Structure Your Assets Asset Protection Strategies for Real Estate Investors

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real estate asset protection

“I love getting sued,” said nobody.

Did you know you can add a layer of privacy to your entire portfolio through anonymous ownership on public filing for your assets?

Holding property in your name makes it easy for anyone to find you through a simple public record search, exposing you to potential frivolous claims from upset tenants. However, by adopting anonymous ownership strategies, you can make it more difficult for them to identify and target you, providing a level of protection against such lawsuits.

In this post, we’ll talk about asset protection strategies you should do, the many reasons why asset protection is vital for real estate investors, how to set up asset protection for your rental properties, and more.

Understanding Real Estate Asset Protection Strategies

Asset protection strategies can protect you from loss due to various risks, like lawsuits and creditor claims. Each asset protection plan should be tailored based on what assets need protecting. Protection for real estate will differ from the type of malpractice insurance that physicians require. When protecting real estate assets, you must be specific when creating your asset protection strategy.

There are several ways to do this, including:

Limited Liability Company (LLC)

Forming an LLC is one of the easiest and most effective ways to protect your real estate investments. LLCs are business entities that separate your personal assets from your business assets. If a tenant or someone else decides to sue your LLC, the assets you own are shielded. In other words, if you lose a lawsuit, you won’t be personally liable, so you won’t lose your primary residence, car, boat, etc. LLCs also come with owner and management flexibility and excellent tax benefits like avoiding double taxation so you don’t pay taxes twice.

Series LLC

Series LLCs are a special type of LLC that offers enhanced asset protection against legal liabilities. Real estate professionals often use series LLCs to have separate series for each investment property they own. This way, each property is shielded from risks associated with other properties. Series LLCs are fantastic legal tools that safeguard your real estate assets and make managing your business easier. However, remember that not all states permit the formation of series LLCs.

Holding companies

Holding companies own other companies. You may know them better by their many forms, including parent companies, subsidiaries, or sister companies (to name a few). They’re also usually limited liability companies or corporations, but unlike these business entity types, they don’t produce or provide services or other commercial activities. Instead, their main function is to hold the membership interests and control the stock of other businesses.

Holding companies and series LLCs are pretty similar. However, with a holding company, you must form a distinct LLC whenever you want to put an asset under your company’s umbrella. Series LLCs simply require you to establish a master LLC. Series LLCs are also usually more cost-effective.

Land trusts

Land trusts are a valuable tool for protecting your real estate assets by keeping them separate and out of public records. Unlike traditional ownership, land trusts provide anonymity as the investor’s name doesn’t appear in standard property searches.

By placing each real estate property in its own land trust, you can shield them from lawsuits that impact other investment properties in your portfolio. If you have multiple properties in the same trust, they may all be impacted.

Liability insurance

This one’s a given, but still worth mentioning. Liability insurance is a critical piece of your asset protection strategy. If someone gets injured or damages your property, your insurance company will pay for it, so you don’t have to.

These are just a few of the ways you can enjoy asset protection. Here are a few more to consider to protect your finances:

  • Asset protection trust (other than land trusts)
  • Retirement funds
  • Family limited partnerships
  • Annuities

Benefits of Asset Protection for Real Estate Investors

There’s no shortage of benefits to protecting your real estate assets. Here are some of the most notable reasons.

Decreased risk of getting sued

When your personal and business assets are adequately protected, it’s much more challenging for a creditor to successfully file a lawsuit against your business. A savvy real estate lawyer can thoroughly examine your assets and identify which ones are vulnerable to a suit.

Minimized loss

Your attorney can’t guarantee total lawsuit protection, but there are ways you can limit risk. For example, if you own a holding company, you can protect real estate assets and make them individual investment properties. Your other real estate holdings won’t be affected if one goes bankrupt.

Limited liability

Whether you form a single LLC or a multi-member LLC, you have personal liability protection. Creditors, disgruntled tenants, and anyone who may sue you can only go after your business assets. The owner’s assets (e.g., personal residence, car, etc.) are safe.

Tax benefits

Asset protection planning also helps you minimize taxes you’d otherwise owe. For example, you can deduct the interest of the loans on your holding company to finance other businesses. You can also defer taxes on their profits. We recommend consulting with a financial planner to determine which type of entity best helps you save money.

It’s a great real estate investing strategy

Most real estate investors want to build personal wealth and expand their investment portfolios. A sound real estate asset protection strategy will help you keep your assets safe while you’re looking to expand into new markets. For example, when you’re eying other properties, such as office buildings or vacation homes, you can create separate LLCs for them and include them under the blanket of your series LLC. If something happens to one investment property, it won’t impact the others.

Steps To Set Up an LLC

1. Reserve your business name

Start by searching on your state’s Secretary of State’s website like this one. You can reserve your business name for a fee if your business name is available. This locks in your LLC’s business name for some time, usually 120 days, while you get your paperwork together. 

2. Select a registered agent

A registered agent is an individual or company that will receive official communications and legal documents on behalf of your LLC. Your registered agent must have a physical address in the state where your business operates; P.O. Boxes are not acceptable. You can serve as your registered agent for free if you meet the requirements. Alternatively, you can opt to work with a commercial registered agent service.

3. File your articles of organization

Your articles of organization are the legal documents that detail the basic information of your LLC, including:

  • LLC name and address of your organization
  • Your “Doing Business As” designation, if applicable
  • The purpose of your business
  • Your registered agent’s name and address
  • Annual report contact information
  • The names and contact information of your organizer and officers

Each state’s articles of organization information requirements and fees will vary. Double-check the document before you file it with your Secretary of State.

4. Draft your operating agreement

Your operating agreement defines your LLC’s rules, regulations, and liabilities. In a way, it acts as your organization’s constitution. You can refer to your operating agreement if you ever have to resolve a legal or financial dispute. Without one, these decisions may be left up to the courts, and their rulings may not be in the best interest of your LLC.

5. Obtain business licenses and sales and use tax permits

Look up the local, state, and federal government license and permit requirements where you’re doing business. These will vary by city, county, and state, so if you’re unsure what licenses and permits you need, consult the local government website where you’re doing business.

After that, you’re all set! You must submit your annual report, pay the annual fees, and remain compliant.

Setting Up a Series LLC

Forming a series LLC requires many of the same steps. The key differences are that you can’t form them in some states, and some states where you can form them require you to provide details about your series LLC on your articles of organization.

Other Ways to Protect Your Real Estate Assets

Here are a few more tips for protecting your real estate assets:

  1. Maintain records for everything. Keep documents for your property transactions, lease agreements, rent payments, disclosures, maintenance and repair expenses, mortgage payments, property tax expenses, communications, and more. The more documentation you have, the better protected you’ll be!
  2. Perform regular maintenance and repairs. Ensure that you or your property management company performs the necessary repairs and conduct routine inspections to ensure the properties are safe and well-maintained.
  3. Stay compliant. Check the local, state, and federal rules and regulations for your property and make sure you’re staying compliant. If, for example, your rental property is part of a Homeowner’s Association with strict paint or lawn care requirements, follow the rules to avoid legal issues.

Get Started on Your Real Estate Asset Protection Plan

One in three Americans will get sued in their lifetime. Real estate investors, in particular, find themselves in one of the most highly litigated professions in the United States.

Those involved in deals with corporate partners are at the greatest risk, and your odds of getting sued simply go up from there if you happen to be risky in other ways; however, some of this can be controlled.

The beauty of an asset protection strategy is that you can structure it to fit your needs rather than avoiding potential opportunities to limit your exposure. This enables you as an investor to proactively establish a strategy that allows you to invest in great opportunities while retaining peace of mind.

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