There’s a book I’m eager to write, tentatively called, ‘How to Make Money In The Dark… Amaze & Confuse Your Competition, Lawyers and Friends for Fun and Profit’.

The book explains that if everyone knows your business; you don’t have a business. You could be knocked off and under priced by tomorrow morning.

More to the point, the same can be said about protecting your assets. This is a big topic that gets little respect: Entity Selection & Asset Protection. Here’s why you should seriously study it.

WARNING: there’s alcohol and attorneys involved.

Your Odds Of Being Sued Are Greater
Than Your Odds Of Being In The Hospital!

As an ‘upwardly mobile’ entrepreneur engaged in the craft of making money in real estate there are those near you, right now, who have their eye on you. The more money and assets you accumulate, the more eyes are on you.

These ‘eyes’ can be your family, your peers and possible business partners who can encourage and magnify your accumulation of wealth. And at the opposite end of all things good are the bad things. So ultimately there are ‘eyes’ around you that could muster the ability to snatch your wealth, legally, because you were caught unawares.

When you own investment real estate some people think you must be rich. Your tenants for example aren’t aware that their rental home may have a mortgage; all they know is that you own the house and they don’t own any so you must be rich.

And, unfortunately, there is a small but growing part of the population that finds filing lawsuits against “rich” people is an easy and profitable way making a living. Coincidentally, we in the US spawn more new lawyers each year than the rest of the world combined.

Unscrupulous lawyers promulgate this seedy desire with phone book headlines like, ‘Get it all because of a slip, trip or fall’

The sobering fact is you have a big red target on your back. As you come and go to closings, to your rental property, as you deal with others; unknowingly you may be in the sights of a sniper who is loaded with just enough know-how to fire down upon you a firestorm of allegations. This is when it’s appealing to be less attractive; invisible and a tough target.

Meanwhile the deluge of claims against you could be so preposterous as to be laughable. That is until you get an order to appear in court because last night your tenant fell backwards off your porch. Luckily, for you and your tenant, the high amount of alcohol in said tenant loosens the muscles and prevents an all-out paralyzation. Nonetheless the shock and awe of the fall was so traumatic it has left your tenant in a state of mind and body unable to work.

Here’s what happens after the fall:

At the crack of noon your tenant awakes and opens the phone book to the biggest ad. The headline reads, ‘Broke Your Neck? Get a Check?’

“Perfect!” exclaims your tenant and phones the law firm. After regaling and explaining the prior night’s shenanigans, the attorney, who held back his amusement, states, “You may have a claim. I’ll check the records and see if I can do anything.” The attorney presses the hold button and with a few mouse clicks is able to easily check the public records to discover to his delight that you have several properties with equity.

The diligent attorney reaches out to his new found client as if he wore a cape and tights marked with an ‘S’ on his chest and pronounces, “Yes. I can help you. Let us schedule an appointment at once to meet, free of charge…. and bring lots of doctors’ bills.” Your tenant eagerly complies and kisses his dog in excitement as he cheers, ‘I Love Lawyers’.

And, a few weeks later, you get a legal notice in the mail from the law firm Dewey, Cheetum & Howe. If all goes as usual you could settle out of court and pay legal fees. And no, you cannot kick out your tenant because you had to pay him off; that’s a whole other lawsuit.

If you think I’m pulling your leg with this story? Read for yourself that we are breeding professional suing craftsman:

• Newsweek Magazine reported, “The average amounts paid to plaintiffs in personal-injury cases has risen dramatically”

• The Wall Street Journal reported, “Something as simple as paying a college kid to clean your gutters or giving youngsters a few bucks to shovel the driveway could lead to a serious lawsuit.”

• Forbes Magazine reported, “with trial lawyers running riot, insurance may not be enough.”These mainstream publications are warning people about the high risk of losing assets by lawsuits and how important it is to protect yourself.”

TIME OUT.  REWIND  <<|

How could the six pack back flip scenario be played out in your favor? If you strategically planned your asset protection as much as you planned your last vacation, you would have had a fighting chance. In fact, the odds are that you may have not even received a letter. Let’s walk through this again with your properties in a trust for example …

Tenant falls… Tenant calls… Lawyer checks records; finds nothing.

Lawyer explains, “I’ll take your case as soon as you deposit a $5000 retainer to my firm.”

Tenant hangs up; kicks the cat and screams ‘I Hate Lawyers’.

What changed?

Instead of surfing eBay to find a deal on a plasma you attended your local REI club and discovered how to protect your wealth and breath easy while you amass your nest egg. You place your properties in LLCs, Limited Partnerships, Corporations or Trusts that you, in turn, own and hides your overall financial picture. This makes you a less attractive target – A “Tough Target”. An attorney deliberating whether or not to take a weak case will always look into the public record to see how much equity is available to satisfy a potential judgment.

REI CYA   or else   SOL.

For the uninitiated, the short hand acronym explanation of REI CYA is crucial to your investing destination: Real Estate Investors Covering Your Assets. A solid foundation to any empire is a key ingredient. This lets you breathe easy while you build a fortune. So you have two choices: stop buying Real Estate or protect yourself and continue unabashedly to make money and secure your future.

What To Do… It’s appealing to be less attractive.

Build your foundation as strong as Fort Knox for the protection of every dime you worked so hard to earn. Basically you want to be come a “Tough Target”. Different approaches will be more suited to you depending on how many properties you own; if they are single families or apartments; if you flip houses or buy and hold. In general multiple LLCs will protect your real estate holdings without the burden of additional tax reporting. And then you need to get your name de-listed from public ownership records.

If you assign real estate contracts full time like I do, you can virtually erase any paper trail that links you to a real estate transaction; so you don’t have to worry about keeping your name off public records when buying and selling real estate.

However if you’re a flipper the target on your back shines really bright: you look like a “deep pocket” investor. To a jury, you just made in a few weeks what they make in a year. That’s damn greedy, they are thinking.

As a rich, successful landlord or investor you are always the bad guy. Never mind the fact you’re ‘going green’ by recycling run down houses and providing the IRS a bunch of money from the capital gains tax you pay. And that you are raising the value of the neighborhood by eliminating another crack house.

For 90% of my real estate armada I use land trusts and two other trust types to protect my home and family, vehicles and private banking. But how do you bulletproof your wealth and avoid getting sued as a business entity or personally? Big question. Here’s some considerations:

• What’s better for real estate – an LLC or a land trust?
• Should I incorporate in Nevada or Delaware?
• How can I safely take more aggressive business deductions?
• Which is better, an S corporation or C corp?
• When is the best time to implement my asset protection plan- you may be surprised.

 

As part of the R.E.I. Association’s continuing efforts to provide real estate investors with the tools to make money it is only fitting to showcase proven strategies to protect your wealth and yourself personally, from those who ‘want it all because a slip, trip or fall’

Check out this month’s speaker at your local REI Club meeting for more Entity Selection & Asset Protection; www.REIAssociation.com

“If you really want it… it’s worth striving for.

If it’s worth striving for, it’s worth protecting.“

Scott FladHammer, Real Estate Collector ©

 

“How can I protect what I have worked so hard to build?”
I have found the following to be helpful in my business:Put your assets in entities and/or trusts. Maximize contributions to pre-tax retirement savings opportunities, like 401(k) plans and IRAs (preferably s-IRA). They reduce current income tax liability while accumulating growth tax-free and are not reachable by a judgment creditor until such time as minimum distributions are required after age 70, and even then only to a small degree.

The accumulation of equity in your personal home is a good way to protect assets. And you can take out a second mortgage to turn around and lend as private or hard money. Inside the city limits a person’s home and up to 1 acre is protected from creditors, as is up to 160 acres if one lives outside of the city limits. Of course laws vary from state to state and the zoning and covenant restrictions affect the likelihood of a judgment.