Have you heard the news? I’m sure you know that we live in unprecedented times of frivolous lawsuits. Unfortunately, real estate investors can become easy targets for lawyers. With today’s technology and easy website searches a lawyer can quickly look up what real estate you own and determine if you have enough assets to pursue in a lawsuit.
Asset protection and privacy are created in layers. I like to think of it as peeling back an onion–each layer is additional protection for your investments.
1. Get off the Grid
This is the first layer of your privacy and protection plan. It’s an easy step to take and it starts with not using your personal address (or phone number) on anything. Period.
- Don’t use it on your lease.
- Don’t use it on your website.
- Don’t use it on your contracts and closing documents, etc.
Instead of your personal address, take the easy step and pick up a PO Box at the post office or your local UPS store. For phone service, grab a Google Voice number and use that for all of your phone call and texting needs.
Take the approach that no one needs to know where you personally live and that will help you get off the grid.
2. Just Say “NO”
If you’re rehabbing a house and some random person walks in from the street and asks if you own the house, be sure to reply “NO.” If your tenants ask if you own the house they’re renting, just say “NO.”
I am not advocating not being truthful. If you’re careful how you deed the property, you will not personally own it, and you’ll be telling the truth.
When tenants make special and unusual requests, simply tell them you’re a property manager, but you’ll be happy to discuss their request with your “boss.” Who is your boss? If you’re like me, it’s your wife. But it could be your partner.
Being discreet with your ownership protects your privacy and your assets and allows you to manage your assets like a professional. Building a business professional relationship with your contractors, tenants, and everyone else will help you to protect your privacy and assets while running your investment business.
3. Get Insured
Be sure to get the standard homeowners insurance policy and a title insurance policy. But that’s not enough.
Double-check your liability coverage to be sure you understand your coverage in case you have a vacant house, or if a contractor falls off your roof, or your heat pump gets stolen. But beyond these standard policies, you need to get your liability insurance extended with umbrella coverage.
An umbrella policy is for liability insurance that sits above your standard homeowners insurance policy. If you have a claim that exceeds your standard homeowners policy, the umbrella coverage kicks in as an extra layer of protection.
You can see why I like the visual of peeling back the layers of an onion when building privacy and protecting assets. Get the proper insurance to cover your assets.
4. Stop Using Banks
If your goal is privacy, consider the banking journey and check how much personal information the bank collects in exchange for a bank mortgage.
Consider how much information is provided on the application, all the property information you supply with rent rolls and addresses in full disclosure. Underwriters may ask for copies of leases and bank statements to substantiate credit worthiness.
Using banks for financing provides zero privacy for real estate investors. Even potentially worst is the issue of personal guarantees and rent assignments that kick in if something goes wrong.
Signing a personal guarantee is the equivalent of signing a blank check with no date on it that will be cashed in if something goes wrong. It puts all your other assets at risk if something goes wrong with your investment.
If your goal is privacy and asset protection, you need to learn to buy houses without using bank financing.
5. Use Entities & Land Trusts
One way to keep your personal information private and your assets protected is to begin using LLCs and Land Trusts. Both will get your personal name out of the tax records. Both have specific advantages.
An LLC can be taxed as S-Corp or a C-Corp. Consult your CPA for the best structure that works for you particular needs. One primary benefit of using an LLC is that the members of the LLC have only limited liability associated with the acts and the debts of the LLC.
The next step up is the Land Trust. The land trust is a good vehicle for providing privacy and asset protection in your real estate investing business. A land trust is a legal agreement where a trustee is appointed to the ownership of property for the benefit of the beneficiary of the trust.
The land trust is not recorded at the local courthouses. Instead it can be retained by beneficiary making it very hard to obtain the property ownership information. All that’s visible to the public search is the trustee information. Protection can be maximized by using a different land trust name for each property purchased, and there are a number of additional strategies associated with using trustees.
Additional land trust benefits include protection from code violations, liens, HOAs, and title claims.
The bottom line with the land trust is that it becomes challenging for anyone to track down the property that you own. When a lawyer does the initial asset search, you’ll appear not to own anything, and you won’t be worth pursuing in a lawsuit.
Privacy and asset protection come in layers. The more assets you accumulate, the more layers of protection you need to protect both your privacy and your assets.
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What are your thoughts on keeping your deals and assets private and protected? Leave us your comments below.