The Pig and I - Posted by Bill Gatten

Posted by Bill Gatten on January 31, 2000 at 18:44:27:


If you can truly use the tax benefits, and can’t sell them for more than they’re worth to you, then you should keep them.

Many of us, however, are not able to use them (too much income or not enough, or too many income properties): others of us sit down and calculate the true cash value of our active tax deductions–whether we can use them or not–then decide whether we should keep them or sell them to someone else for more than they may be worth to us…in order not to have ANY costs and physical obligations associated with the properties we own.

If one’s tax position is such that he/she’d be better off with management and maintenance costs, and less money coming in every month, then they don’t need a device that allows them to pass tax benefits (much less homeownership benefits) to another.

In my own case, I just want armchair investments without any work: and I’ve found that the best way to do that is to make all my tenants partners in my investments. It doesn’t cost me anything and the trust keeps them completely separated from me. And like I said: anything given up in future appreciation potential is going to be more than made-up for in increased cash-flow and freedom from the negatives of rental property ownership. And, too, there may be no appreciation to share in the end. And were that to happen…well, I got mine anyway by having charged a lot more per month, and having avoided all costs of management, maintenance, vacancies and negative cash-flow. And in the no-appreciation scenario, the tenant comes out better too?they’d have lost a lot more if they’d bought the house with standard loan qualifying and a full down payment, or if they’d been renting with a tax drain all that time.

Mark, I’m not the be-all and end-all to every creative financing need out there. But I do see many transactions happening or about to happen here on CRE that could be bolstered and secured and shielded by the PACTrust mechanism. It’s worked for me and a few thousand of our clients for several years now…and seems to just keep on getting better and better.

Most importantly though, remember what Henny Yongman said: "If it hurts when you go like that, well…?

Bill Gatten

The Pig and I - Posted by Bill Gatten

Posted by Bill Gatten on January 31, 2000 at 15:52:20:

Hi all,

This is something I wrote for another purpose this morning, that I though might be worth sharing with those landlord-types on CRE who are in a quandary (or a “hissy”) about the perceived negatives of landlording.


I have purchased and owned many dozens of income properties over the years (though I never owned a stick of real estate until the late 1980’s), and in NONE of those have I ever spent a penny for management, maintenance, repair, upkeep property, tax insurance or vacancies.

Why not? Because each one is held by a land trust in which I have a long-term “co-beneficiary partner,” who handles all payments, maintenance, repairs, upkeep, property tax and insurance for me, in exchange for tax write-off, equity build-up by loan principal reduction, future appreciation, and all the myriad other benefits of home ownership.

The properties I own are all in two-tier (sandwich or ?equity share?) PACTrust (of course) and the tenants are all co-beneficiaries with me, with agreements to handle all costs (100%+) and to share the future profits on sale or re-fi in 3,4 5 6 or 7 years. Note here that anything I might agree to give up in future appreciation, I will have more than gotten back from the increased income I’ve collected when the time comes.

If you own rental houses or condos or town houses (or even small apartment buildings, for that matter), why not increase your rents and eliminate your costs by selling the tenant something other than just Use and Occupancy? Why not sell them tax-benefits, appreciation (some or all); some or all of the equity build-up by loan principal reduction; water rights; mineral rights; pride of ownership; etc.? Each one of these (very salable) commodities has a specific value; and each one is highly desirable to your tenant.

Why not capitalize on selling these “other pieces” of your property? You can get much higher rental income and profit, as well as freedom from management, maintenance, negative cash flow and vacancies. You will not only make more money, but your tenant ends up paying less “rent.”

Think about it? Which is more expensive – renting for $1,000 per month, or owning for $1,250 or $1,300 per-month? The former (of course)! Well then, why not collect the $1,250 or $1,300 and give the tenant something of greater value for his money (appreciation potential, tax write-off, equity build-up, pride of ownership, etc.)? At $1,250 the tenant?s after-tax costs is probably about $250 less than his after-tax cost of renting. This is because in order for someone in a 1/3rd tax bracket to be able to pay $1,000 to a landlord he has to earn $1,500 on his job, so that the state and the feds can take their one-third: leaving him with the $1,000 for rent.

For example, consider the negative after tax effects of a tenant’s renting without a tax write-off or having any access to the property?s profit potential: then compare this with renting for a little more money…but with full tax write-off and a share in some or all the benefits of ownership.

Most landlords complain because there’s so little money in renting out SFR property…but it doesn’t have to be that way at all. It really doesn’t!

Consider this: When a farmer butchers a pig, he doesn’t throw away snouts (he gets $$ from producers of meat additives and dog food); he doesn’t throw away hooves (he gets $$ from glue and gelatin manufacturers), he doesn’t toss the stomach linings aside (he gets $$ from life-saving heparin manufacturers), he sells the hair for brushes; he sells ears (2 each) and gets $$ from makers of dog chews, pump seals, and coin purses. The skin? Shoes, jackets and footballs. Nothing is tossed out! So why the heck don’t landlords learn from that!?

How much in addition to his rent would YOUR tenant pay for a tax deduction and a share in the appreciation potential if were there were ever to be any? And if there weren?t any, how much did you lose?

How do I do all this? Oh, that’s a secret…OK…never mind, I’ll tell you. 1) Land trust 2) Assignment of co-beneficiary interest; 3) Triple net occupancy agreement; 4) Beneficiary agreement with a stipulation as to what and how much of what I’m willing to give away in exchange for getting more (e.g, his/her handling all of my costs and obligations to the property).

Bill Gatten

Triple net occupancy agreement - Posted by Bud Branstetter

Posted by Bud Branstetter on January 31, 2000 at 22:50:52:


Would you go over the Triple net for a residental occupant. Commercially it has been used forever. And a tenant can’t right off expenses for personal use. Even as an investment I would think the IRS would challenge while they used personally. What is your approach?

The flaw in this analogy - Posted by Mark (SDCA)

Posted by Mark (SDCA) on January 31, 2000 at 17:28:14:

Correct me if I am wrong… It sounds like you think I am “throwing away” the tax benefits of home ownership. I am not. I am using them myself instead of letting the tenant use them.