After all the work you do building your portfolio, do you have it protected?
We all like to think that others have our best interest in mind. Unfortunately, there are some gold-diggers out there, looking for ways to mine easy money from deep pockets.
What does this mean to you as an investor?
You could spend a lifetime collecting and managing assets, only to lose them all in one stupid mistake.
We DO NOT want that to happen to you.
Creating an integrated plan to protect your assets takes time, but it’s worth it.
When do you do this? The best time to protect your assets was before you acquired them – the second best time is NOW.
As Stephen Covey teaches in “7 Habits of Highly Effective People” – always begin with the end in mind.
Pulling from our experience, we have put together this show to give you the basics of asset protection, all in non-lawyer terms, to guide you through the basics of entities and insurance.
Tune in to our latest edition of The Real Estate Guys™ radio show with personalities:
- Your protection-pro host, Robert Helms
- His check-it-don’t-wreck-it co-host, Russell Gray
Broadcasting since 1997 with over 300 episodes on iTunes!
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The three sides of risk mitigation
Although we could have easily invited one of our lawyer friends on our latest show, we chose not to. Why?
We are NOT attorneys and this is NOT legal advice. This episode was not about legal asset protection. It was more about MENTALLY how you prepare yourself to acquire assets.
Our goal is to give you the basic understanding so when you meet with professionals, you can ask them questions about things you learned and decide as a business person how to meld it together.
You’re going to need technical advisors who understand how these components work. When you put all their services together, you have a finished product of legal compliance, risk mitigation, and peace of mind.
Here are three sides in the “risk mitigation triangle” to consider and the type of professional folks who can help you with them.
- Tax – Your CPA will help you take advantage of legal ways to minimize tax exposure.
- Asset protection – Your attorney will look at asset protection through the perspective of entities (we get more into that below), while your insurance broker sees it from the perspective of insurance to cover risks. Your property manager will ensure you get your property rented correctly.
- Privacy – This is where a lawyer can help as well as investing in your own education. When you know how to hold title, what kind of insurance to buy, where to have the mailing address, and how you’re supposed to sign documents, your privacy will be much better protected.
The foundation of risk mitigation
With all of that, where do you get started?
The top way to protect your assets is good business practices. Make sure you understand and fulfill your responsibilities, treat your investors well, and maintain capital reserves.
From the get-go, you must do your due diligence. This involves thorough property inspections.
Your responsibility to yourself and your investors is to vet as much as you can.
Even after all that, most of the things that go wrong, you can’t prevent. There’s no way you can see it coming.
What can you do to be as prepared as possible?
Talk to those who have stepped through that mine field before you. Benefit from the experience of those who won AND lost through that mine field.
The reward for successfully traversing it high, but you can’t dance through without paying attention. That’s naïve.
A bit about legal entities
First, what’s an entity?
A legal entity is a construct under the law that can act like a human being. It takes documentation to set it up, such as a: trust, LLC, Corporation, or foundation.
You don’t ever want to sign anything as YOU, an individual person, unless you have the title in your name.
The idea is that you want to set up these legal structures to separate YOU from these entities. Then you have them perform different functions.
The analogy is building a house. Each room has a different purpose. The kitchen is used differently than the bathroom, the garage is different than the living room – yet all pieces make up a whole.
For example, as a developer, you could set up one entity with the role of holding assets, like a treasure box. You don’t give anyone the key or let them know where it is. It OWNS things.
You could create another entity to be the operating company. It is the face of operation that interfaces with the tenants. Why set it up this way?
There’s a corporate veil between those two entities, a critical component in your risk mitigation.
Insurance, your first line of defense
After your foundation of good business practices is solid, you’ll want to implement insurance. Here are the common types of insurance you should know about in real estate:
Commercial liability insurance. This is your basic, must-have business protection.
Errors and admissions insurance (E & O). This can also be called professional liability insurance, and it helps you protect yourself from bearing the full cost of defending against a negligence claim made by a client. For example, if you’ve hired a management company to take care of your property, this can protect you if they make a legal mistake.
Directors and Officers insurance. If you are acting on behalf of an entity, like as a president or vice president, you want to protect your personal assets with this insurance.
These are just three of the types available, and you want to make sure you get an insurance provider with a reputation of paying claims. There are also some umbrella policies that could make sense if you’re running a small real estate business.
Last word about asset protection
We go into much more detail in our podcast, and realize this topic will arise many more questions than we’ve likely answered.
Everything is hard until you know how, and you’re taking the first steps simply by reading these words.
As you increase your holdings and build your portfolio, do your best to NOT be low-hanging fruit for sue-happy folks out there.
We agree with Robert Kiyosaki’s advice to own nothing, but control everything.
Another way to protect your assets? We are huge fans of diversifying your portfolio.
So go out there, make some equity happen, and keep yourself protected!
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