ARMCHAIR LANDLORDING

Bill J. Gatten

Since the advent of the NARS Equity Holding Trust™ concept, some of us—in the know—have not laid out a dime for management, maintenance, repair, upkeep property, tax insurance or vacancies relative to SFR income properties. Why not? Because we hold each property in a land trust wherein our tenant is a successor beneficiary. As such, the tenant pays all mortgage payments, handles all maintenance, property tax and insurance (and our positive cash flow). Each of these tenant beneficiaries has gladly taken on the full responsibility of home ownership in exchange for the benefits of: income-tax deductions, equity build-up from mortgage principal reduction, appreciation potential, and pride of ownership (all of the fee-simple bundle of rights). Moreover, they move into their own home with minimal cash up front and no particular credit requirements, or need for a new bank loan.
And best of all I don’t need to be there, go there or even seen the property or the people in most cases. In have properties in dozens of states that I have never seen, never met the tenants and never spent a penny on. If any thing would go wrong, I have a “ground partner” or the tenant him/her self to take care of problems, relieving me of the obligation.
The agreement provides that at the end of a specific, mutually acceptable, term (3, 5, 10 or 20 years) the property will be sold and any resultant net profit (after a return of my, or the original owner’s, beginning equity) will be shared relative to our particular percentages ownership in the title-holding (land) trust. The resident’s options at termination are to either—1) refinance, pay the other beneficiaries their profit, and keep the property, or 2) sell the property, pay the other beneficiaries their shares and keep the remainder of the profit, 3) walk away and pay nothing further, or 4) petition (ask) that the contract be extended or that the other parties take less for their shares.
Why not sell tax-benefits...appreciation potential…and loan principal reduction? Why not trade management responsibilities for pride of ownership—especially when doing so reduces the tenant’s expenses? It only requires that the property be held in a carefully constructed co-beneficiary land trust (www.landtrust.net).
Wait a second…my tenant pays less, and I get more? Really…?

Although historically reserved only for those with lots of cash and/or great credit, tax benefits, appreciation, principal reductions, etc. all have significant value and are highly sought-after commodities, especially by folks who have never had access to them. So...why not “sell” these elements of ownership to someone who needs them worse than you do? Why not earn more, relax more and avoid the costs and man-hours of landlording, while your tenant actually ends-up paying less than normal rent (after tax). The tenant need only be assigned a successor beneficiary interest in your title holding land trust, and be made a triple-net lessee in the property. With proper documentation, he has just become a homeowner in the eyes of the IRS and you are free of management, maintenance, vacancies, tenants toilets, trash and trouble.
Compare the tenant normal rent to paying a bit more per-month and receiving profit-potential, tax deductions, lower monthly out-go and all incidents of homeownership. Think about it…given a 1/3rd tax bracket, someone paying $1000 per-month in rent pays $1,500 after-tax each month. Therefore, becoming an “owner” (via a co-beneficiary land trust) results in nearly a $500 per-month increase in spendable net take-home-pay. This is to say that when one owes his landlord $1,000, one and one half times that amount must be earned in order to have the $1,000 left over after the government takes its 1/3rd)
Therefore, which is better for you and your tenant? Renting at $1,000 per-month, or sharing ownership at $1,250 per-month? The latter provides each of you an additional $250 per-month, while freeing you from payments, insurance, property tax, vacancies, maintenance, management and negative cash flow. Over a period of 5 years $250 per month pays each of you $15,000 that you both would have lost otherwise.
Q: How is it that the IRS will allow someone to “give” the tax benefits to a rental tenant?
A: Under the Internal Revenue Code, any beneficiary in a land trust will be treated tax-wise as an owner of the trust property, so long as he or she: 1) Makes the payments and permanently resides in the property, 2) Has the risks and burdens of ownership 3) Has a contractual obligation to pay deductible sums, and 4) Has either an equitable interest in the property, or has a beneficiary interest in a land trust, in which the trustee holds such equitable interest [IRC Section 163(h)4(D)].
Q: What if the tenant defaults? Won’t it be difficult to get him out of the property if he’s an owner? Wouldn’t eviction fail in view of a claim of “Equity”?
A: No. Despite the tenant beneficiary’s ownership benefits and income tax treatment: under the land trust, he/she is NEVER an owner of the property per se. The trustee is the legal and equitable owner. The tenant beneficiary remains, therefore, subject to simple eviction. In the event of default, the default constitutes constructive notice of that party’s desire and immediate intent to sell its interest to the non-defaulting beneficiary at Fair Market Value. The non-defaulting party may offer what it chooses, but if the offer is not deemed acceptable to the defaulting party and it is willing to spend the effort and money to do so, it has thirty days in which to pay a stipulated default fee along with all arrearages, and to order an MAI appraisal. If it is proven that more is owed than reflected in the initial offer, the claimant must receive the confirmed amount…by way of an unsecured promissory note, which is due and payable when the property is sold at the trust’s termination. Should there be no challenge of the offer, the trust is revoked and the deed is transferred to the non-defaulting beneficiary.


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