One of the great ways to grow your portfolio is through real estate. With smart choices and the right investments, you can grow value and bring in passive income through renting and leasing. If you own a business on that property, it will also increase the company’s value should you ever wish to sell.
However, to maintain that value, you need to protect your real estate assets in several ways. Plus, you need to protect them in situations where you might risk losing them. There are several strategies to do this, and which one you use will depend on your specific situation. Here are seven ways to protect your real estate assets.
Creating a limited liability company (LLC) is one of landlords’ primary ways to protect their assets. An LLC is an independent company that collects rent and handles bill and mortgage payments. Creating an LLC is an essential process for landowners who have several properties. For example, if one of the properties is sued for a significant amount, the others could be at risk if they are all under the same company or under the landlord’s name. However, if they are all under separate LLCs, the other properties are protected in the lawsuit. Forming an LLC will also protect the landowner’s personal assets.
Your real estate assets are vulnerable to any number of physical risks. These risks include fires, flooding, hurricanes, vandalism, and theft, among others. While you should take steps to prevent these things from happening and mitigate their impact, insurance will ensure that the financial consequences aren’t as dire as they might otherwise be. Therefore, if you have real estate assets, you need insurance that protects your property.
You will require several types of coverage for your real estate properties. For one, you want to have liability insurance if someone sues you for personal injuries or other accidents on your property. You should also have commercial property insurance. Commercial property insurance will protect against damage to your property, including furniture and equipment on the premises. You can also get loss of rental income coverage. This will compensate you if a tenant has to be removed from your property due to damage or repairs. Your tenant should not be responsible for the rent in that case, but you can still get some funding to help cover the loss.
Holding your property in an anonymous trust might be your best option for keeping it away from creditors. The trust makes it hard for anyone to take legal action against you. Even if an opposing attorney suspects that you have property, they will have to discover it first, then invest in the property to see who the trust is for. By this point, it might be too costly for someone to want to make a claim that includes the property, or even at all. There are also many types of trust that cannot be pursued by anyone making a claim. Trusts can simplify naming beneficiaries if you want to ensure that your home is passed on to a loved one and not a creditor. Putting land into a trust is more straightforward than creating an LLC as well, so it might be a better option for you.
Avoid Risk in the First Place
Throughout your time owning property, you should be taking measures to avoid risk. For instance, you should be very diligent when taking on new tenants. Get references, be a stickler for getting all the information you need, and do not compromise if your conditions are not met. One bad tenant can cause years of headaches, both financial and stress-related.
If you have contractors and other workers coming onto your property, ask them to provide a certificate of insurance. The certificate will ease your mind that they are covered if they cause damage or injury, so your insurance is not affected. Plus, if they are insured, then it is less likely that they will drag you into a lawsuit. If a contractor or other partner does not have their own insurance, then do not work with them.
A homestead exemption only applies to primary residences and not to commercial real estate or real estate that brings in revenue. If you have to declare bankruptcy, you can use the homestead exemption to keep your home and the equity you have built in it. Every state has different limits for homestead exemptions, so you will have to look into yours. Some, like Florida, have unlimited exemptions, while others have lower tiers that you can claim.
Divesting of Assets
Of course, creditors and attorneys can’t make claims on your assets if you no longer own them. In fact, you can put them in the names of people you know and trust instead of selling them to strangers. You can use strategic gift-giving exemptions to give your assets to another person. Instead of giving your assets to creditors, you can give them to loved ones, such as children and grandchildren. They will get the benefit without seeing the profit sold at auction.
Many states offer a titling exemption option that can help protect your real estate assets from creditors. For instance, you can put everything in your name and your spouse’s. Then, if creditors come after your property, they cannot get at those that are in both names. Your property can be considered indivisible from each named party, so creditors cannot claim against it. Titling is another strategy that you can only use for residential properties, and some states do not have this exemption.
There’s no reason that you have to lose all of your real estate assets if you have creditors after you or if there has been a lawsuit filed against you. Take these steps so that you can protect your real estate assets. There is no way of knowing when a disaster will strike or you will find yourself in a tight financial spot. Make sure that you can continue building value and pulling in revenue no matter what happens.