Are Your Legal Ducks in Row? A Cautionary Tale

As a real estate investor, having an asset protection strategy is a critical component of a secure, resilient business structure. Most investors have their investment property held in a legal entity, but this is only one component of asset protection and unfortunately, one that can easily be sidestepped during legal proceedings. Without a solid, multi—layered approach, you could lose passive income or entire properties from a settlement or judgment.

What is Real Estate Asset Protection?

Real estate asset protection is a strategic approach to protecting your properties from creditors who may try to take control of your investments due to lawsuits or settlements. When a lawsuit occurs, regardless of whether it’s a settlement or judgment against you, you have the obligation to pay for damages, injuries, attorney fees, and much more. If structured properly, asset protection planning can essentially separate your personal or entity legal obligations from other business assets you own.

Asset Protection Approaches

There are several options to help investors protect their assets. It’s important to look at the costs and benefits of each strategy and speak with a professional for advice on which structure best suits your needs. Investors with few properties may be able to get away with utilizing one or more strategies, while others may want to employ more because of the size of their investment portfolio. Here are a few of the most commonly used asset protection approaches:

• Homestead Protection – Homestead Protection is one of the most foolproof approaches to protecting your asset from seizure but obviously can only apply to one property in which you’ll need to legally reside. In most jurisdictions, a significant portion, if not the entire value of the residence, is protected from bankruptcy, court judgments, or settlements. Currently, the California homestead exemption is automatic, meaning that a homestead declaration does not need to be filed with the county clerk. Under the 2021 law $300,000 to $600,000 of a home’s equity cannot be touched by judgment creditors.
• Limited Liability Companies (LLC) — LLCs are considered separate entities under the law and protect the owners of the LLC from the LLC’s liabilities and business debts. Holding each investment property in its own LLC limits creditors from attaching all your other real estate holding for settling a judgement. For example, if one investment property gets sued, usually the other assets can’t be touched due to the separate nature of the other assets shielded by strategic asset protection.
• Insurance – One of the most popular asset protection strategies in the real estate industry is insurance. The coverage you choose for your property depends on the real estate type. You can protect your home with a homeowner’s policy and your commercial property with a business policy. You’ll need to increase your insurance coverage as your real estate portfolio grows.
• Use a Management Company – A management company can provide some protection if the company is a third—party provider that will manage the real property for you. However, usually these management companies will pass 100 percent risk to the owner, which leaves your rental investment exposed to potential lawsuits. If real estate investment is your actual business, then forming your own management company would be a great advantage and places distance between your real estate and tenants who could sue for nothing.

Disclaimer:  This information is made available by Bagla Law Firm, APC for educational purposes only as well as to give you general information and a general understanding of the law, and not to provide specific legal advice. This information should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.