Attention New Investors - Asset Protection Simplified

[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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.

[Henry Clark]

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.