Investing in rental properties is a great way to increase your wealth, generate passive income, and, if you so choose, reach financial independence. Even while I adore it, there are hazards involved.
The main danger is related to liability.
We understand litigation and the possibility of responsibility as high-earning professional. We could even have moments when we feel like we are targeted. Therefore, we must defend ourselves.
This applies to the field of real estate investing as well. For instance, you can face a sizable lawsuit if a customer or vendor trips and suffers an accident while on your property. You must assume as an owner that this may occur.
Step inside the asset protection world. Asset protection is essential if you own real estate since it ensures that you won’t lose your assets, money, or even your personal savings in the case of a lawsuit (or other tragedies).
Many real estate investors employ a wide range of techniques. We’ll be taking a look at some of the greatest and most popular methods for securing your properties and other valuables today.
Insurance
The most popular and effective approach to safeguard your possessions is via insurance. This does not affect a person’s right to sue you, but it does provide protection for you in such a scenario.
The best part about insurance is how easy and straightforward it is. After all, having insurance on our houses is a need for us as owners. An excellent place to start is by simply raising the coverage’s limitations.
You should probably also have umbrella insurance. Insurance that provides additional coverage to your main policy is known as umbrella insurance. In my view, everyone should have personal umbrella insurance, and they should all have rental portfolio insurance as well. It’s shockingly affordable and definitely worth the money.
The only possible concern with insurance is that if the lawsuit is substantial enough, it might surpass your coverage and leave you on the hook for the difference.
Before adding or changing insurance, it’s absolutely crucial to compare coverages and get the in-depth details on any exclusions that could leave you high and dry when you need it the most. Pay very close attention to the fine print of your policy and make the most educated decision possible.
Anonymity
Another excellent degree of security is anonymity. Many investors will put their money into companies that don’t disclose your identity to the public. In the event of a problem, it will be more challenging for individuals to determine who owns the land.
Let’s face it, as a high-earning professional with a sizable personal financial base, you appear much more prone to a possible lawsuit.
The use of an Anonymous Land Trust, which essentially consists of three parts: a grantor, a trustee, and a beneficiary, is another option. I’ll discuss LLCs in more detail below.
By doing this, the bank (or other organization) merely serves as a temporary trustee while the paperwork is being filed. The only trustee mentioned after that is you.
This may be highly advantageous because, if someone tries to sue you, it will be very challenging for their attorneys to connect your identity to the trust. This becomes considerably more challenging if you utilize this trust to establish an LLC (which we’ll cover in a moment).
In essence, an anonymous trust removes your identity from all relevant papers, making it very hard for anybody to tie you to your property. Uncertainty over who to sue makes a lawsuit exceedingly challenging, of course.
Debt
Debt has the most built-in asset protection of any approach on our list, and it is also the least costly. After all, a future lawsuit won’t be able to take anything away from you if you don’t have much equity.
The fundamental strategy is to continuously take equity out of your assets and invest it in new projects or real estate. This works well for two main reasons: first, the cash you withdraw from your equity is essentially a loan that you utilize to buy another home (or anything else you decide). An important benefit is that this “loan” isn’t tax deductible.
The second reason is that, of course, without much equity available, you can make sure that you never have much to “lose.” This is a great way to minimize risk, but it does require quite a bit of active strategizing.
LLC
I’ve published a much lengthier piece on this specific topic, but in short, whether or not you should place your properties under an LLC relies on a number of different things.
It goes without saying that the key benefit is that it reduces your personal liability. This is a significant benefit for the subject of this essay.
Additionally, if you use the Anonymous Land Trust approach I previously discussed, an LLC can offer an even higher level of security. In essence, your personal name won’t appear anywhere in the paperwork for the trust or property ownership if your LLC is named as the trustee.
The drawback is that creating and managing an LLC isn’t always the quickest or least expensive option. Additionally, there may be gaps that provide less security than you may anticipate.
Make sure you seek legal advice if you think this is a suitable choice for you. By doing so, you’ll ensure that you avert any mistakes that might end up costing you money and ensure that you’re set up properly.
Conclusion
Finding the best plan for your scenario is perhaps the most crucial step in asset preservation.
It’s one of those situations where you hope you never need to fully rely on the safeguards you put in place, but if anything does, you’ll be glad you did. When an event occurs, it is already too late.
You’ve put a lot of effort into getting where you are, and you’re working hard to make the greatest life possible for you and your family. Take this carefully since it’s one thing that may ruin all you’ve accomplished very quickly.
Risk reduction is essential to real estate investment success and it pertains to all aspects of the buying process, even if you already own a property. Additionally, making the proper decisions up front will spare you a tonne of difficulties later on.