If you're a buy-and-hold real estate investor, a house hacker or a Nomad™ and want to learn about asset protection for real estate investors then you've found the right place.
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Here is a summary of the 10 asset protection tips for real estate investors:
- Asset Protection BEFORE There’s a Problem
- Meet With Your Attorney About Your Situation
- Maximize Auto Insurance, Property Insurance and Large Umbrella Policy
- Use Licensed and Insured Contractors
- Use a Property Manager
- Don’t Arbitrarily Create LLCs in Other States
- Don’t Assume Adversaries Are Incompetent/Dumb
- Understand the Tax Implications
- Weigh Ease of Operations versus Asset Protection
- Use Business Entities When Appropriate
Get Bespoke Legal Advice
- Your situation is unique… this is NOT one size fits all
- Don’t take advice from free articles, free classes (like this one), podcast episodes, forum discussions
- Everything that I tell you may be 100% WRONG FOR YOU and YOUR SITUATION!
- I am NOT an attorney, CPA, insurance agent
- I am a real estate broker but…
- Get educated so you can have informed discussions with your advisers
- Be careful if you don’t understand your plan… don’t blindly implement
Default Buy-And-Hold Real Estate Investor
Default Buy-And-Hold Real Estate Investor – Multiple Properties
Buy-And-Hold Real Estate Investor with LLC
Buy-And-Hold Real Estate Investor with LLC – Multiple Properties
If A Tenant Sues And Wins… A Discussion
- Do they automatically get all your properties?
- If you have an LLC, do they automatically get that property?
- What really happens?
- What role does insurance play?
- Let’s look at a few examples
Asset Protection for Nomads™
We have a detailed discussion about asset protection for Nomads™.
Don't Assume Incompetence
Information technology is making it easier than ever to look up what you own. Don't assume that a trust is going to hide anything. At best it protects you from nosy neighbors.
Due on Sale/Due on Transfer Clauses
We can think of risk along two axes: one measuring the severity of the risk (how much money will it cost us if it happens) and the other measuring likelihood or frequency of occurrence (how often it happens).
The biggest danger for us is risk that happens very frequently and has severe repercussions.
The next two biggest dangers are risks that have medium severity or likelihood but the other measure is very high.
Insurance Premium As Proxy For Risk
- The business of insurance – how they make money
- Collect more premiums than they pay out
- If something is more likely to happen, charge more
- If something that happens is expensive when it does, charge more
- If something is not likely and/or not expensive, charge less
- The higher the cost of insuring something, the more “risky” it is for the insurance company (higher likelihood or severity)
- If you’re wondering how “risky” something is… consider getting insurance quotes
- Be careful of minimums (deductibles) and maximums
- Test the extremes (with quotes)
Cost/Value for Protection Examples
Next we look at the cost compared to the value of protection we receive for a variety of insurance products. These are examples… your cost and value will definitely be different for your unique situation.
Auto Insurance – Approximately $1,200 per year includes the following:
- Bodily Injury:
- $1MM each person
- $1MM each accident
- Property Damage: $100K each accident
- Medical Payments: $50K each person
- Uninsured Motorists
- Bodily Injury:
- $1MM each person
- $1MM each accident
Rental Property – Approximately $1,200 per year includes the following:
Umbrella Insurance – Approximately $1,200 per year includes the following:
- $4 million
- Picks up where auto and property policies leave off for liability
- Devil is in the details (so read your actual policy and talk to your insurance broker), but typically covers…
- Lawsuit settlement from accidents in your covered home and properties
- Medical expenses or damages if a visitor is injured
- Damages you make to someone else’s property (car or home)
- Some judgments from defamation
- Does not typically cover: Business losses, contract disputes, personal belongings, criminal or intentional acts
- Remember, your umbrella is not the amount of your equity… it is the amount you want to insurance company to cover if you’re sued
- You’ll end up paying everything over this amount
Here's an example of a Contractor/Handyman's insurance costs:
- $9,500 per year general liability plus
- Almost $20,000 per year in workman’s comp/additional insurance
- In these examples… the insurance companies consider doing contractor/handyman work to be about “8 times risker” than just owning a rental property ($1,200 versus $9,500)
- Why are you doing any work on your properties?!
Here's an example of a Real Estate Broker:
- $206 per year for the individual (includes extra coverage)
- $202 per year for the company (includes extra coverage)
And here's an example of a Title Insurance policy: varies but maybe $2,000 – one-time fee (not yearly).
You Don’t Know What You Don’t Know
- Will something happen to you?
- What, exactly, will happen to you?
- If you knew when something would happen and what would happen, we could better defend against it.
Discuss Asset Protection Cost/Value
- Let’s say you have $100,000 in equity
- Assume you have maximized your property insurance, your auto insurance and have a solid umbrella policy
- Should you still create trusts, LLCs, etc?
- Discuss with your attorney, but here’s how I look at it
- What do trusts do?
- What do the LLCs do?
- What does insurance do?
- Extra expenses
- LLC tax return: +/- $500 per year
- Additional time with minutes and meetings
- Even if it is just $500 per year, what do you get from that?
- If someone sues you personally, does the LLC really help? How much?
- If someone sues your LLC, does the LLC really help? How much?
- Does this change with more equity?
- Does this change if you have partners?
- This is a personal risk/reward decision for each investor (and their advisers) and their unique situation
Stop Doing Stupid Stuff
- Don’t meet your employees at your home/properties
- Obvious ones like employees or contractors, but also “household workers, gardeners and even babysitters” (exclusion right from my insurance policy)
- If your handyman is not “in the business” with their own insurance, then they are your employee
- Mail stuff… try to avoid “dropping things off” or have people come pick stuff up
- Don’t rent out basement bedrooms without egress windows
- If something in your house becomes a known health/safety issue… have it fixed by a licensed, insured professional
- Don’t go outside and don’t stay cooped up in confined indoor spaces
Reflecting Back on Implementing An Asset Protection Plan For Real Estate Investors
And, we end the class with a reflection on what it has been like after implementing the asset protection plan Brian taught in the previous two classes: Asset Protection 1 of 2 and Asset Protection 2 of 2.
Additional Asset Protection Resources
Check out the other Asset Protection Classes for additional information.