If you are a real estate investor, it is important to be proactive about protecting your assets. Although investing in real estate can be lucrative, a lawsuit or financial issue can put your investments and your personal assets at risk. Pennsylvania real estate lawyers recommend some of the following asset protection strategies that help safeguard you from judgments and creditors.
1. Choose the Right Insurance
It should go without saying that it is critical to have liability insurance policies that cover all your properties, but it can be confusing to know which type and how much insurance you need to ensure your interests are fully protected. For example, you may want to purchase landlord or rental property insurance, which may include insurance for liability, hazard, and loss of income. Which types you choose will depend on the value and function of your specific properties. Most lawyers for real estate have relationships with insurance agents who can take a look at your real estate portfolio and advise you on which types of insurance and what policy amounts will best protect your interests.
2. Create an LLC
Business liability lawyers often help real estate investors form limited liability companies (LLCs) to shield their businesses and personal assets from claims and creditors. LLCs are business entities that hold the property and pay its mortgage and expenses. If you own multiple properties, creating a separate LLC for each one provides an extra layer of protection.
For example, if you own four investment properties worth $300,000 each and you are sued, $1,200,000 may be at risk. If each property is placed in a separate LLC the potential risk would be limited to $300,000. It is critical to ensure any business entities are properly set up and work to your benefit. If you have partners or co-investors, it is also a good idea to bring in the best contract lawyers you can find so everyone’s interests are protected.
3. Consider an Anonymous Land Trust
A real estate attorney can also advise you on how to set up an anonymous land trust. A trust is a legal entity that involves a grantor, trustee, and beneficiary. Living will attorneys often use them in estate planning to help clients protect their assets and their loved ones’ interests.
When real estate is held in the name of a trust, it may be more difficult for creditors or someone who wants to bring a lawsuit to discover who the owner of the property is. An anonymous land trust also provides protection if there are multiple owners of a property. If one of the owners has a judgment against them, assets in the trust cannot be touched.
4. Use Debt Strategically
Debt is another way to help protect real estate investments. If you own a $100,000 building free and clear, the full amount that it is worth could become a target in a lawsuit. However, if you strip the equity out of it and maintain a loan-to-value (LTV) ratio of 75%, the amount of cash that is potentially at risk decreases to $25,000. This can deter creditors or litigants from pursuing a claim, as it simply is not worth the time or expense.
Do you need assistance with asset protection planning? Our experienced team of business attorneys and real estate lawyers can help.