Liability Worries Keeping me on the Sidelines

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Liability Worries Keeping me on the Sidelines

Account Closed
Bixby, OK · Member since 2017 · 2 posts · 0 votes

Hello all, I'm looking to hopefully get some mixed perspectives on this post based upon a nagging worry I have about jumping into REI.

At this point in my life, I have a sizable 401K primarily made up of stocks and have been researching REI over the last several months as a means of diversification. I love my job and don't look to REI as a means to retire early/quit my job/achieve FI, I'm simply approaching it as an an additional investment to add to my portfolio.

That being said, what is keeping me from jumping in is the liability risk in dealing with tenants. I've read up on $2M umbrella policies and putting properties in LLC's, but at the end of the day, do I really want to deal with all this just to have a different type of investment in my portfolio? I would dread ever having to deal with litigation or having part of my 401K that I've worked so hard to grow be at risk (even though this may be low risk). I have access to funds/loans, have seen a few local deals, and found some that pencil fairly well (more so if I'm willing to self manage). But at the same time, I could just pump more money into stocks and achieve similar returns and not have to deal with any of the worry of finding tenants/juggling insurance/dealing with angry or litigious tenants, etc. I run IRR's, NOI's, COCR's and the whole bit and nothing really excites me enough to pull the trigger. I could just sit back and put more money into stocks (or real estate crowdfunding or REIT's) without having to worry about replacing a roof, adjusting insurance, finding tenants, dealing with drama, etc.

With this post, I really just hope to see some different perspectives on my concerns, both for and against moving forward into REI taking into account that my goal is simply diversification at this point. I know some of you might just say that I need to do what's right for me, but I'd be interested to hear everyone's take from their own points of view.

Thanks for your time and thoughts!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
8y

Stop thinking like a lawyer.  One day, you'll be to afraid to leave your house

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y

    Stop thinking like a lawyer.  One day, you'll be to afraid to leave your house

    7Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    @Account Closed So your post is really mixing two things: 1.) Liability and 2.) Active Investment. I think some of this boils down to if you're investing purely for diversification or if you see other advantages. And, secondarily, if your version of investing is "1 duplex" or 50 units. When you start to scale those "risks" (operational and liability) get spread across a bunch of units. It's just easier, more dollar-efficient, etc. and if you have a similar asset class within REI you might be surprised how little it costs to go from a $2MM umbrella to a $4MM umbrella. Odds are, it's cheaper than you think.

    This might be sacreligious to say on the BP forums but if your desire for REI is 90% driven by "diversification" then there are easier ways to do it. You can look into some of the syndications that are out there, publicly traded REITs, etc. There are a multitude of ways to get exposure to the real estate market without being an owner operator. Heck, you could buy stocks for homebuilders and home improvement stores and get some of the swings associated with real estate. But you won't get the tax benefits, you don't get to physically touch your asset, you're at the whim of national trends rather than local trends (could be an advantage or disadvantage), etc.

    All of that rambling aside, my recommendation would be to put your money into a publicly traded REIT. It's a 100% liquid stock that you can trade out of if you hate it later. You get "diversification" both in semi-direct exposure to real estate but it's also one giant portfolio that's usually spread across the country. And if you want to really diversify you can look at the different REITs that focus on different asset classes and invest in those as well. It's not what I do and not what the majority of people do here on BP but it might meet your goals.

    1Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    @Account Closed, I own both direct real estate, and also invest in real estate passively through syndications/crowdfunding.

    First, I think you're asking a very smart question. (And the big problem with @Joe Villeneuve's advice is that people who fail to plan ahead and think like a lawyer, sometimes find themselves easily victimized by someone else who did).

    Second, it's not really that hard to set up an umbrella policy and put properties into an LLC. Once you do, it's pretty much autopilot after that. Nor is it really that expensive, considering the protection you're getting.

    Having said that, I think it's a perfectly legitimate thing to say that you really don't have the time, inclination or desire to deal with all the hassles of tenants. Many people jump in feet first, and only realize this much later. So you're ahead of the game by thinking this out.

    I'm not a financial advisor, but in my opinion your best option is to invest passively in real estate. Public REITs are not really a great option for you because you are trying to diversify and if you run the numbers will find they actually are very correlated with the public stock market. To get the benefits of diversification, you need to invest in private real estate, through syndication/crowdfunding. In all of the structures, you are a limited liability partner, meaning that you generally are only liable for the amount of capital that you put in. 

    If you have any questions, just ask, or feel free to private message me.

    The Real Estate Crowdfunding Review
    View Page
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Ian Ippolito:

    @Account Closed, I own both direct real estate, and also invest in real estate passively through syndications/crowdfunding.

    First, I think you're asking a very smart question. (And the big problem with @Joe Villeneuve's advice is that people who fail to plan ahead and think like a lawyer, sometimes find themselves easily victimized by someone else who did).

    Second, it's not really that hard to set up an umbrella policy and put properties into an LLC. Once you do, it's pretty much autopilot after that. Nor is it really that expensive, considering the protection you're getting.

    Having said that, I think it's a perfectly legitimate thing to say that you really don't have the time, inclination or desire to deal with all the hassles of tenants. Many people jump in feet first, and only realize this much later. So you're ahead of the game by thinking this out.

    I'm not a financial advisor, but in my opinion your best option is to invest passively in real estate. Public REITs are not really a great option for you because you are trying to diversify and if you run the numbers will find they actually are very correlated with the public stock market. To get the benefits of diversification, you need to invest in private real estate, through syndication/crowdfunding. In all of the structures, you are a limited liability partner, meaning that you generally are only liable for the amount of capital that you put in. 

    If you have any questions, just ask, or feel free to private message me.

     Did I say anything about going ahead blindly?  LOL.  If you've read anything I've written, you would never have made that statement..

    .. "And the big problem with @Joe Villeneuve's advice is that people who fail to plan ahead and think like a lawyer, sometimes find themselves easily victimized by someone else who did".

    As of this post of mine, there are at least 4 others that got what I was saying....which clearly you didn't.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Based on your personal situation, as outlined in your post, the last thing on earth you will want to do is invest in income real estate ownership. It is hard work, stressful, and a high risk. Most tenants secretly resent all landlords and the general public feels we are all rich and greedy.

    Real estate investing is about as far as you can get away from PASSIVE investing.

    This would  be a ideal investment if there was some way that we could get rid of all tenants. As is they can be a major pita. Highly stressful at times to deal with starting out and PMs are not much better.

    In your position I do not see any upside. 

    0Reply
  • Larry Fried
    Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
    8y

    As others have said in this thread, something totally passive where you are not directly exposed to potential tenant liabilities may be best for you.  I have written a BP blog on 

    Three Key Routes for Passive Real Estate Investing that you might find a useful read.

    0Reply
  • Jeff Ronningen
    Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    8y
    Jarod, for me the primary motivating factor to invest in real estate is freedom and stability. My strategy is developing income streams, I buy properties intending to hold them indefinitely. You appear to be a much younger man and than me. I’m glad you love your job but that may not always be the case. Having children and having family members with serious health issues tends to give you a different perspective on working in corporate America. As you move through your career, you’ll have opportunities for more responsibility, money, and status. But it comes at a price. When the time comes, and your family needs you, will you have the freedom to be there?
    0Reply
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