You decided to become a passive real estate investor to take advantage of attractive returns compared to other investment instruments. Now it is time to mitigate your risk and protect your assets as you start to reap the benefits of a steady cash flow and appreciation. An attorney can help you make the right choices for your real estate investment business and shield your assets. Here are some things to consider :
1 – Separate your Assets
Separating your real estate investments from your other assets will limit your personal liability for claims and business debts. This includes maintaining different bank accounts for real estate & personal funds. If you do nothing, a creditor such as a bank or a contractor may be able to go after your personal assets, including your house and your car in some states. By separating your assets you will be able to mitigate your risk.
2– Consider an LLC
An LLC (Limited Liability Company) is designed to isolate your risk. Individual investors are considered sole proprietors and as such you are operating a sole proprietorship. Without the protection of a business entity such as an LLC, all of your assets may be at risk in a lawsuit. Setting up an LLC to hold your investments is a common solution to limit your personal liability. There are costs associated with setting up an LLC and maintaining it, and the LLC will be in the public record. Other options include partnerships and corporations.
3- Obtain Proper Liability Insurance
Experienced real estate investors will tell you that having extensive liability insurance coverage coupled with an umbrella policy is vital to any real estate business. Review your coverage limits carefully with a qualified insurance broker. You may be at risk of a lawsuit if a renter or contractor is injured in one of your properties, or in case of a fire. Although you may not be at fault, a subsequent lawsuit can bankrupt an investor who is not adequately covered by insurance.
4 – Review Joint Accounts
You may have jointly held accounts with family members, friends, and business partners. Money in a joint account with a child, a senior citizen parent, or anyone else could be at risk in a lawsuit. In the event of a tax lien, divorce, or legal judgment against the joint owner, funds in the account can be vulnerable.
5 – Think Twice about Partnerships
You may want to conduct business by forming a partnership, but think long and hard before forming a partnership that can put your assets at risk. Partnerships do not provide the protection of an LLC, and if your partner is liable due to an accident or malpractice, your assets may be vulnerable. The tax and Liability consequences of a Partnership are different than an LLC.
Tips for Limiting Liability
Every real estate investment situation is different, so it makes sense to consult with a real estate attorney to devise the right plan for you to limit your liability. Obtaining adequate liability insurance, forming an LLC, further separating your assets, and establishing a line of credit on your properties are common strategies that real estate investors use.
Real estate is a popular investment choice because it can offer a stable asset that produces an immediate cash flow. You can leverage the capital investment to build wealth faster…
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