The so called “cloak of invisibility” in real estate investing is where an investor uses various tactics to hide his ownership of a property in the public record. The most obvious reason is the liability associated with frivolous law suits.
Less obvious is the investor trying to achieve a goal accumulating parcels or adjoining properties for another purpose such as the way Walt Disney bought up property in Orlando, Florida for the purpose of creating a theme park – the rest is history in this case.
Four common ways and the reasons for using them are as follows:
1. Land Trusts are the easiest means to hide the ownership of the buyer(s) of properties. The owners of the Trust or beneficiaries are not shown or listed in the public record.
The key here is to have the trustee be someone with a different name, an attorney, or an entity that isn’t obviously related to the beneficiaries. This was the method used by Walt Disney in the above example.
2. Others use multiple entities owning one another with out-of-state entities being the ultimate owners. This method is currently being used by major national banks in buying tax certificates.
Their cloaking doesn’t hide them from a serious investigator, but it makes them invisible to the casual observer. The names of these entities are specifically designed to be inconspicuous so as to not draw attention to them.
3. Using a DBA (Doing Business As) is an interesting phenomenon because it has been done for probably hundreds of years, but in this case, an investor forms a corporation and does business as any name available – specifically an individual’s name.
For example, let’s say that the investor has a corporate name of Jason Sells Wholesale Homes, Inc. When he buys under that name, anyone can find what he owns in the public record. If Jason files for and receives authorization to use a DBA designation, he could start buying properties in the name of Mark Twain.
4. Foreign offshore entities have long been the hiding spots for billions of legal and illicit money. They have legal and viable purposes especially in making it difficult for the average person to determine who he is dealing with and who is in charge of the entity.
5. There are attorneys who specifically work with individuals to establish and operate foreign corporations. In various states, a foreign corporation is actually an incorporated entity from another state and is treated differently for registration and taxing purposes. There are a couple of states that are particularly friendly to out-of-state individuals seeking the protection of a cloak of invisibility by opening corporations in their state – Nevada and Delaware are good examples.
Alien Corporations are corporations that are not incorporated area turkey where they are operating. Some states refer to these as foreign corporations. Strict laws usually govern their being used in the other state if they have a physical presence or if they are doing business in that state.
I have listed the above five “cloaks” in the order of their protection, the first being the highest level of protection and so on. Each one of these paper entities has its positives and negatives, so do your homework before committing to doing any of them.
As you may have noted, I specifically omitted LLC’s. I did so because of recent Supreme Court rulings and state statute changes that have impacted the value of single-member LLCs. This is another reason to get the advice of an attorney and CPA in your area.
In summary, state laws vary greatly so always seek the advice of a local attorney who is familiar with starting entities for investors. The insights of a local CPA may also direct the investor to what entity would work best for him for tax purposes. The purpose of each of the above entities is to reduce owner liability, the first step of which is to be invisible in the public record.