There are few surprises real estate investors face that are less pleasant than litigation and lawsuits. When everything seems to be going really well, a litigation nightmare can ruin everything. That’s why when you’re starting your real estate investment journey you will need to learn about a new concept: asset protection.
When you’re starting your real estate investment career, you don’t need to panic. Basic steps, like insurance, should always be taken. But as your portfolio grows and attracts more attention, asset protection becomes more important.
Basic asset protection requires you to take several steps to defend yourself from legal challenges. Regardless of which specific measures you take, your asset protection plan will need at least the following measures.
Avoiding High-Risk Circumstances
Prevention and common sense are always the best places to start. By learning to assess situational risk, you are starting on the right foot.
For new investors, transactions generally produce some level of risk. So, learning the right business practices allows you to avoid some high-risk situations.
Some high-liability situations are unavoidable for some professionals. Just think about what professionals such as physicians go through. But as a real estate investor, it’s your responsibility to do your due diligence and avoid any and all risky ventures. Look into the reputation of anyone you work with and go the extra mile to be a good businessperson.
Jointly Held Account Audit
Not every legal challenge will be entirely your fault. But you must take steps to avoid suffering because of someone else’s mistake.
Do you have any jointly held accounts with other individuals or entities? If one of the joint owners is subject to a tax lien or lawsuit judgment, your assets are also at risk.
Prevention is a good first step, but there are many situations where prevention alone won’t protect your assets. That’s why, as a starting point, each of your properties must come with an appropriate insurance policy.
Insurance on its own doesn’t act as a complete asset protection plan. But insurance is a critically important part of your plan.
Each of your properties must have an appropriate insurance plan. If you’re renting out a rental unit, a typical landlord’s policy might be sufficient. Sometimes, you may need a more specialized plan for your property’s asset class.
Insurance isn’t just a last resort; it’s also a preventative part of your asset protection plan. One of the reasons you need appropriate insurance is to avoid frivolous lawsuits in the first place. The number of civil lawsuits filed in the US every year is disputed but estimated to be at least 40 million. Do you think all of those lawsuits were serious, genuine, and justice-minded?
Insurance policies always come with limits. But they knock out the chances for meaningless, frivolous lawsuits to bother you. Beyond that, you will need to consult an expert you trust to ensure you find the appropriate insurance for all your properties.
Compartmentalize Real Estate Assets With Business Entities
If your investment and personal assets are all under your name, you’re asking for trouble. That’s why it’s always a good idea to compartmentalize your assets so you’re not risking everything at the same time.
When it comes to rental properties, you can shield your assets with a Limited Liability Corporation (LLC). By compartmentalizing your assets this way, your debtors can’t come after your personal assets when your business assets are the target of their actions.
Creating a new entity is easy. You can form an LLC in a matter of minutes in some states. The whole process also often costs one small fee followed by an annual fee for your registered agent. For $50 per year or less, you can protect your investment assets by using an LLC to buy and manage them.
LLC-held properties allow you to protect your personal assets from seizure. You can have all of your rental and commercial properties placed in different LLCs with different names to avoid risking all your assets because of a single lawsuit involving just one of them.
There are several entities you can hold properties in. There are also several kinds of LLCs. Consult a lawyer to ensure that your real estate assets are legally and adequately compartmentalized. That way, you can be sure they never cross paths.
There are a few easy steps you can take to protect your anonymity as an investor.
Some of the simplest steps you can take include the common-sense measures we discussed above. There are both passive and active measures you should take to protect yourself.
Always make sure you behave appropriately on your online social media profiles. Don’t do anything silly that will put your anonymity and your investment business at risk.
Unfortunately, common sense isn’t always enough. If you want to protect your anonymity, there are resources that allow you to obscure both property and company ownership. Whether your assets are in an LLC or under your name, anyone seeking legal action against you would need to take the time and pay the money to find you before they even got started.
The simplest way to protect your anonymity is through an anonymous land trust. The trust includes the beneficiary, grantor, and the trustee. With a trustee, your name doesn’t even have to appear on your property’s records. This is a simple step that makes it a pain for someone who’s considering minor and frivolous legal action against you.
What To Do Next
With the combination of all these steps, you will be protected from most of the common and frivolous legal actions your career could be ruined by. Many legal actions could be shot dead in the water before even emerging. Should anything go wrong, you should be able to handle any lawsuits without them being a killing blow to your real estate investing career.
The importance of your asset protection measures increases as you become more successful. The more assets you’re managing and the more valuable they are, the more protection you need.
This list isn’t comprehensive, but it represents the most basic protections you can take as a beginner real estate investor. You can always talk to a trusted professional to learn about more comprehensive steps you can take to protect yourself. For now, continue your investing career with the basic protections that you need.
Hi, I’m just an inspired recent real estate beginner investor named Miguel Rivera from a modest town neighborhood called Pigeon Hill in Aurora, Illinois, the City of Lights! I have 3 years in so far investing in real estate and excited to continue to walk my chosen path to reach my ultimate financial goal of living off my rental income before I reach 35 years old! Driven by infinite growth potential and guided by my mentor, I managed to get started and make it work with just a modest salary, practically no education in the field, learning and applying some key habits. This website is a collection of all things that I have learned so far that I wish can help other recent real estate investors! Click here to view more about my story.