Asset Protection for Novice Real Estate Investor

[JASON CHOI]

Hello BP Members!

I am in need for some honest guidance as to protecting my assets before I start my real estate business. I've gotten some mixed opinions in protecting my personal assets: create LLC vs. purchase more insurance per house in addition to umbrella policy.

Some real estate investor told me that LLC would only increase your out-of-pocket costs since you have to pay to create it and also pay taxes annually. She suggested buying more insurance (you will need to have this anyway even if you have LLC) until I accumulate 5-7 properties in my own name.

My biggest concern is protecting my family assets and separate any potential problems from business. I would appreciate your advice!

Thank you.  

[Ricardo R.]

Jason  , this is an age old question. With three different camps giving tree different and sometimes opposing views. And to be honest with you it's pretty hard to find someone that is qualified in all three. The Lawyers will tell you to lock it up and down as full proof as possible but, it increases your filing costs and it makes it harder to finance/refinance, harder to manage. The accountants will tell you that it increases your costs and it makes it harder to move between lenders and tell you to keep the lender involved. The insurance salesmen will vouch that all you need is to increase your coverage and get umbrella insurance. The problem with all of them although they may be really good in their perspective fields is that they don't approach it from the eyes of an investor. A you are an investor; fluid, you may need to dispose of a property now or borrow against it at the lowest rates, or pull money out or any other number of scenarios.

There are honestly so many different ways go about protecting your assets and all have their upsides and down. But, the thing with LLC's and I'm not a lawyer but have been down this road enough times to know is that if you make one mistake the whole thing can be circumvented there goes money, time and effort down the drain, also from my understanding SLLC's are relatively new and still being tested by law, so no guarantee there. @Scott Smith is right in using a mixed approach but at what cost? both actual cost and time and effort and then how 'fluid' will you be? do you have to go through hundreds of steps before you can refi? are you now going to be in a different insurance bracket and have to pay a higher premium? are you now going to have to have a lawyer represent the LLC during evictions? are you now having to use more expensive and less forgiving commercial financing? these are all costs that we as investors look at that are missed. But to be honest with you I have never seen anyone get sued for their property, sure I have heard about it, read about it; but if you think about all the properties out there you would figure it would be more common. I'm sure it happens and I'm sure one would regret it then but, a house can burn down anytime and we're not protecting ourselves by only buying homes next to fire stations. I hope this helps