4 Asset Protection Strategies Every Real Estate Investor Should Consider

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Let’s say you worked your tail off to save up some money to invest in a piece of real estate.

Or maybe you’re more experienced, having studied real estate investments and networked with others in the industry, and now you’re starting to acquire a small portfolio of rental properties.

Either way, you’ve worked hard to get where you are.

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So, How Do You Plan to Protect All of Your Real Estate?

Over the years, I’ve taken several “asset protection” courses. From these, I’ve implemented some strategies, but others have been much harder to implement. The first thing we should do is to take a look at our own situations and assess our risks (divorces, autos, tenants, employees, creditors, etc.).

Insurance

The first step on the asset protection pyramid is probably insurance. I could write an entire article on this topic, but I think we all understand the importance and cost-effectiveness of insurance. Obviously, we need it on our primary residence, as well as our rentals.

As we build larger portfolios, it may make sense to increase our liability insurance coverage and to eventually have an umbrella policy for a few million dollars, too. Some folks insure for catastrophic things like floods and earthquakes. I even know some investors who insure against maintenance by keeping home warranties on their properties.

Related: 3 Fundamental Tips for Protecting Yourself Legally as a Real Estate Investor

Titling and Entity Selection

This is probably the next area of decision-making one has to encounter, and there’s a variety and degree of protections to combat almost any exposure. For example, some forms of title or strategies are low or no cost.

You’ll see many folks start out by titling real estate in their own names and then later in entities or trusts. Sometimes having multiple buckets of assets makes a lot of sense. In my state of Pennsylvania, for example, you can own real estate as a married couple (tenants by the entirety), and creditors can’t force the sale if there’s a judgment that’s only against one spouse.

Many people prefer using LLCs (Limited Liability Companies) to hold real estate rentals in because these pass-through entities can work fairly well at relieving one from being personally liable. They do cost a little to set up and maintain, and you are in the public record. A better option may be to own fewer properties in your name and just control them instead.

Recently, I got to see my good buddy Jack Shea teach a course on lease options and trusts in Philadelphia. Jack thinks one of the best strategies one can employ is trusts, especially land trusts. Not only does it give you anonymity, but it keeps you out of the public record, as well as probate.

Asset Protection by Debt

The concept of asset protection by debt may be one of the cheapest forms of asset protection there is. If there’s little equity, there’s not too much for anyone to take, especially if one doesn’t have a large amount of earned income.

Once I knew an investor whose strategy was to put the maximum amount of debt against his real estate for this very reason, and he would keep pulling the equity out of his properties at every chance he could. He would then use that money (tax-free since it was a loan) by reinvesting it in more real estate with little or no money down for as many mortgages as he could get. He often invested in notes with some of that excess cash as well.

He said he didn’t care if some assets were in his name, his wife’s name, and/or some entities because he had enough buckets of investments, especially when factoring in things like his other business, his personal IRA, his life insurance, etc. Since he liked the write-offs from the real state debt, he maintained liquidity through his other investments.

Now, I’m not saying he’s right. But he didn’t care when he paid off his rentals because he had a couple million dollars in life insurance that would pay off all of his properties for his family if he died. Besides, they would get a step-up in basis on the inherited real estate.

Larger Real Estate Portfolios: Trusts, Entity Structures, Etc.

As your portfolio grows to over a million dollars in equity, obviously you need more protections. Utilizing trusts, entity structures, debt, and even a combination of onshore and offshore accounts may start to make more sense.

For example, a pretty airtight way to protect real estate would be to take title in a trust with the beneficiary being an LLC that’s owned by your living trust. If there’s any excess equity in the property, you could have another LLC give you a mortgage to protect the excess equity.

Another strategy that Jack Shea recently taught was to record a defense option (for a low value) against the property to deter creditors.

Related: 5 Reasons I Do NOT Invest in Real Estate Using An LLC

As you can see, asset protection can be a complex strategy that’s not a one-size-fits-all type of thing, especially when so many other things can come into play.

Another common idea is to build in some estate planning strategies into your current asset protection plan.

One of my good friend’s family has done this by utilizing the family limited partnership, which can help reduce estate and income taxes. It gives you the ability to manage your assets, while denying creditors access to them, and it has a built-in tax penalty for any creditor who receives a charging order against it, providing a substantial deterrent.

So, let me ask my fellow BP members: How do you like to protect your real estate?

Let me know with a comment!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

15 Comments

  1. Good article and advice. Its important to note that new investors should form land trusts and LLCs from the start. If a decision is later made to make a trust it can be very expensive. Changing title to a property in most states includes paying closing costs again. If you have acquired 20 homes that’s $70,000 up front. Don’t fall for the bank trick that you can put it in your name now and change later. I have actually walked out of closings when I see my instructions were not followed.

    I also left deals when they refused to put the owner address as a P.O. Box rather than my home address. Its easy to do and when they balk its usually the case of the agency, bank , or lawyer being too lazy to go to the county offices. You don’t need a tenant looking you up on the county real estate page and then showing up at your front door. Your not the owner and cant make decisions. You are just a insignificant member of the trust.

    • Dave Van Horn

      I completely agree Larry. And in states like mine (Pennsylvania) you will also have to pay a transfer tax (even from an individual to a trust for estate purposes), so best to title the property correctly at the time of purchase.

      Best,
      Dave

  2. If you have a land trust holding your property…..how do you structure the lease? Who is the lessor? Thanks. And BTW if you use an LLC in Florida, you cannot represent yourself in an eviction. You must have an attorney. FYI

    • Dave Van Horn

      Hi Al,

      There’s a lot of variables and a lot of different types of trusts that vary from state to state (and individual to individual), so in the beginning of the process it may make sense to talk to an attorney.

      The biggest decision for me when forming a trust is appointing the right trustee and successor trustee, as well as the entity structure.

      Best,
      Dave

      • Larry S.

        Indeed, the most difficult thing is appointing the trustees. As time goes on,people change and children change. Sometimes for the better and sometimes for the worse. Its worthwhile to have a yearly review to analyze if things have changed in the trustee or trustees lives that would make it wise to make a change. Leave heart felt emotions out of the equation and deal with the facts on how the estate could best be managed..

  3. Kevin Yeats

    Dave,

    First thank you for taking the time to write this essay. I certainly agree with you that wealth accumulation, protection and distribution are complex subjects and one-size does NOT fit all.

    I will comment that there are many different “liability arrows” constantly in the air from many different sources that may hit the RE investor’s wealth at any time. Not all of them come from tenants and thus an asset protection strategy that shields from tenant lawsuits may not do well in protecting against a fire-breathing scorned spouse or a bitter current or former employee.

    These issues are best discussed with several professionals. The investor should keep an open mind and not approach these issues with a “That will NEVER happen to me” attitude. Look at what happened to Will Barnard.

  4. Russell Sharif

    Good article Dave. Even if one doesn’t see high probability of sue from their tenants, one’s young son/daughter/spuose driver can get into a wreck and then the “ambulance chasing” lawyers can go after the real estates.. specially if they are paid-off..

  5. Larry S.

    Putting real estate into a trust makes sense. One should also consider putting all personnel property into a trust. Personnel property may seem like the petty cash department until a price is put on everything and the total is added up. Lawyers will tell you to just put personnel property into a will. This is better than nothing ,however a a personnel property trust can eliminate a number of potential problems.

    • Dave Van Horn

      Hi Uri,

      To my knowledge I don’t think you can bookmark it within BP, but you can certainly email it to yourself by clicking the envelope icon at the top of the page (as well as bookmarking it within your internet browser).

      Hope this helps.

      Best,
      Dave

  6. Cliff H.

    Thanks for the post Dave! I have read about trusts and have some experience with LLCs via various SMBs, but any tips on locating a qualified lawyer to bring all this together? Given the involvement in insurance policies, etc is a lawyer the best place to start? Thanks in advance.

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