Can A Land Trust Borrow Money to Buy Property? Finance Your Next Investment

There are many advantages to setting up an anonymous Land Trust for your real estate investments. Did you know that you also can use these trusts to borrow money to buy additional property?

In this article, we will examine the advantages of a Land Trust mortgage and how to obtain one.

What is a Land Trust?

Over in our Tax, Legal, & Asset Protection Secrets For Real Estate Investors mastermind group, you'll hear me recommend this type of asset protection pretty often, but before we go much further, let’s make sure we are clear on some definitions.

A Land Trust is a legal entity that has control over a physical property and other real estate-related assets at the instruction of the property’s owner. As a living trust—one that is created during your lifetime—a Land Trust is typically revocable, meaning it can be amended or terminated at any time.

A Land Trust can protect both your assets and your privacy and prove to be a valuable part of your estate plan. Let’s say you own an investment property. If you deed the property to the trust, your name comes off the property deed as the owner, and the trust becomes the owner.

The terms of a Land Trust can be unique to the type of real estate it owns. You, as the grantor, then choose someone, called a trustee, to make sure your instructions in the trust agreement are carried out to benefit your heirs (beneficiaries). The trustee can be a friend or a relative, your attorney, or a professional appointed from a financial institution.

Unlike a will, which is a public document, a living trust is private. No one can know the details of your Land Trust other than the trustee.

REN 12 | Real Estate Investment And Tax

What Is A Land Trust Mortgage?

Now, let’s say you want to borrow money to make improvements or preserve assets that are held in a Land Trust. Or maybe you need to refinance a property held in the trust. As long as the trust is revocable, you can apply for a mortgage.

Not all lenders extend loans on trusts, so your first step is to notify the lender that the property is included in a trust and provide them with a copy of the trust agreement. If the lender is on board, you’ll next need to check the trust deed to determine if the trust allows the trustee to take out a mortgage on the property. (It is not always the case.) You’ll also need to confirm that the trust allows the property to be used as collateral or security for a loan.

How to Obtain Financing Through Your Land Trust

If the trust does allow the loan, the trustee will need to sign the mortgage or a promissory note. The note stipulates that the trust will be responsible for paying back the loan and that the refinanced property will be used as collateral for the loan. If the trustee won’t be signing personally, you will have to apply for the loan and sign the guarantee or the note.

If the trust doesn’t allow for the loan, the trustee cannot sign the mortgage. If the property can still be used as collateral, however, the lender may require you to re-title the property. This requirement means you will have to take the property out of the trust and return it to your personal ownership before you can take out a new loan.

This process requires the preparation and recording of two deeds with your county recorder or registrar. One deed takes your property out of the Land Trust, and the other one puts it back.

Some lenders will accomplish this deed paperwork for you, or you can ask your attorney to handle it. Your attorney should then draw up a document that states the property can be used as collateral on the new loan.

Suppose your property is already in a Land Trust and you want to borrow against the beneficial interest. In that case, the lender must serve a Notice of Collateral Assignment on the trustee. Then the trustee will write an acknowledgment of the assignment. When this situation occurs, the trustee cannot transfer the property’s title in the trust or encumber or mortgage it without the lender’s written consent.

Now, here are the five steps the lender will take before granting the loan.

  1. The lender will review the trust instrument, also called a deed of trust.
  2. The lender will confirm the identities of both the grantor and trustee.
  3. The lender will establish whether the trust grants the trustee power to borrow money and pledge or encumber trust assets.
  4. The lender will determine if the trustee needs to sign a trustee certificate to stipulate the trust’s terms and confirm the trustee’s authority to apply for a loan.
  5. The lender will require the deed on record as legal evidence that the trust actually owns the property. (You’ll need to provide the deed on record for this step.)

Advantages of Land Trust Mortgages

Borrowing money on property held in a Land Trust gives you more options than a conventional loan can provide. In addition, selling property held in a Land Trust to current tenants is often more secure and less risky than conventional sales.

In addition to maintaining your privacy as an investor, you also can avoid transfer taxes because the sale of a beneficial interest in a Land Trust does not involve the property itself. Another advantage is that tax assessments are lower because the sale price of the property is not publicly available for real estate assessors to view. You also can skip lengthy and costly probate procedures after the death of an owner.

What About The Due On Sale Clause?

Many investors worry that they will sacrifice their anonymity by triggering the due on sale clause if they finance a property purchase through a Land Trust. This clause in a loan or note states that the full balance of a loan may be called due upon sale or transfer of ownership of the property used to secure the note.

It's important to understand that banks rarely invoke the due on sale clause if mortgage payments are being made regularly on a property. After all, banks profit from your mortgage payments.

You are able to transfer your property or obtain better financing for an investment property without the worry of triggering this clause. Here are the basic—and perfectly legal—steps to take.

  •       Consult your lawyer.
  •       Buy property in your own name for optimal loan terms.
  •       Transfer your property into a Land Trust.
  •       Move the property from the trust to an anonymous LLC.

I like to encourage my clients with this advice–a Land Trust is simply a tool for an investor. You can use this tool to protect your anonymity, prevent frivolous lawsuits, or manage certain pieces of property. Yes, an unethical person can use a Land Trust in a dishonest way, but that reveals more about that individual’s integrity (or lack thereof) than it does about the Land Trust as an investment entity.

Finally, if you’re seeking to obtain a loan against your Land Trust assets, you’ll need the advice of an expert trust administration attorney. Our dedicated professional team at Royal Legal will prevent you from taking any action that might harm the assets of the trust.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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