If you haven’t been sued yet, you haven’t lived long enough. As a real estate investor, you are walking around with a target on your back because you’re easy to identify, easy to sue,and appear to have a deep pocket.
Everyday real estate investors can lose all of their real property as well as personal assets in just one successful lawsuit. Potential plaintiffs include disgruntled tenants, delivery persons, handymen, guests, neighbors, employees, utility workers, or even criminals, breaking and entering.
After all, people fall, balconies and porches collapse, buildings catch on fire, carbon monoxide leaks, mold grows, windows break, and people hurt each other.
These are not alarmist “Chicken Little” claims; you can be successfully sued for something you did or didn’t do; something you should have done or should have known about; and something someone else did – even a criminal act.
Understanding Liability Arising From Investment Real Estate
If you own your investment real estate in your own name (or joint names with a co-owner such as your spouse) and you are sued for damages arising from that property, your other investment properties and personal assets are subject to seizure.
Bottom line: If you own property in your own name, other assets owned in your own name are on the line and you could lose them.
How to Protect Your Assets in Two Easy Steps (and Sleep Well Tonight)
- First, purchase significant liability insurance. Any real estate investor needs business liability insurance and umbrella business liability insurance. Consult with a knowledgeable business insurance professional.
- Second, never own investment real estate in your own name; instead own real estate in an entity such as a limited liability company (LLC), corporation (INC), or limited partnership (LP). Consult with a knowledgeable asset protection attorney to design and implement an asset protection plan that matches your individual situation.
What is Asset Protection Planning?
Let’s just chat for a moment about “asset protection”. Some folks mistakenly think asset protection is only for the rich or that it must involve offshore trusts and secrecy, perhaps, even dishonesty.
Nothing could be further from the truth. Asset protection is for the everyday real estate investor, who owns a few rental houses or an apartment building, as well as for those who own a multitude of rental units.
“Asset protection” refers the arrangement of your properties in a way that reduces exposure to future lawsuit risk. It has nothing to do with tax savings, being a slumlord, or running away from your responsibilities.
Instead, asset protection planning is about being fully insured and changing how you own your real estate to make it (and your other assets) less vulnerable to the claims of people who may sue you in the future.
How a Business Entity Protects Your Other Assets
Changing the name on the title to real estate provides insulation from lawsuits. For example, if a property is owned in an LLC and a lawsuit arises from that property, only the assets in that LLC can be used to satisfy a claim. Any assets owned in a name other than the name of the LLC are protected.
Without Sufficient Asset Protection
Here’s what happens when an everyday real estate investor does NOT have adequate asset protection:
Ron and Michelle own three houses as rental property. The houses are owned in joint names. Faulty wiring causes a fire and a tenant is killed. The lawsuit results in a judgment of $2 million against Ron and Michelle.
- Their homeowner’s insurance pays the first $100,000.
- Their home, investment real estate, bank accounts, and other financial investments are seized to pay off the judgment.
- They lose almost everything.
With Sufficient Asset Protection
To contrast, here’s what happens when an everyday real estate investor DOES have adequate asset protection:
Tony and Frank own three houses as rental property. The houses are each owned in their own LLC. Faulty wiring causes a fire and a tenant is killed. A lawsuit is filed and the tenant’s family settles for $1.1 million.
- The business owners’ insurance pays the first $100,000; the business umbrella liability insurance pays the next $900,000; and the equity in the LLC real property is $100,000.
- The plaintiffs have no access to any of Tony and Frank’s other assets, which encourage the settlement. There’s no sense in taking a risk by going to trial when there are no additional assets available to satisfy a verdict.
- Tony and Frank still have all of their LLC assets including their other rental properties, their own home, and their bank accounts and other financial investments.
How a Business Entity Protects It’s Own Assets
When you own investment real estate in your own name, it can be taken from you even if a lawsuit has nothing to do with the property.
For example, you may be sued because of a slip and fall at another property, injuries stemming from a car accident, or a physical or financial injury caused by malpractice.
Here’s an example of liability arising outside of an LLC:
Andrew owns two houses as rental property. The houses are owned in an LLC and have equity of $200,000. While driving home from work, Andrew glances at a new call coming in and plows into the car in front of him. The driver is killed and a passenger is seriously injured. Andrew is sued by the injured persons’ families.
- Jury verdicts in similar cases have been around $4 million; however, because Andrew’s real estate investment assets can’t be seized, the families settle for a $2 million insurance policy.
- Andrew’s car insurance and umbrella insurance pay the $2 million; while his personal assets can be taken, the $200,000 equity in the rental houses cannot be touched.
- Even if the case went to court and a jury returned a $4 million verdict, only these same assets would be available (the $2 million insurance and personal assets).
How to Get an Asset Protection Plan to Protect Your Assets
Fortunately, asset protection planning is available and affordable for everyday real estate investors. However, you must protect your assets BEFORE you are sued, as asset protect plans only are effective for future creditors.
If you are a real estate investor, consult with a qualified business insurance professional to ensure you have appropriate business owner and umbrella liability insurance coverage and consult with a qualified asset protection attorney to ensure your real estate assets are titled properly, so your assets can’t be seized by future creditors.
Editor’s Note: Bud Lethridge, an expert on asset protection, will be a featured speaker at the FREE Million Dollar Trade Show and Landlording Conference at the Long Beach Convention Center, Thursday, April 25th 2013. His company specializes in securing assets using unique strategies not found anywhere else. Come hear him speak and you will discover principles of asset protection that most lawyers and accountants don’t execute or even understand.
To preregister for the trade show click here.