What do you need to know about real estate private equity law? If you’re in any way interested in this aspect of the real estate business, then you’re tuned in to the right episode. Garrett Sutton, is the owner and operator of Sutton Law center, which has provided services around the world with asset protection, corporate formation, and maintenance services. He is a premiere source for asset protection strategies. In this episode, Ava Benesocky and August Biniaz interview Garret about real estate private equity law. This episode will bring tremendous value to active or passive real estate investor. Tune in to learn more.
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About Garrett Sutton
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Real Estate Private Equity Law 101 With Garret Sutton
We have another great show for you. Please like and subscribe as it helps us build our channel and allows us to keep bringing you great content and expert guest speakers. Our mission is to empower investors to create financial and time freedom through passive real estate investing. In this episode, we are joined by Garrett Sutton.
Garrett is the Owner and Operator of Corporate Direct and Sutton Law Center, which since 1988 has provided clients from around the world with asset protection, corporate formation, and maintenance services. Robert Kiyosaki, the bestselling author of Rich Dad Poor Dad, calls Garrett and Corporate Direct the premier source for asset protection strategies. We believe this interview will bring tremendous value to active or passive real estate investors. I’m going to go ahead and welcome Garrett.
Thank you. It’s a pleasure to be with both of you.
Thank you so much. Garrett, you are an attorney, an author, an educator, and a Rich Dad Advisor. We are truly honored to have you on our show and believe you will add immense value to our readers. Why don’t you start off by telling our readers a bit about your background? As I assume, you started as an attorney before getting into real estate. At what point did your interest and focus begin on real estate?
I grew up in the San Francisco Bay Area. I went to the University of California at Berkeley. Robert Kiyosaki likes Berkeley. He has a few things to say about that school. I went across the Bay to San Francisco to Hastings College of the Law, which is the University of California’s law school in San Francisco. I have always liked Corporate Law. I passed the bar exam and started practicing Corporate Law.
In 1989, I moved up to the great State of Nevada. It’s a great state to set up entities, corporations, limited partnerships, and LLCs. I’ve practiced law here since 1989. We started Corporate Direct to help real estate investors and business owners be able to set up corporations and LLCs for asset protection. Along the way, I became involved in investing in real estate for my own account. That has been incredibly rewarding. I’m so glad that several years ago, I started investing in real estate because it has been a great thing for my family and myself.
That’s basically it. I worked with Robert Kiyosaki and the rest of the rich dad team. We travel around the world, at least we used to. Talking about financial education that’s a topic that everyone around the world is interested in. We’ve done a number of events up in Canada. One of the best ones was up in Banff, where it was during the winter. I got to ski at Sunshine Village. I’ve had some great times with Robert and the team up in Canada. It has been enjoyable to be able to write the books and communicate this information to people so that they too can take steps to improve their financial wellbeing.
One key takeaway that I take from that is you saying that you invest in real estate as well. Whenever you are dealing with a consultant or advisor is important that they understand the business you are in. If you have a lawyer who invests in real estate, that makes the process a lot easier. I got to make a quick admission here.
A few years ago, when I started being involved in real estate private equity, CPI was focused in the US but I was leaving my business as a developer and builder. I was educating myself in this space of real estate private equity, raising capital, and legal structures. I stumbled on your videos on YouTube, and they brought immense value and knowledge to me. I want to jump in and appreciate those videos and the content you’ve created, so thank you.
Thank you, August. I appreciate that.
Garrett, why don’t I start by talking about the benefits of incorporating? Many times, people have difficulty understanding ownership. They believe that if they own something, then they are free and clear. That the property is owned by them. Many times, owning real estate through a corporation makes much more sense, especially when it comes to liability and legal protection. Maybe, please begin by telling us the benefits of incorporating for real estate investing purposes.
If you take the title in your individual name and a tenant sues, they have a claim against you. That’s who they rented the property from. You are going to have insurance but we all know that insurance companies have an economic incentive to not cover every claim. You will have an insurance policy but there’s a chance that the insurance company may not cover you. We want a second line of defense. That is, in the United States, an LLC, Limited Liability Company. In other countries, a corporation provides the same service but in the US, the LLC is the best entity or the limited partnership. We can talk further about that.It's been really enjoyable to be able to write the books and communicate valuable information to people so that they too can take steps to improve their financial wellbeing. Click To Tweet
The LLC or the LP is the best way to protect yourself. Now, people will say, “I’ve set up my LLC. I’m finished.” No, you’ve got to transfer the title from your individual name into the name of the LLC. That’s a very important second step that you have to make. Some people in the US are worried, “The bank is going to call.” No, there’s a due on sale clause but here’s the issue. You haven’t sold the property.
You’ve transferred it from you to your LLC. There’s no sale there. We always recommend that you don’t tell the bank. If they question it, you ask for forgiveness but you don’t ask for permission. You just transfer the title from your name into the name of the LLC. Make sure the insurance is in the name of the LLC. Again, the insurance companies will say, “I thought we were insuring Ava. We didn’t know we were insuring her LLC.”
They will use that as an excuse not to cover you. With these simple steps, if you do them right, the LLC gives you a great deal of asset protection. That tenant who sues now has to sue the LLC. They are not dealing with Ava as an individual. They are dealing with her LLC. They have the ability to sue the LLC but they can’t get beyond the boundaries of the LLC to get at Ava’s personal assets. What we want is asset protection.
Why don’t we discuss real estate private equity? The space of raising private capital to acquire large assets. Please explain what are limited partnerships and LLCs? Why are they the common legal entity used by real estate investors to syndicate projects? Maybe we could start off with limited partnerships first, and then we will move on to the LLCs, please.
The limited partnership has been around for a long time. The LLCs in the US only started in 1977 but the limited partnerships were used in England to send people on voyages around the world in 1500 and 1600. The limited partnerships have been around for a while. The idea behind the limited partnership is that a group comes together. They invest their assets, and if things go wrong, their losses are limited to what they put in. Their other assets are not exposed.
If you invest $50,000 into a limited partnership and things go bad, your loss is limited to that $50,000. They can’t go after your house or your other assets. One of the requirements of the limited partnership is that you have two types of partners. One is the limited partner who is, as we mentioned there, the risk is limited. The general partner runs the whole show. They are in charge of the investment. The general partner does have unlimited liability.
We don’t want that. What we have to do to protect the general partner is to set up a second entity. Be it a corporation or an LLC to act as the general partner. With the limited partnership, we have to set up two entities, the general partner entity, and the limited partnership but it’s a good way to go. The general partner has 2% ownership, and the limited to has 98% ownership. The limited can’t tell the general partner how to run the show. They are limited in their activities.
That gives the general partner a lot of control. In family planning situations, limited partnerships can be great because mom and dad can have as little as 2%. The kids may want to sell the duplex that’s in the limited partnership, so they can start the band up and go on the road again. The parents can say, “You can’t sell that asset. We are the general partners. We make all the decisions.” Now, by contrast, the LLC, the Limited Liability Company, only need one entity. We set up the LLC. Within the LLC, we have someone who manages the LLC but we don’t need what’s called the general partner as we do in an LP.
In the US, a lot of people are using LLCs because they only need to set up one entity. The laws in the premier states for asset protection, Nevada, Delaware, and Wyoming, are very protective of LLC ownership. We have those two entities in the US. We analyze your situation and see which one is best for you. Now in a syndication matter, sometimes the limited partnership is better because the syndicators want to have absolute control through that general partnership interest. There are benefits to each way to go.
One quick point that I could make as being someone whose background was being a builder and finding a deal and bringing on investors initially my friends and family. A lot of times, the investors, the limited partners, believe in the general partner and their skills, and that’s why they say, “I will be your investor. You manage the project and we will share with the profits.” There’s also that belief that the LPs have to the GP and their expertise and credentials.
To further on that, August. A lot of people are too busy. They want to be a limited partner. They don’t want to have someone asking them for advice or questioning them on what to do. They want to be limited. They put their money in, and you send them a check. That’s your job.
Coming from a limited partner’s perspective. Maybe you can elaborate on what it means to subscribe to a limited partnership. The subscription agreement is a well-known document signed by investors to subscribe to a certain investment. Maybe you could explain that in more detail for us, please.
The subscription agreement for me is one of the most important documents for the general partner. The subscription agreement says that the limited partner has read the document, understands all the risks, realizes that they could lose everything and they’re signing saying that they understand the investment they are getting into.
If something goes wrong later, the general partner must have that document so that if the limited partners say, “You acted improperly or you were negligent in the investment.” The subscription agreement says, “You understood the risks when you entered into this agreement, and here we have your signature on a document saying that you understood the risks.” The subscription agreement for me is a key document for the general partner.
Who owns the asset in a limited partnership? Is it the GP that owns the asset? Please explain, what do the limited partners who subscribed to the LPO own? Did they get to have what I like to say, bragging rights that they also own this large asset?
Let’s say it’s a hundred-unit apartment building. The asset that the apartment building is owned by the limited partnership. When you go to the county recorder’s office and look up who has title to this hundred-unit apartment building, it will say, “XYZ limited partnership.” That’s who’s on the title to the property. The general partner has management responsibility.
They typically will own 2%, maybe 10%. It could be even 20% of the limited partnership. In a 10% example, you would have 90% owned by limited partners and 10% owned by the general partner. The general partner has an interest in the limited partnership. Their owners just as well as the limited are but they have the management control. That’s the difference.
Now I wanted to talk about LLCs because funny enough, here in Canada, we don’t have legal entities such as an LLC. An LLC seems to be a hybrid of a corporation and a limited partnership. Can you please explain to us what an LLC is?
They started in Germany. At the turn of the last century, they were called the GmbH. They spread throughout Europe. In the case of the United States, these wildcatters were doing business in Latin America and came across this entity. They lobbied the Wyoming legislature to allow for LLCs. It was such a popular entity that within a couple of years, all 50 states had LLCs. It’s the most popular entity now. Ninety percent of all entities now are LLCs. The advantage, especially with the good states, is they offer great asset protection.
You get in a car wreck, and someone is suing you, and they want to get at your interest in real estate but the interest is held through an LLC. In Wyoming, Nevada, and Delaware, they can’t barge in and force a sale of the real estate. They have to wait for distributions to be made, and that’s a pain for attorneys. They don’t want to have to monitor distributions.When you're raising money, the limited partnership can be a great way to go when you're in family situations. For syndications and for family planning matters, the limited partnership works pretty well. Click To Tweet
The LLC offers great asset protection. In the United States, we have various ways. You can be taxed. You can be taxed as a C corp, an S corp, a disregarded entity or a partnership. With the LLC, you can choose however you want to be taxed. They have great flexibility in terms of taxation. Since 1977, they have become the most popular entity in the United States for those benefits and others.
Maybe we can differentiate between the two. Maybe you could explain the difference between a limited partnership and an LLC.
Again, the main difference is with the LP, you have to have two entities to be fully protected. With the LLC, you only need one. When you are raising money, a limited partnership can be a great way to go. When you are in family situations like we mentioned, with mom and dad having as little as 2% ownership of the limited partnership, having absolute control, there is an advantage for the LP. For syndications and family planning matters, the limited partnership works pretty well.
For all other situations, if you are going to buy a duplex in Reno, Nevada, where I am, you would probably use an LLC because you only have to set up one entity. It’s not expensive to maintain. You can have a tax however you want. You can’t do that with a limited partnership. Those are some of the advantages that you would see using an LLC.
It brings it to my next question, Garrett. Let’s talk about Corporate Direct, a company you founded. With a world of internet and subscription-based online platforms, you could jump on a website, follow a template, and create a contract to do millions of dollars at business and transactions in real estate. It sounds crazy to us but a lot of people, in fact, do this and create contracts and legal entities, and what have you. Could we discuss the important part as far as what your company provides and the legal protections that it provides to investors when it comes to this process of contracts or illegal entities?
You are right, August. There are so many online service providers now. It’s scary, and the amount of misinformation that’s on the internet is dangerous, almost. We’ve tested some of these services. The $99 incorporation service that gives you the articles of incorporation, and the second piece of paper is the invoice, and that’s all you get. That’s not enough to protect yourself. You need more documentation than that. You need an operating agreement. You need minutes for the first meeting. You need a membership certificate. We provide all of that at a flat fee price.
We also provide a free fifteen-minute consultation with one of our incorporating specialists. You can call up, make an appointment and discuss to see if we can help you. Our prices are not expensive. The flat fee for setting up an LLC is $695, plus the state filing fees. You are getting it all done properly at the start. You could get this for $99 but that’s not enough. You need all of it to be protected.
I have been doing this for a while. I deal with a lot of Robert Kiyosaki’s students and the other Rich Dad Advisors students, and it has been satisfying. My son is in his second year of law school at the University of Wyoming Law School. I think he’s going to take over the business, so we are going to keep this thing going for a while.
To give a perspective to our readers from Canada and the US and the price difference. There are some stats that there are 40% of all the lawyers in the world are in the US. Some crazy number. It’s a very litigious country but that also creates competition. People complain about prices but the prices you mentioned are very reasonable. When you compare those prices for any legal services here in Canada, it blows your mind.
For the last few years, we have been on this journey of creating CPI and all the compliant and legal entities and talking to multiple securities and corporate lawyers. When we talked to our lawyers in the US, the prices that we heard from them were shocking to us because, again, the competition creates the prices to be reasonable. I wanted to bring that point up here.
People complain about attorneys until you need one. If the prices are better here, I would agree with you. I have clients in Canada and was shocked at what they would charge for a limited partnership up there. It was quite expensive.
I wouldn’t get into it because I don’t want to cause any issues or anything.
Attorney’s fees and acid reflux. It’s all the same.
I’m excited. You’ve written multiple books, manage a law firm, and you took the time to be on our show, which we appreciate. How do you manage everything? Are you a master of delegating? What systems do you put in place and use particular software to stay organized that maybe you can share?
First of all, I enjoy writing books. You will do what you enjoy. Writing the ten books and the Rich Dad Advisor series has been satisfying. The same with traveling with Robert and the team around the world. That’s enjoyable. We get energy from meeting entrepreneurs from around the world. In terms of time management, I don’t know. Due to my parents, I have always been anal about time, so I try and be timely on everything. I don’t have a secret for you.
You are naturally productive.
Naturally superstar. That’s awesome. You are a Rich Dad Advisor. Please talk to us about your connection with Robert Kiyosaki. I know many of the professionals that we talk to, tell us that reading Rich Dad Poor Dad was the impetus for them to leave their careers and go on this journey to become successful entrepreneurs. What effect did the book have on you? Number one. Did you ever contemplate leaving your profession as a lawyer to live the Rich Dad Poor Dad way?
Meeting Robert early on and reading Rich Dad Poor Dad helped me start to invest in real estate. Like everybody else, I benefited from reading that book. It’s interesting. I get on the phone with clients all the time. We would get on the phone for half an hour and talk. A lot of them have read Rich Dad Poor Dad and have benefited from it as well.
We all benefit from this. I became acquainted with Rich Dad Poor Dad, with Robert Kiyosaki. It has been several years now. It was the early 2000s when Rich Dad Poor Dad first came out, and it was a sensation. They were looking for a Nevada attorney. At the time, Nevada was even better than Wyoming. Wyoming is a little better than Nevada now. It was fortunate that I had played rugby. Robert Kiyosaki loves rugby. August, it looks like maybe you play a little rugby in the game.
I played rugby a bit but when I went to a few practices, I noticed guys having these puncture wounds. I’m like, “What was that? Is that a car accident?” He’s like, “No, it’s cleats.” I’m freaking out about those.People complain about attorneys until they need one. Click To Tweet
I have a confession to make. I played rugby for several years.
I could see you as a winger. What position were you in?
I was a winger.
Robert and I have been to a few of the World Cup Rugby tournaments. We were in Japan in 2019 for that one. Rugby has been a great connection with Robert. The whole thing with the Rich Dad Advisors, Robert, the team, and talking to people around the world who have taken what they read in Rich Dad Poor Dad and applied it to their own situation has been fantastic.
It had this trickle effect around the world and changed so many lives. What an incredible thing that you are part of. That’s so great. It’s time to have some fun. We are going to start the next segment of our show, and that is the ten championship rounds to financial freedom. We are going to go ahead and get started on our questions. Whatever comes to your mind first, just fire away. Here we go. Who was the most influential person in your life?
I have to say Robert Kiyosaki for several years and his writings. As we’ve mentioned, being able to go around and teach with them. That would be Robert.
What is the number one book you recommend?
Loopholes of Real Estate, my book. I would read Rich Dad Poor Dad first. If you are going to invest in Us real estate, this is a great book, Loopholes of Real Estate.
Hopefully, when we get to meet, we will get you to sign a copy for us and get the chat chance.
Now, if you had the opportunity to travel back in time. What advice would you give your younger self?
Buy real estate. I didn’t buy real estate until I was in my late 30s. When I went to Berkeley, you could get a house for $50,000. I wish I had bought real estate when I was much younger.
What is the best investment you’ve ever made?
One of the best ones was I went to a tax lien sale before they got popular. I bought this a tax lien for $2,000, and they didn’t pay their taxes. I gained the property, and about eight years later, I sold it for $95,000. That was a pretty good return.
What’s the worst investment you’ve ever made?
There have been a few. I invested in an entertainment publication one time that didn’t pan out. That would probably be the worst one.
How much would you need in the bank to retire now? What’s your number?
I don’t have a number because I don’t see retiring. I enjoy working. I suppose I could retire now if I wanted to but I don’t want it. I also have to keep going, so my son can take this over. That’s a couple of years from now. I’m not retiring anytime soon. I don’t play golf, so what else would I do with myself?
Do what you love.
That brain work creates longevity. There are lots of studies.
You are not working anyways. If you could have dinner with someone dead or alive, who would it be?
George Washington. He was a rebel. He was a very formal man. He led the revolution here. I’ve read a number of books about him. I would love to have dinner with him.
If you weren’t doing what you are doing now, what would you be doing now?
Some marketing and construction like you did, August. That thing might have been interesting. I haven’t thought of that one, Ava.
Would you choose book smarts or street smarts?
When I was younger, I was always told book smarts but street smarts are more important.
Last question, if you had a million dollars cash and you had to make one investment now. What would it be?
I’m going to do a movie. I’m working on a movie deal, so that’s the next investment.
That’s a wrap. Thanks, Garrett. That was a lot of fun.
We appreciate it. As I said, I’m a big fan. I have been watching your videos for years and getting an education as such. We appreciate you taking the time to come on here. Again, this adds immense value to our viewers and ourselves as well. I’m sure I will go back and reread this at some point. Thank you for taking the time and joining us, Garrett.
My pleasure, August, and thank you, Ava.
Maybe briefly, you can say how people can get in touch with you if they would like to use your services.
Our main website is CorporateDirect.com, and you can sign up for a free fifteen-minute consultation at that site. We also have a lot of articles and information about real estate investing. That would be the place.
Garrett, you are wonderful. Thanks for bringing so much value to many people around the world.