Attention New Investors - Asset Protection Simplified

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Stuart Udis:

Attention new investors: As I’ve immersed myself in the BiggerPockets forums, I’ve observed an extreme emphasis placed on asset protection by those entering the business but their approach and where they decide to allocate their time and resources is misplaced. This is causing unnecessary distractions and taking away from your ability to focus on the action items that matter most: building meaningful industry relationships and sourcing investment opportunities. I decided to post my thoughts in the “Starting Out” category hoping to get your attention knowing there are service providers waiting in the wings ready to take advantage of your unfounded beliefs and further upsell you through scare tactics. Here’s what you should know:

You should purchase non owner occupied real estate in an LLC. More than anything this will exclude you personally from claim history (some of which is without merit and is the nature of the litigious society we live in). This could also open the doors to direct equity investments in the future if you scale and continue to hold these initial assets. Some may argue it's not necessary at the start, but it becomes costlier to transfer a property held in your name to an LLC at a later time and this is good forward thinking business planning.
Don't worry about forming an LLC until you execute an agreement to purchase real estate. You can incorporate language into the sales agreement that allows you to form an LLC and take title in that LLC as a closing condition. Just remember to notify your lender and the title company and disclose to the lender who will be the members and guarantors before the loan is underwritten.
In most cases, form the LLC in the state in which you live or the property is located. Speak to your accountant to confirm the best option for you.
Anonymity is not asset protection. Forming an LLC in a specific state believing you will be better protected is not true and will not prevent claims from arising.
Understand insurance and make sure you have the appropriate types of insurance depending on the investment opportunity you are pursuing whether it be land, a construction project, a tenant occupied property etc.. The types of coverage will change accordingly.
Make sure every vendor who performs services on your property or on your behalf maintains appropriate contractual relationships whether it be directly with you as the owner or with an intermediary such as a General Contractor or Property Manager. Similarly, make sure all of these transaction participants maintain adequate insurance and list you, the property owner and any intermediary as additional insured.
If you rely on an intermediary relationship (most commonly a General Contractor or Property Manager), understand the authority granted in any agreement you execute to act on your behalf.
Review the indemnification provisions in any service agreement ensuring the standard of care will not preclude insurance coverage and the provision is equitable.

To recap, it's not necessary to form a land trust, separate management LLC's or form entities in specific states believing you will hide in the cloaks of secrecy. Most of what I shared are proactive measures you can take to greatly reduce your liability exposure and shield you from a host of claims that commonly arise in real estate. If you believe I am oversimplifying this, I am not. In fact, what I just shared is the playbook for a $1B real estate portfolio I previously counseled as an attorney and mirrors how most other similar portfolios operate. Meanwhile your peers who own $100K houses in Detroit (no knock on Detroit, just used for illustration purposes) feel the need to create a convoluted web of entities and ignore most of what I shared. Don't be like them. As I shared initially, if you have not purchased your first property, focus on building your industry relationships and deal sourcing. Once you've purchased your first property be proactive, mindful of your vendor relationships and intentional with how you operate your business. This will keep you personally protected and allow you to run your real estate business far more effectively.

Hi Stuart,

What about a scenario where all of the properties are in one LLC and opposing counsel locks all of the bank accounts, and also files against the owner personally and locks all of the owners and the owner's spouses personal bank accounts.

I realize the owner can be removed from the lawsuit but that takes time. In the mean time 100% of the owners ability to touch any cash is eliminated. Although bills still need to be paid, mortgages still need to be paid, Etcetera.

I've seen this happen three times on large portfolios with a lot of equity. And it's an emotional and financial disaster for about 90 days until some things can be loosened up by going to court.

That's the only downside to the single LLC that I can see. Allowing that chess move by opposing counsel.

These were are all in California and put the personal residence mortgage of the owner in danger also.

These were all professional owners not W2 earners.

It may be state specific, for instance Texas prohibits naming the owner along with LLC I think??? But I am told it happens with no punishment.

Do you have any thoughts on the put all of your assets into one LLC In light of this???

Kevin S.

Member since 2024 · 400 posts · 240 votes

2y

@Stuart Udis

Does LLC need to be done by an in-state attorney?

You said it cost more to transfer from personal to LLC after the sale. I hear many recommend to 'consider' LLC after buying more than one properties, not the first and only property.

Isn't there a yearly cost to maintain LLC? If so and I was to create LLC after buying my third or fourth property, is the cost of transfer to LLC at a later date really that expensive compared to the maintaining of LLC on just one property for few years?

Thanks.

Stuart UdisPro Member

OP

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

@Scott Mac You raise some good points and open the door for some additional dialogue. First, I don't believe a real estate investor should own all of their property under one LLC. Can you own a few single family homes or smaller multi's? Yes. It is otherwise inefficient to operate. Of course if there are different LP partners that will necessitate separate entities, even if the underlying assets themselves don't justify the need. Lenders will be vocal about their comfort level with issuing a loan when there are multiple properties owned through a single LLC, particularly if the portfolio is financed through multiple lenders and that threshold can vary depending on each lenders internal standards. However as a general rule of thumb when the lenders begin to nudge you when you are operating smaller assets single LLC's, its usually time to begin acquiring in a separate LLC.

I don't want my comment about having separate management LLC's to be construed as having separate deed holder LLC's. That comment specifically relates to the investors who believe they are better protected by having a separate LLC collect rent and perform management functions independent of the deed holder LLC. This offers no additional protection, adds additional operating expenses and is treated in court as an alter ego entity. There are instances where a separate management LLC does make sense, but these investors are nowhere near the point where their operational level to warrant this.

To broadly cover your other points about being individually named as a defendant as well as going after the LLC's assets I believe its helpful to understand the true objectives of the plaintiff's attorneys pursuing claims against these investors. More than likely they are working on a contingent fee basis because the plaintiff does not have the means or alternatively would rather part with some of the upside for contingent fee representation. This means the plaintiff and their counsel only gets compensated if there is a settlement/jury award that gets paid out. The last few words are critical because a judgment entered against a plaintiff or even a settlement for that matter where no insurance carrier is involved does not guarantee compensation. This is why you customarily see plaintiffs attorneys take inventory of all parties who can be brought into claims and focus primarily on what insurance money can be made available.

This is also why its important as a property owner you maintain proper contractual relationships and manage insurance certificates correctly with your vendors. More times than not the person responsible for any claim that arises that's not financial related is a vendor who performs work on your behalf or on behalf of the property & keeping these vendor relationships in order can greatly reduce the need to fully rely on your own insurance policies.

As for being named individually, while the standards will vary it is generally very difficult to pierce the corporate veil and comingling the funds is the most common culprit. This is why its important to operate your LLC as a business and follow the operating agreement. The rules and procedures of your operating agreement and your ability to follow the agreement is far more important than the actual state specific filing docs. Most plaintiffs attorneys won't name the LLC member individually unless there is a clear and convincing fact pattern that points to piercing the corporate veil. Are there aggressive attorneys who will name plaintiffs without any true merit? Sure. However this is the minority, and that same aggressive minority will likely make the argument to bring the plaintiff in individually as an additional named plaintiff if the name is not readily available when the claim is first submitted once they go through discovery. Another way of saying anonymity is likely not going to help much anyway when dealing with this minority plaintiff attorney you hope not to encounter and most never will.

I believe the second half of this post really speaks to the mechanisms and practicalities of litigation and should point to how you should operate your business to avoid such claims from arising but if they do, what should be done through your day to day operations to mitigate your personal and business exposure. As you can see the emphasis on anonymity, and management LLC's aren't going to really change the outcome and following through on the suggestions from my initial post is the best course of action.

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

2y

I operate with a separate management LLC and I believe it's been worth it's (minute) price. For fix & holds, for PMs, etc., it operates as a business on it's own. Has it's own tax return, etc.

Stuart UdisPro Member

OP

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

@V.G Jason Do you manage properties for 3rd parties, have employees who perform management functions on behalf of your own portfolio or is the management company used for any other business activities such as construction/maintenance? There can be financial/business reasons for having a separate management company, but most create the management LLC's and believe collecting rent through a separate LLC shields them from liability by creating a degree of separation which is not the case.

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

2y

Quote from @Stuart Udis:

@V.G Jason Do you manage properties for 3rd parties, have employees who perform management functions on behalf of your own portfolio or is the management company used for any other business activities such as construction/maintenance? There can be financial/business reasons for having a separate management company, but most create the management LLC's and believe collecting rent through a separate LLC shields them from liability by creating a degree of separation which is not the case.

The management LLC does literally all management activities-- hire PMs, hires contractors for renovations, hires the legal experts for other stuff, buys STR furniture, hires interior designers for STRs, hires pest control, etc. It's there to keep just operations and assets separate.

Sam YinPro Member

Los Angeles, CA · Member since 2021 · 583 posts · 738 votes

2y

@V.G Jason

That's how I set mine up. My LLC is the manager of all the assets. Along with a few LLCs that each own a few buildings. However, I also carry a few umbrellas to cover each group. All are contained in my Trust.

It's cheap, it's easy, and simple. It might not be perfect... But nothing is perfect.

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Stuart Udis:

@Scott Mac You raise some good points and open the door for some additional dialogue. First, I don't believe a real estate investor should...

...change the outcome and following through on the suggestions from my initial post is the best course of action.

It seems to me that operating the management company as an LLC, would be a wise move because it seems like it would shield the owners personal assets, and personal income from a lawsuit involving a property.

It seems like if the owner operated as a sole proprietor having his or her assets locked, or personal cash flow locked would be a most likely scenario- for at least 90 days, possibly more???

It seems like even a W2 earner would like to avoid that.

Also I completely understand what you're saying about having multiple properties in one LLC.

Although it seems like again the income locking situation would be an issue as all properties are going to use bank accounts under the LLC and the LLC is going to have all of its accounts locked by opposing counsel until the owner could get it released by the court to some partial extent- possibly???

I've seen these releases in Southern California to be 90 days (With no guarantee of that short of a time) of locked accounts where the owner had issues paying the mortgage, insurance, taxes and operating expenses for the properties. Because the cash flow from the properties is locked from the lawsuit. Frivolous stuff where plaintiffs were looking to get onto some sort of public assistance forever based on a fall or a stumble where one should not have fallen or stumbled.

Another question, in Texas for instance my understanding is the alter ego for a single member LLC is tough to make happen in the court. Although in other states the courts are more likely to do that in a single member LLC situation. The single member LLC precludes a partnership return Which is nice. Any thoughts on that???

I'm not talking about jurisdiction shopping Texas, I'm talking about owners who live in Texas and operate in Texas 100% Although jurisdiction shopping to Texas seems like it would work the same way as long as the lawsuit was in Texas, if the local court would allow that.

Stuart UdisPro Member

OP

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

@Scott Mac Why would a separate LLC that serves as a management company provide greater protections or shield personal assets? Why can't the plaintiff's attorney merely name both the deed holder LLC and the management LLC each as defendants? The deed holder LLC is likely the entity with better insurance which makes that the easier mark for the plaintiff's attorney anyway.

You seem to obsess over the accounts being locked by opposing counsel. Could you give the fact pattern where this has occurred? Specifically personal assets and not entity assets. This would require piercing the corporate veil, which is very difficult to do. The standard will vary state to state but again, very difficult to accomplish as long as the deed holder LLC operated like a business and no comingling occurs. Also keep in mind most investors have limited liquidity in the accounts and its not worth the pursuit by opposing counsel. This is why insurance money is what's targeted. It's how both the plaintiffs attorney and their client are compensated. A plaintiff's attorney is not going to burden themselves with chasing down the limited assets in most of these accounts on a contingent fee basis. This goes back to the practicality of litigation in most cases involving real estate investors. Particularly the new investors the original post was targeted towards.The text book example of an alter ego is forming an LLC for the sole purpose of collecting rent and performing management functions on behalf a property and performs no other functions.

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

@Stuart Udis

OK, yes new investors- not deep pockets.

Both of the individuals I saw go through this had very deep pockets personally one operated without any llc's at all.

In both cases it wasn't the judgment amount that was the wolf at the door it was locking up everything they owned as well as their bank accounts for what at first appears to be an unknown amount of time, but worked out to be about 90 days.

In California, with activist judges, and attorneys who may choose to take certain cases based on let's just say physiology versus money, to me it presents more risk- which is why I do not operate in California.

But for beginning operator, If I understand you correctly what you're saying is there is just is not enough worth going after to worry about it.

They are not looking to lean wages for payment, or seize personal things, or leave the individual owner with a judgment on his record making further borrowing hard. All they want is the insurance money and then they will go away- most likely???

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Stuart Udis:

@Scott Mac Why would a separate LLC that serves as a management company provide greater protections or shield personal assets? Why can't the plaintiff's attorney merely name both the deed holder LLC and the management LLC each as defendants? The deed holder LLC is likely the entity with better insurance which makes that the easier mark for the plaintiff's attorney anyway.

......

If the opposition names both the owners management company llc and the property llc in the suit, It seems like the owner's personal bank accounts, home, fishing boat, pickup truck, work tools, et cetera... Seem like they would be protected by the management company llc, versus the owner operating as a sole proprietor.

But as a sole proprietor I believe, correct me if I'm wrong but I believe he or she would have full exposure of all personal assets to the lawsuit less What is protected under state law from seizure (Texas has pretty good protection laws for residents).

For a beginner, do you think this sort of setup is like building a huge fortress against an army of ants, Or is this something the client might like to have some choice about as a beginner. I would assume in different jurisdictions, and with different judges, things might go one way or things might go the other regarding keeping the owner on the lawsuit for the judgment until the insurance company pays off which seems like it would be a long time to have your stuff locked up on the court. I was in LLC, in Texas you Get a charging order- as far as I understand.

Mark F.

Rental Property Investor · Northern NJ · Member since 2019 · 672 posts · 677 votes

2y

@Stuart Udis I'd love for you to post another reply or new thread on how to continue operating the LLC the way it was intended such as setting up the operating agreement, continued proper use of the LLC, and on what occasion it would be time to put your next property in the same LLC as your last property or form a new one. Also someone asked the question I'm curious to know too, can we set up our own LLCs in our own states for a rental without issues? I know setting one up takes about 10 minutes via the states website.

I'm also curious and assuming you'd recommend a roboust umbrella policy (personal or is there one for businesses/LLCs?) and continued maintenance of your property as other good strategies? I have a personal umbrella policy but wasn't sure if they're also separate for LLCs. Thanks for your time.

Neil Tibma

Investor · Member since 2021 · 3 posts · 2 votes

2y

Great info! Looking forward to reading more of what you have to say.

Karolina Powell

Member since 2021 · 107 posts · 82 votes

2y

Stuart Udis, do you mind commenting on ways investors make it easy for opposing counsel to pierce the LLC veil?

Thanks

Stuart UdisPro Member

OP

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

@Scott Mac When you say sole proprietor are you referring to owning real estate in your name or as a single member LLC? I do not encourage owning investment real estate in your personal name. Most who lean in the direction of taking ownership in their name do so because they may get slightly better terms on their financing for non owner occupied real estate which is not even the case if the individual is bankable with a half decent balance sheet. However understanding what you mean by sole proprietor is important.

To reiterate my earlier point, creating a separate LLC to serve as a management company will not redirect the plaintiff's attorney away form the deed holder whether that deed holder is an LLC or is the individual owning that real estate in their name. In your example of listing the owner's personal bank account, fishing boat and pickup truck etc...all of that is most likely protected whether there is or not a management company LLC. Even if the property is owned in the individuals name without an LLC, the plaintiffs attorney (which remember is likely a contingent fee representation) is most focused on the insurance proceeds and not the personal assets because its extremely difficult and more expensive to go over these personal items. This is why its important to conduct your business correctly and make sure your insurance is in order (along with any vendors who perform services for you) because a good operator does not do things where insurance coverage is denied.

Now just in case I misunderstood and you are referring to owning real estate as a single member LLC as a sole proprietor, this does not open the door to a plaintiffs counsel going after your personal assets easier than if it is a multi-member LLC as long as you conduct your business correctly. Each state has different standards/factor tests that are utilized but to answer @Karolina Powell's question if you consistently avoid these bad actions expect to be ok.

1. Improper Formation

2. Inadequate capitalization of the companies operating account

3. Comingling of Fund

4. Consistently observing the corporate formalities

My initial post in this thread was intended to get new investors refocused and thinking about asset protection more practically. My follow up responses are more general answers but there is quite a bit more that goes into this subject. For now I am closing my portion of the loop on this subject but recognizing this is a subject that's of interest to many I plan on releasing a number of $30 webinars over the summer where I will get more into the weeds on these topics. Direct message me if you are interested and will make sure you are notified. As a reminder I am not your attorney and the information I shared is for information purposes only.

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Stuart Udis:

@Scott Mac When you say sole proprietor are you referring to owning real estate in your name or as a single member LLC?

Neither, I'm talking about operating as management company with no entity to shield your personal things.

Freida Fake Slipenfall
Plaintiff
vs
Bob's Deedholder LLC,
Bob property owner/manager, a real person
Defendants

instead of

vs
Bob's Deedholder LLC,
Bob's property management LLC
Defendants

Let's say Bob owns three properties in his LLC and is operating as the property manager for himself.

Wouldn't we expect opposing counsel to name Bob as the property manager along with the deed holder LLC in the lawsuit???

Or is this unlikely, or just not going to happen for some reason???

Stuart UdisPro Member

OP

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

No, if you are operating your LLC correctly a stand up plaintiff's attorney will not name you personally as a defendant. Are there aggressive attorneys out there who will? Sure, but they are the minority and those who fall under this category will find a way to name the individual as a co-defendant irrespective of whether there is merit or a separate management LLC. At this point you are focusing on an extreme minority and not the practicality of litigation involving a real estate investor or the monetary objectives of a plaintiff's attorney.

Michael SmytheBusiness Member

Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes

2y

Great dialogue gentlemen!

Logical Property Management4.9446 Reviews

Website View Page

Jonathan Bock

Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes

2y

@Scott Mac

Can you give more color on your friend's asset freeze ?

Calvin Thomas

Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

2y

Quote from @Stuart Udis:

Attention new investors: As I’ve immersed myself in the BiggerPockets forums, I’ve observed an extreme emphasis placed on asset protection by those entering the business but their approach and where they decide to allocate their time and resources is misplaced. This is causing unnecessary distractions and taking away from your ability to focus on the action items that matter most: building meaningful industry relationships and sourcing investment opportunities. I decided to post my thoughts in the “Starting Out” category hoping to get your attention knowing there are service providers waiting in the wings ready to take advantage of your unfounded beliefs and further upsell you through scare tactics. Here’s what you should know:

You should purchase non owner occupied real estate in an LLC. More than anything this will exclude you personally from claim history (some of which is without merit and is the nature of the litigious society we live in). This could also open the doors to direct equity investments in the future if you scale and continue to hold these initial assets. Some may argue it's not necessary at the start, but it becomes costlier to transfer a property held in your name to an LLC at a later time and this is good forward thinking business planning.
Don't worry about forming an LLC until you execute an agreement to purchase real estate. You can incorporate language into the sales agreement that allows you to form an LLC and take title in that LLC as a closing condition. Just remember to notify your lender and the title company and disclose to the lender who will be the members and guarantors before the loan is underwritten.
In most cases, form the LLC in the state in which you live or the property is located. Speak to your accountant to confirm the best option for you.
Anonymity is not asset protection. Forming an LLC in a specific state believing you will be better protected is not true and will not prevent claims from arising.
Understand insurance and make sure you have the appropriate types of insurance depending on the investment opportunity you are pursuing whether it be land, a construction project, a tenant occupied property etc.. The types of coverage will change accordingly.
Make sure every vendor who performs services on your property or on your behalf maintains appropriate contractual relationships whether it be directly with you as the owner or with an intermediary such as a General Contractor or Property Manager. Similarly, make sure all of these transaction participants maintain adequate insurance and list you, the property owner and any intermediary as additional insured.
If you rely on an intermediary relationship (most commonly a General Contractor or Property Manager), understand the authority granted in any agreement you execute to act on your behalf.
Review the indemnification provisions in any service agreement ensuring the standard of care will not preclude insurance coverage and the provision is equitable.

To recap, it's not necessary to form a land trust, separate management LLC's or form entities in specific states believing you will hide in the cloaks of secrecy. Most of what I shared are proactive measures you can take to greatly reduce your liability exposure and shield you from a host of claims that commonly arise in real estate. If you believe I am oversimplifying this, I am not. In fact, what I just shared is the playbook for a $1B real estate portfolio I previously counseled as an attorney and mirrors how most other similar portfolios operate. Meanwhile your peers who own $100K houses in Detroit (no knock on Detroit, just used for illustration purposes) feel the need to create a convoluted web of entities and ignore most of what I shared. Don't be like them. As I shared initially, if you have not purchased your first property, focus on building your industry relationships and deal sourcing. Once you've purchased your first property be proactive, mindful of your vendor relationships and intentional with how you operate your business. This will keep you personally protected and allow you to run your real estate business far more effectively.

I'll challenge you on this. I would think, and this has been confirmed to me by several estate and elder law attorneys; as well as tax attorneys, that a tree structure where you have a parent LLC and then wholly owned sub-LLCs under it's umbrella is the correct way to do this. In addition, transferring funds from one LLC to another should be done in a certain way, such as loans from parent to sub, or sub to sub to prevent piercing the corporate veil. This can be evident in the current cases against former President Trump and his web of companies within the Trump Organization. It seems they did pierce the corporate veil and are/did going after him and his family personally. This is currently on appeal, so we will see which theory, tree structure, or just good insurance is better or not. Nothing is 100%, but having separate LLCs lending to each other can be a recipe for disaster. Then a person can say since LLC lent or transferred money to LLC 2, then both are, in effect, liable for a particular action from the primary LLC since the secondary LLC benefited from it.

I will agree that good insurance, agreements, and everything else you said are correct.

Jason Sousa

Real Estate Agent · Austin, TX · Member since 2022 · 95 posts · 39 votes

2y

Quote from @Stuart Udis:

Attention new investors: As I’ve immersed myself in the BiggerPockets forums, I’ve observed an extreme emphasis placed on asset protection by those entering the business but their approach and where they decide to allocate their time and resources is misplaced. This is causing unnecessary distractions and taking away from your ability to focus on the action items that matter most: building meaningful industry relationships and sourcing investment opportunities. I decided to post my thoughts in the “Starting Out” category hoping to get your attention knowing there are service providers waiting in the wings ready to take advantage of your unfounded beliefs and further upsell you through scare tactics. Here’s what you should know:

You should purchase non owner occupied real estate in an LLC. More than anything this will exclude you personally from claim history (some of which is without merit and is the nature of the litigious society we live in). This could also open the doors to direct equity investments in the future if you scale and continue to hold these initial assets. Some may argue it's not necessary at the start, but it becomes costlier to transfer a property held in your name to an LLC at a later time and this is good forward thinking business planning.
Don't worry about forming an LLC until you execute an agreement to purchase real estate. You can incorporate language into the sales agreement that allows you to form an LLC and take title in that LLC as a closing condition. Just remember to notify your lender and the title company and disclose to the lender who will be the members and guarantors before the loan is underwritten.
In most cases, form the LLC in the state in which you live or the property is located. Speak to your accountant to confirm the best option for you.
Anonymity is not asset protection. Forming an LLC in a specific state believing you will be better protected is not true and will not prevent claims from arising.
Understand insurance and make sure you have the appropriate types of insurance depending on the investment opportunity you are pursuing whether it be land, a construction project, a tenant occupied property etc.. The types of coverage will change accordingly.
Make sure every vendor who performs services on your property or on your behalf maintains appropriate contractual relationships whether it be directly with you as the owner or with an intermediary such as a General Contractor or Property Manager. Similarly, make sure all of these transaction participants maintain adequate insurance and list you, the property owner and any intermediary as additional insured.
If you rely on an intermediary relationship (most commonly a General Contractor or Property Manager), understand the authority granted in any agreement you execute to act on your behalf.
Review the indemnification provisions in any service agreement ensuring the standard of care will not preclude insurance coverage and the provision is equitable.

To recap, it's not necessary to form a land trust, separate management LLC's or form entities in specific states believing you will hide in the cloaks of secrecy. Most of what I shared are proactive measures you can take to greatly reduce your liability exposure and shield you from a host of claims that commonly arise in real estate. If you believe I am oversimplifying this, I am not. In fact, what I just shared is the playbook for a $1B real estate portfolio I previously counseled as an attorney and mirrors how most other similar portfolios operate. Meanwhile your peers who own $100K houses in Detroit (no knock on Detroit, just used for illustration purposes) feel the need to create a convoluted web of entities and ignore most of what I shared. Don't be like them. As I shared initially, if you have not purchased your first property, focus on building your industry relationships and deal sourcing. Once you've purchased your first property be proactive, mindful of your vendor relationships and intentional with how you operate your business. This will keep you personally protected and allow you to run your real estate business far more effectively.

Thanks for sharing this. I have been preaching this to all my buyer clients in Austin investing for the first time. Build the foundation from the beginning right and the castle you build will weather any storm.

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Jonathan Bock:

@Scott Mac

Can you give more color on your friend's asset freeze ?

I will on one.

In the 90's.

He had been operating since the 1960s and held all of the properties in his own name.

He was aware of the llc protection but chose not to ever do anything about it.

These were apartment buildings that he owned. Five separate properties.

There was a bogus slip and fall at one of the properties by someone visiting a resident. The person had a history of this slip and fall lawsuit thing.

All of the properties bank accounts were locked as soon as the lawsuit started.

All of his personal accounts and personal assets as well as those of his wife were also locked. Leaving him with access to no cash at all until the court lifted some of the restrictions allowing to access to just some of the money.

It took 90 days to access some of the money, but his credit was messed up and he almost lost the rentals as well as almost lost his home and his cars Due to not being able to make the monthly payments as well as make the insurance payments required by the loans.

He made workouts with the banks to handle it so he didn't lose anything but his credit was damaged.

He was very shaken up by this experience, and moved everything into individual llc's, and operated that way until he passed away.

Until he got the restriction lifted a little bit the only thing he had to live on was a borrowed credit card from a relative.

I am not saying this is the Norm, and I know of only two men that this happened to- both could be considered deep pockets type people.

These were not beginning investors, both had decades in the business and had very comfortable lifestyles. Large Fancy homes Et cetera without taking steps to protected there wealth.

But this thread does not seem to be about wealth protection, it seems to be about advice to people just starting out trying to build their wealth.

Jonathan Bock

Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes

2y

@Scott Mac

Thanks for sharing the personal experience rather shocking to have assets frozen for a simple premises liability case.

In hindsight, I don't think the LLC would have been advised by an attorney and accountant in my home state of PA. Before my time, but PA didn't have a statute until the mid 90's and had unfavorable tax treatment for them as well. But the unfortunate lack of planning does help showcase the validity of proactive planning.

Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

2y

OP if you're primarily referencing new investors I would also have them focus on the LLC operating agreement and their operating procedures.

LLC operating agreement address voting against cash distributions to prevent legal claims. If partners how to value, right to purchase on exit, divorce and death, etc.

Operations- this is about mitigation versus prevention. Proper documentation on renter rejections or evictions. Maintenance procedures such as snow and ice removal, steps and hand railing, etc.