Asset protection...does it even matter?

61 Replies

My question is mostly out of curiosity. Does anyone on here have any example of you or anyone else being sued and losing the entire asset, business or worse?

I hear so much about asset protection and it just gets me thinking, I've never heard of anyone being sued and losing everything or losing the asset. I own a couple rentals in a LLC with million dollar+ liability coverage, the likelihood that I would be sued and loose excess of that seems highly unlikely. Seems to me that if something major does come up the insurance will pick it up, and if not you will likely be held liable personally anyway for some reason or another.

I sued a concrete subcontractor once on behalf of a GC and obtained a judgment for $250K.  He operated as a sole proprietor and I took his only investment property at an auction on the courthouse steps.  My client was very happy to have that property because it was located in a prime part of San Antonio.

So I'm curious about your comment, "and if not you will likely be held liable personally anyway for some reason or another."  How is that a consolation?

I think asset protection is over-hyped. I know people with 50+ rentals all owned in their personal name. They've never been sued, they've never lost an asset, and they certainly didn't lose everything. I manage rentals for over 150 different owners and not one of them has ever been sued. I can't even think of a single person on BP that's lost an asset.

Can it happen? Sure. Your kid could also be kidnapped walking home from school. In fact, it's probably more likely. Even more likely is that you'll die in a car accident within one mile of your home but I bet that doesn't stop you from driving every day. 

The best thing you can do to protect your assets is to operate within the law. Treat people honestly and fairly. They can still try to sue you but justice will almost always prevail if you are truly honest.

I personally intend to set up an LLC and place my properties there just to separate them from my personal assets, but I'm not rushing to do it and I don't lose sleep over it.

It's like an auto insurance. You will never appreciate until you total your car. I have totaled two cars within two months and didn't have to spend a dime both the time. So yes Insurance was worth it for me.  

Same way, asset protection via entity or insurance will come very handy when something unfortunate happens. It does happen. I absolutely agree with @Jim Jopling

It's a bit different than car insurance in my opinion. Although we do live in a litigious society you actually have to do something wrong to be sued and lose. I have been involved in one lawsuit in real estate and it was against a slum lord who hid things behind walls etc. It was a long expensive process that I eventually won but that taught me how truly hard it is to sue someone when you have the law 100% percent behind you. Everything I own with partners is owned in an llc but i'm starting to realize like @Nathan G. said the good owners never get sued, have never lost an asset. This includes thousands of units my mentor's, property managers and friends own. The fact that we haven't heard these horror stories from great landlords on BP truly gives me pause and leads to to believe it is over-hyped. As a caveat of course if your a slum lord maybe you should have an llc because the possibility of getting sued is much much higher lol. 

Great responses. @Jim Jopling sounds like he was sued as a bad contractor, not as a real estate investor. Not a consolation, but think about why decent landlord would be sued for large sums of money. It would likely be over major negligence. In the litigious Society we have the individual will likely be at fault more the the LLC.

I agree it’s good to have some asset protection, but the guys getting different LLCs for each 30-100k property seems way excessive. Not to mention if you the individual is sued for massive amounts (say terrible car wreck your at fault) your rentals are fair game, LLC, INC or not.

Originally posted by @Jim Jopling :

I sued a concrete subcontractor once on behalf of a GC and obtained a judgment for $250K.  He operated as a sole proprietor and I took his only investment property at an auction on the courthouse steps.  My client was very happy to have that property because it was located in a prime part of San Antonio.

So I'm curious about your comment, "and if not you will likely be held liable personally anyway for some reason or another."  How is that a consolation?

I think what he means is, if you will be held liable personally anyway, then having assets in an LLC won't protect you in the end.

This thread is somewhat of a classic "law and economics" debate.  I'm getting close to escaping from the education phase of being a new RE investor and actually pulling the trigger on my first deal.  I'm glad to hear that the good guys just don't get sued that often.

However, there is one incorrect statement in here:  "...you actually have to do something wrong to be sued and lose."  Unfortunately, that is not true at all.  I would like to believe that this kind of thing does not happen that often, but it does.

Good question to those investors that do have properties in a LLC...... have you ever been sued and did your insurance coverage or your LLC protect your assets.

My guess is there will be no first person responces.

Ugh, this again? Yes all of my properties are in LLCs, no I have never been sued. No my house has never burned down and yes I am covered for that possibility in case it does. Honestly people, just choose your level of risk tolerance and weigh it against the cost and effort to set up and maintain whatever level of protection you think YOU need. Personally, if a lawsuit happens, frivolous or not, I do not want all of my assets on the table. That's me and I'm willing to pay for it. You do what you have to do because you are not me and are not in my situation.

PS @Thomas S. , you did shut down my first response with that "no first person responses" qualifier.

@Andrew Millard Whenever this topic gets brought up, the same rational for not having an LLC is put forth: 'I've never heard of anyone in my life/on BP who has has gotten sued'

That train of thought is a cognitive bias (Anecdotal Fallacy and/or Neglect of Probability). Also looking on BP for examples of landlords getting sued seems inefficient. I know for sure that you can find examples at your local housing court.

 The decision comes down to the probability and severity of the event compared to your assets and the cost of protection. 

For a simple example lets take Jack and Jill who both live in CA and have a 1% chance of getting sued and loosing every year. If they lose this lawsuit they have to pay $100k in punitive/compensatory damages and legal fees. Thus each should pay up to $1k to protect themselves from this event (.01*$100,000). 

Jill works in Tech and has a net worth of $3m including her stocks, REI, vested options. It makes sense for her to pay the $1k to protect her assets. Now Jack has a net worth of $45k because he is house hacking a triplex that he bought with an FHA loan. The max he can lose is $45k since you can't bleed a stone so does it make sense for him to shell out $1k a year? Most likely not.

In short: it depends on what you have to protect and what do you have to protect it from? Is REI another asset class you've picked to diversify your investments? Is this your Retirement plan or your line of work? What's your earning potential? This isn't a yes or no questions. Do LLCs reduce the risk to 0%, of course not and they don't provide protection from gross negligence, but they can de-incentive people from starting litigation against you.

The most important thing any investor can do is reduce risk in the first place. No trampolines, put ice melt on sidewalks in the winter, fix broken railings on steps, follow fair housing, etc. 

Secondly don't flaunt your wealth or success. People love to sue that rich @sshole landlord, so don't be one. Treat people right and don't roll up in a $100K sports car to meet tenants.

The reality is that insurance, not your LLC, will always be your first line of defence. Insurance does the job but with a LLC you still need insurance. One you need, one you don't.

Having both is like wearing two pairs of rubber boots at once.

@Thomas S. , that is simply not the case. Insurance and business entities are not interchangeable. They do different things. You are correct that insurance will always be you first line of defense, but it shouldn't be your only line of defense. You see how well the Maginot Line worked for the French. The bottom line is that if you rely solely on insurance then all of your assets are on the table when you get sued. That puts you in a bad position if you have significant assets to protect. 

I think some may have missed my original point. Is it stupid to have a LLC? No. Good standard practice? Yes.

My point is there’s some much obsession over it I just wonder how often it really happens that someone’s sued to the point that the LLC mattered. Just like the infamous 2 am clogged toilet calls that rarely happen.

In cases of gross negligence, does insurance or a LLC even offer protection?

OP is not asking to LLC or not. But in what cases people have heard of actual landlords getting sued and losing their properties

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)

I just watched a youtube video where a landlord lost a lawsuit to a tenant for 400,000. Here is the link.

https://www.youtube.com/watch?v=BsBY6HUj0qc

@Andrew Millard interesting thread. I would be a bit different in my reasoning for using asset protection.

If I can do it with some one time fees (and I think I can) and it doesn’t cost a lot to maintain each year I would eventually like to move my rentals into some sort of entity to get my name out of the public record.

I value my privacy and would like to eventually be anonymous with regards to what and how much real estate I own

Don't forget folks, even if you have 1K to your name, a 2 mil judgement against you will follow you for life. One person locally had a 2 mil judgement against her; pitbull attacked someone.

I agree that insurance will be your first line of defense. Whether someone chooses to have a LLC or not it seems like a no brainer to get an umbrella policy to protect your personal assets at a minimal cost.

What is the typical annual cost for each LLC? I’m just trying to do a cost-benefit analysis with some numbers. I own a few rental properties but do not currently have them in an LLC. However, if it’s a nominal annual cost to maintain an LLC for each property it would seem like a worthy expense. Can someone please give details to the average annual cost per LLC? Thanks.

Ok here is my take on liability protection. First you must have insurance. Next run your business correctly . Third LLCs do work. The law supports forming LLCs and corporations to prevent personal liability if operated correctly. Companies do not protect you from all liability, but they do from most. My Sub S corp costs my $50 a year to the state to keep my filings up. Companies do require a lot more book work. Separate bank accounts, separate book keeping, separate mileage tracking, etc. I do not find it an efficient use of time to have an LLC for each property or even every 2 or 3 properties. I think I currently have 3 corporation and LLcs set up with over 30 units at stake.

Hope this helps.

I think there's probably a lot of landlords who've been sued but you're just not hearing about it.   Are you going to broadcast that you've been sued?   

LLC's are way cheaper than insurance in most states. So why not ?

Doing something wrong has zero to do with getting sued. Too many crazies out there looking for a payday.   In fact, you're going to be named just for being remotely associated.    And sadly, it's not about the crazy lawsuit anyway - it's about  the hopeful settlement that usually happens.   

There are 2 types or origins of lawsuits that should be kept in mind.  The two always get blended together as one in conversations about liability protection,  but are totally different.    Took me a long time to finally wrap my head around it.    

1) Tenants sues LLC. LLC protects you personally, but the LLC's asset (the building) are up for grabs. A personal umbrella policy won't protect your building from being taken.

2) You get sued personally for something (car accident, crazy neighbor, etc). Your personal assets are up for grabs........your personally owned car, house etc. Yes you're llc protects your building. BUT your membership in an LLC is an asset. They can't get the building, but they can get your portion of the membership in an LLC singed over to them. Specifically the income from that portion. In theory, a personal umbrella should protect your LLC membership. Unless it goes over the $1 - 2mil typical limits.

So to me,  if you're a landlord, you're exposed way more than the average person.  So why even hesitate to get way more protected than the average person?   

Join the Largest Real Estate Investing Community

Basic membership is free, forever.