being sued rightly or wrongly by in particular contingency lawyers that are out just looking for someone to settle a case for and make a few thousand dollars. So if they can look up your name and find out what you own, that makes you more of a target.

Let me give you an example of how our legal system works.

Mike: Can you really tell us that in a quick summary?

Randy: I can.

Mike: That’s a complicated subject.

Randy: It is. Let’s say I run over your dog, you go to your lawyer and you want to sue me. Your lawyer says well what’s that guy’s name? You say Randy Hughes, he types in Randy Hughes, and the printer starts printing all these addresses that are in Randy Hughes name. Now your lawyer looks at you Mike and says I think we’ve got a pretty good case here.

Mike: Yeah.

Randy: Where as if he types in my name and the printer doesn’t budge he looks at you and says well I’m not sure we’ve got a good case here Mike, but of you just sit down and write me a check to my escrow account for ten thousand dollars, we’ll get started on suing this guy. So it’s a difference between a contingency case, and a case where you got to write a check. Now if you’re got to write a check for ten grand, chances are you may not want to sue me so bad and that is the crux of it right there. Hard assets that the attorney can go after if they sue you and win.

Mike: I see. And there’s a lot of people that use land trusts as well, correct me if I’m wrong, to hide anonymity because maybe they’re consolidating land, or I know one case was back in the day in Florida Disney world was scooping up all the land to create what was ultimately Disney World, but that was all done. They were trying to do it anonymously, so they did it with land trusts.

Randy: That’s exactly true, and of course on a smaller scale, I don’t like people tracking what I’m doing. Not because I’m doing anything illegal or immoral or fattening. It’s just that it’s none of your business what I’m doing in the business world, and its none of my business what you’re doing. And if I’m doing everything in my name that gets recorded at the court house, you can track everything I do. What I pay for it, what I sell it for, and that’s just not information that you’re entitled to, in my opinion.

Mike: So what are the other pros of land trusts? Besides these are the main ones, but anything else that folks use land trusts for?

Randy: Well yeah, in fact I get that question so much that I finally sat down and I wrote a booklet. It’s called 50 Reasons to Use a Land Trust, and if you don’t mind I’d like to give out my email address, and anybody listening to this, if they want to send me an email, I’ll send them that booklet for free.

Mike: Yeah, go ahead.

Randy: It’s [email protected]. So it’s [email protected], and just send me an email ask for that. The booklet 50 Reasons, and I’ll send it to them. But there are many many reasons, and there are reasons if the property is already in your name now, get it out of your name. Yes, the smartest way to buy real estate is to take title directly from the seller, to your trust, so you’re never in the chain of title. That’s the smartest way, but if it’s already in your name or your entity’s name, deed it out. Get it out of there, to the trust.

Mike: Yeah. For folks this isn’t intended to be a tax discussion here, but there’s a million reasons to never put these things in your personal name anyway, right? You should always have some sort of legal entity that’s holding these things.

Randy: Right. Now see what’s interesting, I always get this question mike, my attorney tells me to put it in an LLC. Now again I use LLCs, I love LLCs, and corporations, but not the whole title for a lot of reasons. One is an LLC and a corporation is registered in the state, so its public information. Number two, didn’t grandma teach us all that we don’t put our eggs in one basket?

Now does it really make sense for you to put ten apartment buildings in one LLC? And title it in the LLC, so if you’ve got a claim that’s uninsured, or under insured, on one apartment building, and that claim bleeds into the assets of the LLC, which they will if they’re all titled in one entity, you just gave up more than you needed to. You just gave up everything. So its one issue to lose one property to a lawsuit, its stupid to lose multiple properties to a lawsuit when they’re unrelated properties.

Mike: Yeah. Tell me about your experience, because you know its interesting, I was taught early on, right or wrong, put eight to ten properties in my business, primarily single family houses, into a legal entity, and then form another legal entity, and then ultimately ends up creating an accounting nightmare because you have all these legal entities. But you know then I know people who have hundreds of properties in one legal entity and they say “I’m just going to buy extra insurance, so if I get sued the insurance is going to take car of me.”

But every time I talk to some body about this, and in all honestly without getting too personal here, we’ve made a bunch of changes in my companies over the years by consolidating more rental entities, getting more insurance, things like that, but I’ve yet to talk to anybody that has really had a significant lawsuit on their hands. Where they kind of just lost the property, or where it pierced the corporate veil and they got into, you know, lots of other assets that a real estate investor owns. Conceptually or academically it could happen, but do you have any experience with this where folks have really lost a lot of assets that they could have been protected if they had done something differently?

Randy: Yeah, sure do. One that comes to mind right away is a friend of mine in Columbus Ohio, he’s a full time policeman, part time real estate investor, and he over the years got himself in the position where he had enough real estate to quit being a cop and just be a real estate investor full time.

Mike: Great.

Randy: One day he went to the mail box and got a letter from an attorney that said one of your tenants children fell out of the window and wasn’t killed but was permanently disabled, and we’re going to sue you. And they did, because he was held responsible because he didn’t have a screen in the window of that particular apartment. Now I’m sure you go around every day, Mike, and check the screens in all your rentals to make sure they’re in there and secure so no children fall out.

Mike: Yeah, those screens are really heavy duty too.

Randy: Yeah, they are. With bars. But here’s the problem. I am a proponent of insurance, I say buy all you can stand, but realize that insurance doesn’t cover every claim. Insurance companies are notorious for having exceptions to the coverage, and the biggest issue is they don’t cover defense costs. Those, often times, are what will kill you, are just defending yourself from a lawsuit, and they don’t cover it.

So insurance by itself isn’t going to do it. No body is going to look after your assets like you are. Your attorney is going to say oh don’t worry about that, the odds are you wont get sued. Well how many times does it have to happen for it to affect you. Once.

Mike: Right. In that example or in other examples do you have where somebody then had access to other properties or other assets that that person owned?

Randy: Well yeah, what happened in this case is they sued him, and they took every one of his apartment buildings away from him and bankrupted him because the claim was in excess of the insurance coverage. And he went back to being a cop, and a very depressed individual. So these things really do happen, and here’s the real kicker.

Last year, in America, 3% of the law suits went to trial. That means 97%
were settled. Most attorneys don’t even know how to try a case, they just want to settle. So that’s, to a large degree, us real estate investors, have a target on our back because we do have hard assets. We’re more inclined to be sued for all kinds of frivolous reasons. So, you know, you work hard. You take time away from your family learning how to build an estate, doesn’t it make sense to spend a little bit of time learning how to protect that estate?

Mike: Absolutely yeah. Now do you advise folks to primarily use land trusts for the purpose of assets they plan to keep long term like rental properties, or flipping houses, buying, rehabbing, reselling. Do you also advocate using land trusts for that as well?

Randy: I do, because I don’t think you should take titles to any real estate in your name for one day. You’ve got liability for one day or for 20 years, so since it doesn’t cost anything to form a land trust, why not?
Just why not. Nobody can give me any good reasons to hold titles to real estate in my name. There are only negatives, there are no positives. So if I’ve got an entity that gives me total privacy of ownership, that’s not registered with the government, not with the state government, not registered with the IRS, there’s no other entity that falls into that category. That I can form myself, without a law degree, for free. It seems like a no brainer to me.

Mike: Yeah. How ad lenders feel about them, if a lender is funding your deal, and the property is in a land trust, how do they look at that.

Randy: Well it depends what kind of lender you’re dealing with. If you are dealing with a lender that’s going to qualify your loan in the secondary market, they will not let you close directly into your trust. There are a few exceptions, like Illinois will let you close, Bank of America will let you close for loans in Illinois, but not everyone lives in Illinois. So in general they won’t let you close into your trust.

Now that doesn’t mean that the day after you close you cant put it in trust for all the reasons, 50 reasons to do so, but that’s if you’re getting a conventional loan. Now, we all know that the lenders will only let you have so many conventional loans. Bank of America will only let you have four conventional loans. After that, if you go in for your fifth loan they say sorry, we can’t help you.

Mike: Right.

Randy: So if you are a mover and a shaker in this business, you’re going to have more than four loans and you’re going to be forced into dealing with what I call a portfolio lender. Which is a bank that keeps the loan in house, which is a bank that will let you close directly into your trust.

Mike: Okay, and even if you don’t, and some lenders look down on this, you could always deed the property over after the fact.

Randy: After the fact. Right.

Mike: Right. So what would you say is some of the biggest misconceptions are with land trusts?

Randy: I hear those primarily though my students, coming from their attorneys. They’ll say things like don’t use a land trust. They’re old school, use LLC, or corporation. But I’ve also found that attorneys are not taught land trust laws in law school, so 98% of them don’t anything about a land trust, and therefore don’t recommend them because they don’t know anything about them.

I feel that if they use the land trust a few times and had some street wise experience with them they’d realize just how great a tool they are, and they’re becoming a better and better tool as we go along in this post patriot act world that we’re living in, where the government is causing everything to be tracked, like the LLCs and corporations. They don’t do that with the land trust and I think that’s a tremendous benefit to hold title in an entity that’s not registered anywhere on the planet.

Mike: Yeah.

Randy: So the problem is going to somebody for advice, and asking somebody for advice that really doesn’t have knowledge to give you that advice. Its like if you came to me and asked me for advice on getting into investing in apartment buildings. I don’t invest in apartment buildings. I’m single family house guy, so any advice I give you is probably not good advice.

Mike: Right.

Randy: But because my ego is such I don’t want to say, Mike, I don’t know anything about apartment buildings, I go ahead and spout off and tell you stay out of apartment buildings, they’re terrible investments, that’s not very good advice.

Mike: Right. Yeah, so talk a little bit about your business and how you teach other people how to do this. Talk a little bit about what you do for others.

Randy: Well about 15 years ago I was encouraged by some local real estate investors to teach them how to use land trusts, for all the reasons we’ve been talking about, and so I initially put together a seminar where I taught about real estate investors in the Chicago area, how to create their own land trusts. You have to be an attorney if you’re going to create land trusts for somebody else, but you do not have to be an attorney to create land trusts for yourself.

So I teach real estate investors how to create their own land trusts, and provide them the education and the forms they need, and they just load this up on their computer, and there after for the rest of their lives can create all the land trusts they want at no cost.

Mike: Wow.

Randy: So that’s pretty cool. Over the last 15 years I not only taught live seminars, but I put it into a home study course because there are a lot of people they can’t or don’t want to attend a live study seminar, so its been reduced to a home study course with CD’s, DVD’s, and a course guide.

Mike: Okay. And one question I’ve been meaning to ask with land trusts are they different by state? Are there ways to do this differently by state or is there a universal method across the country?

Randy: Good question Mike. There’s no federal land trust law. It’s all state by state, and there are only six states that actually have a land trust statute, but that doesn’t mean you can’t form other land trusts in other states. For example Texas, the state you’re in, doesn’t have a specific land trust statute, but they’re legal. California does not have a land trust statute, but they’re legal to form in California.

Now having said that I’m in Illinois, I don’t use Illinois land trusts. For a lot of reasons, it’s too much to get into in this short period of time we have together, but some states have better laws than others. I like to use other states laws to form trust to hold property in my state. We’re kind of getting into some advanced techniques here.

Mike: Yeah.

Randy: But just think about that, I mean if you’re coming after me, and the property is in Illinois, and the trust is out of say Florida, and the beneficiary of the trust is my Nevada LLC, now we’ve got three different states laws here that all the sudden kind of mucked up the system, and really ups the ante for any adversary that may be coming after me for any frivolous lawsuit.

I don’t teach people this information to take advantage of others, or to avoid their just responsibilities. If you owe money to somebody, pay them. But that’s not the way our legal system is going in this country, and you need to know how to protect yourself from the frivolous lawsuits that are coming at real estate investors every day in America today.

Mike: Yeah I’ve sheared a few times. I don’t talk about it a lot but I’ve had a few lawsuits myself, really I went for years without having any, and then I had three all very frivolous. Like you said one of them eventually just went away, probably the most frivolous one. One of them we just settled because we didn’t do anything wrong but our attorney said you can continue to fight this but it’s going to cost you three or four times more.

Then you always look like the bad company, like you say and its like not really, it’s my wife and I are real estate investors, but you know. You learn really fast how to protect yourself better with insurance, or legal entities or maybe even land trusts, is how you can prevent those things from happening in the future.

Randy: Yeah, and I’ve avoided lawsuits myself just by having the property in the land trust, because it makes it more difficult. I’ve found that most of these contingency fee lawyers want something that’s easy. They like easy money, and once they just realize hey this isn’t held in an individuals name, its held in a trust and I’m going to have to do some work, 99% of the time they go on down the road and find an easier sucker to get then somebody that’s going to present some work in the course.

Mike: Sure, sure. So aside from, you kind of commented on, the patriot act and avoiding a lot of registration type stuff that’s happening across the country where you’re going to have to start giving everybody your papers pretty soon, but aside from that we’re supposed to be avoiding politics here Randy. Talk a little bit about just where you see things going even beyond that.

We’re becoming a more and more litigious society; it’s easier to find stuff about people online than ever before. Just talk about, I’m sure I’m throwing you a soft ball here, but it sounds like your belief is land trusts are only going to make more sense as time goes by.

Randy: Well it certainly has in my life, I mean I started using these about 35 years ago, and at that point everybody, including my wife, said I was a paranoid schizophrenic. Now with identity theft, the legal system run amok, it’s amazing how people have kind of come around and said you know that does make a lot of sense to me.

You just take the concept of identity theft. The identity thieves now can go online, find the mortgage you signed, they know your address, they can scan and take that signature right off that mortgage you signed, and steal your identity. So, just by using a land trust and not signing a mortgages and documents that get recorded at the court house, makes you less of a target for identity thieves.

Mike: Yeah.

Randy: Let’s talk about management, day to day management of real estate, and I’ll give you a prime example. I had a tenant last summer who, it was a lady tenant, in a complex of condos that I own, and the cops were being called all the time. She was always at the heart of the trouble. When her lease came up we didn’t renew it, and she was mad as a hornet. She wanted to know why, and we said the owner told us not to renew it. Well who’s the owner, I said its a trust, and we’re not allowed to give the information on that.

She looked up in the courthouse records, who the owner was, the trustee anyway. Trustee just happened to be my attorney. She looked him up in the phone book, marched down to his office, and demanded to talk to him about her lease. My attorney’s secretary called me and said, “What do you want me to do?” And I said, “Throw her out and if she wont leave voluntarily call the police.”

But that just shows you to some extent what some of these tenants will go to. What if you’re evicting a tenant? You know I’ve been a land lord for 42 years, I have two daughters that fortunately are now grown, but for a long time would answer the door. Do you want someone who you’re in the process of evicting, who’s mad? Who now has a carry and conceal permit, showing up at your door with your 7-year-old daughter answering the door?

Mike: Right.

Randy: Those are the kind of risks that you run when you own real estate in your name.

Mike: Yeah.

Randy: That lady called me last week from Florida, she said Randy how do I get in your home study course. I need it, fast. I said what’s the hurry? She said I own seven rental properties down here, and one of my tenants is a man who’s interested in me, and I’m not interested in him. He’s going to each one of my properties, because they’re in my name, looking for me for my home.

Mike: Wow, geez.

Randy: So you just don’t realize how important anonymity is until you get out into the real world and experience some of this stuff.

Mike: Yeah, yeah, great. Well Randy for folks that want to learn more, tell us how to get to your website to learn more about your home study course, or just more general information about whether a land trust makes sense for them.

Randy: Okay. Website address is landtrustsmadesimple.com. That’s land trusts, plural with an S on it, landtrustsmadesimple.com.

Mike: Okay, fantastic, we’ll add a link down below the video here so that anybody that’s interested can find how to get a hold of you. So Randy, very interesting subject, and definitely appreciate your time, and sharing some of your knowledge with us today.

Randy: Glad to be on there, thanks for inviting me on there Mike.

Mike: Awesome well next time I’m in the Champagne area I’ll look you up. Well, I don’t know if I could find you though.

Randy: Well I probably won’t be here, but I’ll be somewhere Mike.

Mike: I won’t try to find you through one of your properties. It sounds like that’d be a dead end.

Randy: That’d be a dead end for sure.

Mike: All right Randy, have a great day.

Randy: Thanks Mike.

Mike: Bye bye.

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