Does High Equity Increase Your Liability Risk?

Question

A lawyer (family member) who works in personal injury once told me that one of the first things a lawyer will do when you come to them with a personal injury case is to look into the kind of insurance/assets the potential defendent holds. Basically, how lucrative would this case be, if they were to win? And if said defendent doesn't have any "good" assets, most lawyers won't go after them because even if they win, they likely will not get paid and neither will their client.

I am curious if and how this translates to real estate. Is there any benefit to keeping your properties reasonably levaraged (50-60% in my opinion) even if you can afford not to, to reduce your assets' risk against libility claims? To put it another way, does someone with 100% equity look more attractive to a potential lawsuit because if the plaintiff wins, and a sale is forced, they would essentially have "first dibs" on the proceeds, as opposed to forcing the sale of a highly leveraged property and being left with the banks' sloppy seconds?

Does anyone consider this when strategizing how to protect themselves and their assets? Or is this not really ever a factor in a potential lawsuit?

Larry Turowski · Answer

@Megan Clancy The answer is reasonable firewalls between sets of assets, and plenty of insurance.  This issue is not unique to real estate investors.  It is an issue for business owners, and just wealthy people.

An investor can split their assets between personal and one or more entities (LLC's, trusts, corporations).  And then have each entity have adequate insurance.  Unless there is gross negligence on the part of the "officers" of the entity, "piercing the corporate veil" is highly unlikely.