Asset Protection For Real Estate Investors
Building a real estate empire takes years and monumental effort. The last thing you want is to leave all of your real estate investments and other assets vulnerable to the claims of creditors and lawsuits. Asset protection for real estate investors is similar to asset protection for other high-net-worth individuals but with an increased emphasis on real estate protection.
Asset protection for real estate investors can include protecting your liquid capital and funds from creditors or lawsuits; protecting your properties from claims; and protecting other assets, like stocks and bonds, from lawsuits and creditors. There are several asset protection strategies you can implement. The most successful real estate investors often leverage each of these protection strategies in conjunction with the others, resulting in several overlapping layers of defense that minimize possible risks.
Holding Companies – you should form a limited liability company (LLC) that would hold and protect the property. Depending on the size of your real estate portfolio, it will always be wise to form an individual LLC for each rental property you own. A creditor is usually only limited to the assets held in a specific LLC. Therefore, if one of your mortgages goes into default, a creditor coming after you might only be able to go after the property in the relevant LLC, not your entire estate or portfolio. Separate LLCs is a great protective measure to defend yourself against tenants and others also, for example, a former tenant sues you because they thought the property was hazardous. If they are successful, they might only be able to access the assets in one LLC, not across your entire portfolio.
Landlord Insurance – you should have a landlord insurance policy, which offers specific, comprehensive coverage for owners of rental properties. Landlord insurance is necessary because it’s designed to protect you from losses such as: injuries, property damage, and loss of rental income. The right insurance policy will prevent you from paying out-of-pocket for all kinds of potential dangers and hazards in this line of work.
Homestead Exemptions – in addition to the above strategies your state might allow certain types of homestead exemptions. Homestead exemptions apply to primary residences and allow owners of properties to register those properties as homesteads. When you register, your homestead property is unavailable to the majority of creditors.
Use Debt to your Advantage – carrying debt on your real estate assets through a mortgage or a loan can have its benefits. By stripping equity in your real estate portfolio through borrowing against the portfolio could potentially deter third parties from suing and reduce the number of lawsuits you receive. A lawsuit might be more appealing to someone if you own a property outright without a mortgage or a loan. Getting rid of this equity and maintaining a 75% loan to value ratio reduces the funds available through your assets or LLC. You can also use the stripped equity to further your investments by purchasing other properties or land.
A comprehensive real estate asset protection plan that caters to you and your assets is the best option. Regardless of which strategy you choose to protect your real estate assets, it is imperative that you create a plan before investing, and especially before you rent your property out to tenants. If you already have a portfolio of real estate assets, consider your protection strategy options before it’s too late. Asset protection for real estate investors is an important part of any strategy.
If you need help determining the best real estate asset protection strategies, we can help. Click here to schedule your consultation. Becoming a business owner, you control your own destiny, choose the people you work with, reap big rewards, challenge yourself, give back to the community, and you get to follow your passion. Knowing what you’re getting into is smart business because the responsibility of protecting your business falls on you.
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.
