Unless you want to risk losing everything, it’s crucial that you take steps to protect yourself before investing in real estate. In today’s sue-happy society, you never know when someone will decide to bring you to court. If a lawsuit is filed against you, all your personal assets, like your house, car and bank accounts are at risk. If the other party wins the suit, you would personally be responsible for paying and for many people, this could mean bankruptcy. However, if you plan ahead, there are some steps you can take to protect yourself. Here are four key ways to ensure your property and assets are secure.
Set Up A LLC
The single, most important step to protect yourself from litigations is to form an LLC or Limited Liability Company, before you purchase property. This works by legally separating yourself from the investment. If someone does decide to sue and they win, they would only have access to assets in the LLC, not your private assets.
Maintain The LLC
There are several things you need to do to maintain your LLC and these vary by state, so be sure to check your local regulations. If these are not done, the LLC will lose it’s good standing and if that happens, then it can no longer protect you from litigations. Here are some examples of things you may need to do to maintain the LLC:
- Pay taxes and the annual state fee
- Maintain records and file annual reports
- Keep a registered agent- the agent receives legal notices for the LLC
Think About Creating Multiple LLCs
If you have more than one property or many properties, you may want to have multiple LLCs. This is because, in the event someone wins against you in court, they will have access to all the assets of the LLC they won against (up until the amount owed). If all of your properties are in one LLC, you could risk losing them all in one swoop. It would be much better to lose just one LLC and still have the others to keep you afloat.
Insurance is what most people think of for asset protection and it will probably be your first line of defense. Unfortunately, it doesn’t always cover everything. They may end up winning more than your coverage or because there are so many loopholes in coverage, they may not end up paying out. That’s why we mentioned above, that an LLC is so important. If you rely solely on insurance coverage, you may end up paying for it.
These are just a few of the basic ways to protect yourself and your assets when investing in real estate. It’s important to consider your strategy for asset protection before you invest in real estate. Acquiring your first property is exciting, but talk to a professional about your individual situation, because there may be more you can do or more you need to consider. You’ll be glad you planned ahead, if you ever find yourself sitting in a court bench.