View the Webinar
Real Estate Asset Protection Strategies
What Are the Most Effective Ways to Protect Your Investment Properties?
- Get Insurance. Hazard and Liability Insurance are a must. It is now also possible to insure against Tenant Default, Eviction and Malicious Tenant Damage.
- Encumber your Properties. This is another line of defense. If you own a property free and clear, it becomes an appealing target for someone looking to file a lawsuit. On the other hand, if a bank has a first position lien on the property for 80% of its value (because of the mortgage they gave you), it is a much less appealing target.
- Hold Your Properties in a Separate Legal Entity. In addition to the two strategies above, using an entity to establish a "corporate veil" between you and the entity that holds your property is also very important for two reasons:
- To make it difficult for someone suing you personally to get access to your property.
- To make it difficult for someone suing your property-owner (the entity) to get access to your other (personal) assets that are outside of the entity.
Why an LLC is (usually) the Premiere Asset Protection Entity for Holding Rental Properties*
A Limited Liability Company, or LLC, is a hybrid of a partnership and a corporation. It's better than a Partnership, because your managers can be protected from personal liability. As long as you act in good faith and in the best interests of the LLC, and don’t personally guarantee debts of the business or otherwise involve yourself personally, it is usually the most effective entity to protect you from liability when buying and holding rental property.
Why an LLC is (usually) the Premiere Tax-Advantaged Entity for Buying and Holding Rental Properties*
LLCs can do many unique things, but one stands out. They can make their own tax election. That means you can take any kind of LLC – manager managed, member managed, formed in Georgia, formed in Delaware, etc., and tell the IRS and state tax people that you want to tax it as either a sole proprietorship, a partnership, an S Corporation or a C Corporation. No other structure can do this. If you are buying and holding rental property, you can stick with the optimal election for your passive income (sole proprietorship for 1-owner companies, partnership for 2+ owner companies), which would be completely different from the (S or C Corporation) election that flippers and developers would choose for their ‘active’ income.*
Why a “Manager-Managed” LLC is (usually) the Optimal Set Up*
You get to elect how you want to set up the LLC, and whether you want it to be a "member-managed" or a "manager-managed" entity. Manager-managed LLCs are usually optimal because they have a traditional 2-layer structure, where you have owners (called "members"), who are more passive, and 'managers", who are the ones actively working the business and making decisions. Managers can be members, but Members aren’t automatically managers. This structure gives you, as the owner, the most flexibility and control.
*IMPORTANT NOTE: For some people, including certain foreign nationals such as Canadians, LLCs are not the most advantageous entity for holding U.S. rental properties (and there can actually adverse tax and other consequences for using them). ALWAYS consult a qualified tax and asset protection specialist about your individual situation and applicable law.
Disclaimer: Maverick is not a legal or tax professional, and this information is not legal or tax advice. Laws change all the time, precedents and new case law are regularly established, and it is YOUR duty to always consult a qualified asset protection specialist about your individual situation and the most updated applicable law.