Legal Issues - Any that I should be aware of as a new investor?

Question

Hello, I currently am new to the real estate scene. I was wondering if anyone has any advice on legal issues I should look out for when owning a rental property I know one question I have in mind is more so liability. My biggest fear is a tenant getting hurt on my property (i.e. Slipping on ice, down the stairs, etc). Is there anything that I should be aware or take precautions to prevent these things from happening. I know that I can't stop everything but if i could even minimize issues that would be great! Thanks in advance for all the help !!

David Dachtera · Answer

Account ClosedHere's what you need to understand about business entity structures...To get protection from your business entity structure, your entities need to be owned by each other, NOT by any human person.THAT is where the protection comes from - there's nothing "magic" about LLCs, S-Corps or C-Corps.Set up a trust with you as the beneficiary. The trust becomes an owner of your S-Corp and your LLC(s). The S-corp is another part owner (member) of your LLC(s). So, you get the multi-member LLC protection. Because the beneficiary of the trust is not publicly available, your identity has good protection. You control the entire structure, but you do not own it. The entities "own" each other. "Control everything, own nothing".Umbrella policies INVITE litigation - they do NOT discourage it. The whole purpose of a business entity structure is to discourage litigation by limiting potential ill-gotten gains should someone decide to sue instead of earning their own income honestly.The idea of having an LLC for each property is slightly misconstrued. For SFR's, no, this generally not advisable; however, you don't want to have too much / many assets in any one LLC. Successful litigation against an LLC could result in the loss of the LLC and its holdings. So, limit your losses by limiting the holdings in any one LLC.For example, if you had 12 high-value SFRs you might have them in six or more LLCs. If those 12 SFRs were low-value, you might only have three LLCs, depending.Don't let the cost thing distract you. A business entity structure incurs certain costs to protect the integrity of the "corporate veils". Likewise, insurance incurs costs to emplace and maintain the policy. Unlike an umbrella policy, however, the entity structure discourages litigation. The umbrella policy invites it.Remember: you don't make money by not spending it - that's a consumer ("broke-minded") paradigm. You make money by making money: invest for income and put your income to work earning more income and/or preventing losses. That's the entrepreneurial paradigm.David J Dachtera

David Dachtera · Answer

I would disagree with that. Reqardless of equity, if the properties are lost in litigation, any leverage against them is still going to impact your business(es) - it doesn't just vanish just because the property(-ies) was(were) awarded to the plaintiff in litigation.Remember also that transferring properties between business entities incurs costs and fees, not to mention your time to monitor equity build-up. (Why do people place so little monetary value on their own time? It's BY FAR our most valuable and dearest asset!)David J Dachtera

David Dachtera · Answer

Account Closed pointed out, you're going to be doing this in concert with an attorney who knows your local legal situation, ordinances and regulations.That said, the other aspect is that you can build business credit in your LLC(s) and/or S-Corp separate from your personal credit. Lenders like to see at least one year in business. So, get that clock started!David J Dachtera

Matthew Kreitzer · Answer

I would caution against taking any one approach you find in an online forum. Corporate/business law is different for every single state in the United States. Luckily, you live in a state that has some fantastic options for incorporation. The option that Mr. Dachtera recommended may or may not work in your particular jurisdiction, and rose to popularity in other jurisdictions. Some jurisdictions taken issue with the kind of spoke and hub model that Mr. Dachtera recommends. Consult a local attorney before doing anything.

Chris Soignier · Answer

Darryl Mekeel · Answer

Account ClosedAs compared to what? LLC's are not expensive, you can do yourself but it is not advised. I'm no expert just a beginner but my first move was to get legal on board. Hope this helps.

Robert Lum · Answer

Account Closed you should speak with a CT attorney on whether you wish to form an LLC, S-Corp, etc. Every State has their own corporation laws, thus, different tax benefits and protection. Nonetheless, you should form a corporate vehicle to hold your real estate investments in order to protect yourself not only from personal injury liability, but also to keep these investments out of reach from creditors, judgments, etc. Hope this is helpful!

David Dachtera · Answer

Account Closed,You'll want to have an business / tax attorney on your team, for sure, and an investor-savvy accountant.There's a reason some people build elaborate business entity structures to hold property and channel income to themselves. "Control everything, own nothing" is their mantra.David J Dachtera

Account Closed · Answer

David Dachtera Thanks for taking the time out to write that. I now understand what you're saying in your first post. I guess the question now is should I start this process once I have multiple homes our right now ?? Anyone please feel free to answer

Account Closed · Answer

David Dachtera Would you advise the LLC route as well? I've been looking into umbrella policies, wouldn't that gave me the same assurance of safety as an LLC?