Getting sued is every real estate investor’s worst nightmare.
Running your own real estate business can be rewarding, but it’s also inherently risky. You put your money, time, and dreams on the line to make it a success, but sometimes things don’t go as planned.
Any number of things can happen, and it’s nearly impossible to prepare for all of them. Still, if your portfolio isn’t protected from some of the most common pitfalls, everything from your real estate assets to your personal belongings could be on the line.
Getting sued can wipe out everything you’ve worked hard to create. So what can you do to protect your business from the inevitable lawsuit?
In this article, we lay out some basic asset protection tips: from getting flood insurance to setting up Series LLCs to more advanced incorporation strategies. It’s important to plan for the worst before it happens because almost every experienced real estate investor will -- at some point in their careers -- deal with some sort of legal issue.
In this podcast with BiggerPockets, Royal Legal Solutions’ own Scott Smith outlined some of the most important steps you need to take in order to avoid getting sued.
This one may seem obvious, but one of the first and most important things that Scott says in the show is this: There’s “no one blanket piece of advice that applies to everybody… Everybody’s business is different. Everybody’s situation is different.” If you don’t invest your time and money into some sort of individual asset protection -- beyond reading an article on the internet -- you’re definitely not doing all you could to avoid a lawsuit. While we might be able to give you some tips that likely apply to your business, it’s still important to get a more personal look.
Obviously, floods don’t happen all the time. There’s no guarantee that your property will have a flood, even if it’s in a flood zone. Still, that danger exists -- and you likely have some form of insurance to protect against it (if you don’t, get it). The same thing is true for fire insurance: fires might happen, but there’s no guarantee. In case that they do, you know you want to be protected. Finally, lawsuits work the same way. A lawsuit might happen—or it might not—but you still want to be protected in the off-chance that it does.
What happens if someone sues your LLC?
“You don’t really have any friends once you start getting sued,” Scott says in the podcast. When your friends and associates hear that you’re getting sued, it’s very likely that they’ll consult their attorneys for advice on what to do, and it’s very likely their attorneys will tell them to distance themselves from the situation as much as possible to avoid any additional scrutiny.
Avoid putting your properties in your own name. When it comes to asset protection, this is a big deal. In fact, Scott said it’s one of the first things he’ll ask real estate investors at conferences and business events. He puts it this way: “what rich people do is rich people don’t own things. What rich people do is they control things.” You don’t have to keep the property in your name, because that indicates ownership to any outsider who might be interested in pursuing a lawsuit just because they know that you have a lot of money.
Use a Series LLC to isolate your assets. This falls under a similar category as the point above. It’s possible to separate your real estate assets from your personal assets, creating an additional layer of security and making lawsuits very difficult. One way you can do this is by holding the properties in individual LLCs and then setting up those LLCs in one legal entity. This strategy is only specific to certain states, however, like Texas. You’ll have to do your due diligence to find out if it’s an option where you live. If it is, it offers an additional layer of protection and makes doing your taxes that much easier.
Use advanced strategies. When you’re setting up an LLC, you can actually put the name of a trust as the registered manager. Since the trust doesn’t have to be publicly filed with the state, every aspect of your business is essentially anonymous as long as you don’t attach your name to any of your properties or LLCs.
Getting sued is probably one of the scariest things that can happen to a real estate investor. In this article, we laid out some basic strategies on how to avoid it.
One of the first things you should do is consult with your lawyer. While some of the strategies in this article are nearly universal, laws do vary from state to state, so it’s important to make sure the advice that you receive is personalized and actually applicable for your specific situation.
Beyond that, make sure that you have more than an umbrella insurance policy, don’t put your real estate assets under your own name, use a Series LLC to isolate your assets, and possibly even utilize some advanced strategies.
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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