Investors should ensure an asset protection plan is in place before acquiring any piece of real estate. And, if you’re reading this with properties to your name but no plan in place, make these steps a priority to protect your hard work.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
Understand How the Judgment Process Impacts Assets
Much of the focus of asset protection centers around liability issues that may jeopardize the property or other assets that you own. When we refer to liability concerns, these are the collectible debts that arise from court judgments against a person or entity.
Creditors can go to court to receive judgments against the debtor anytime they are owed money. Often, these judgments result in liens against the property. Liens may limit financing options, and they will have to be settled before good title can be transferred to the new owner when selling the property.
Alternatively, judgments arise from lawsuits where the court finds that the person or entity owes money to the plaintiff. Unfortunately, in real estate, these judgments frequently happen due to an accident on the property. Those situations pose real risks to property owners due to the unpredictable nature of medical bills and other monetized harm that may befall a victim, like loss of income.
Establish an LLC to Limit Liability
Limited Liability Corporations (LLCs) shelter assets by reducing the income and assets that a creditor can attach for judgment collection. LLCs are legal entities that can own and operate assets and then pass through any profits to the owners, and real estate investors benefit from that liability protection in two main ways.
First, LLCs can be used to protect the investor’s personal assets from debts incurred in the course of the real estate business. Second, by creating several LLCs through a Series LLC, investors prevent assets from being in jeopardy due to debts on another. It essentially compartmentalizes each property or asset.
For example, someone drowning on your property in a pool that was not fenced. If a court finds you responsible, the family may collect money not only by placing a lien on your investment property but also on your personal home.
They could also garnish your wages from any job you may have and garnish your business and personal bank accounts. An event like that has the potential to decimate not only your business but also your family’s well-being.
Alternatively, if that property with the pool were owned by your LLC rather than you personally, the family would only be able to garnish the LLC assets, including the property and related income. Thus, your home and personal funds would be safe.
Use a Trust for Anonymity
Trusts are another asset-protection vehicle. Trusts are legal entities created to hold assets, so we often describe them as a vessel. The trustor/settlor funds the trust, and the trustee holds the assets for the benefit of a third party called the beneficiary. The same person may fulfill all three roles.
Some owners like using trusts to hold property because the assets are then titled in the name of the trust rather than the individual’s name. Assets held in trust also benefit from not being subject to probate laws, meaning that the contents of the trusts will not become public through any proceedings that occur upon the death of any party.
Trusts must be registered in the state in which they are formed, and the registration statement requires the name and contact information of the trustee. For the most privacy, hire a professional trustee for purposes of registration, and the person of your choosing may subsequently replace that trustee.
Insurance Protects the Property
Finally, debt and judgments are not the only risks to a burgeoning real estate empire. Mother nature and crime can be just as costly, if not more. The challenge is striking a balance between adequate protection while keeping overhead costs down.
Ideally, the property’s insurance plan covers harm that befalls any residents or guests on your property. However, insurance is not a substitute for good property management and ethical dealings with tenants and staff. Owners can find themselves on the losing end of a battle with insurance when the incident stems from the owner’s actions.
After acquiring multiple properties, you may qualify for comprehensive insurance that serves as an umbrella policy for all properties. Be sure to reevaluate insurance policies regularly to be sure you have the best value.
Final Thoughts
A nightmare scenario for any investor is that their efforts to earn extra income and stabilize their finances could lead to the loss of the seed money and the assets they and their spouse have worked a lifetime to accumulate. Fortunately, the steps detailed in this article can protect both personal and business assets.
Life Bridge Capital is a leading real estate syndication company. We offer our investment partners the opportunity to leverage shares of multifamily rental properties into a passive monthly income. Learn More
