Asset Protection for Real Estate Investors

Colin Ley is an asset protection attorney at LayRoots.

Last month, we spoke to the Seattle Investor’s Club about asset protection for real estate investors.  We received a TON of great questions and we know there was a lot of information.  So, here is a recap of our presentation to refresh the memory and a couple of additions based on the questions we received during and after our talk:

What is asset protection?

Asset protection, as we like to say, is structuring and owning your assets in such a way as to discourage stupid lawsuits and minimize possible damages or losses.  The tools for asset protection primarily involve insurance policies, trust planning, and business laws.

When building a plan to cover your ass(ets), you start at the bottom and work your way up. Think of asset protection planning as ascending a flight of stairs. As you climb the stairs, the level of protection increases and the amount invested in the plan increases. During our talk we covered what are commonly the first few stairs of a plan. They are:

1. Have proper insurance and look into an umbrella policy. Find a good insurance agent who you know, like and trust. Make sure he or she knows what business and investment activities you are up to, so that you can get a policy that covers your risks and liabilities. For example we had a client who found out her “backyard cottage” rental was excluded from her homeowners policy.  She needed a policy that covered the additional building and the rental property activity.
   
2. Reduce risk from “inside liability.” Inside liability refers to risks related to the property, such as injuries to tenants and their guests or damages to the tenants’ property. To reduce risk from inside liability we discussed moving properties or other “hot” assets into protective entities like LLCs. An LLC can protect your personal property (home, investment accounts, etc.) from the liabilities of your rental property.
   
3. Reduce risk from “outside liability.”  Outside liability is risks unrelated to the property, such as a car accident. If you are sued for a risk unrelated to the property (or sued personally), all of your personal assets will be exposed to creditors, including all property owned in your name. Even if you moved your property to an LLC, the owners of “single-member” or spouse-owned LLCs can also lose their businesses to these personal creditors.

I saw some wide eyes in the audience when I explained number three – that with single member LLCs, your LLCs and the properties within those LLCs could be lost to a car accident lawsuit. I hope that it calmed some nerves to know that certain states offer additional protection for single-member LLCs. Your assets just have to be structured properly when you own properties in different states or use out-of-state companies to own your property (unfortunately, the big corporate service companies don’t explain these things since they aren’t attorneys providing legal guidance).

Depending on what your portfolio looks like, you may be higher or lower on the staircase and that is perfectly fine.  Your asset protection strategy can grow with your business and investments.

Shreya & Colin of LayRoots

If you happen to feel like you have outgrown your current plan (or lack thereof) OR you just have some follow up questions.  You can talk to us.  Seattle Investors Club members receive a complimentary consultation (we normally charge $197 for it).  Just use the code SIC when scheduling your appointment online.