How Do You Protect Yourself as a Real Estate InvestorSep 05, 2023
Are you new to real estate investing? Have you committed yourself to build generational wealth for yourself and your family? And do you feel overwhelmed by the prospect of making your real estate investments and building your personal empire?
If you answered yes to all three questions, don’t let that discourage you. It’s natural to feel beset with self-doubt or concern about undertaking such an expensive wealth generating strategy. In fact, by learning to work through those concerns, you can pivot your own mindset, build self confidence, and take that first step forward on your real estate investment journey.
Having the right mindset is one secret to becoming a successful investor. The other secret is knowledge; specifically, the knowledge of how to protect yourself as a real estate investor.
What is real estate asset protection?
A real estate investment strategy can create lucrative opportunities to increase your personal wealth. You can generate steady streams of passive income and establish financial security and independence as you build your real estate empire.
However, any investment does carry a degree of risk that can leave you personally liable for significant financial penalties. Real estate asset protection is an investment strategy that protects your properties, your business, and your personal assets from creditors or plaintiffs who may bring a lawsuit against you.
There are two principal ways to apply real estate asset protection for your own financial security.
1.- Property and landlord insurance
Suppose you were buying a new home for yourself. Once you finalize the terms of the purchase price, the mortgage, and the closing dates, you’re prepared to take possession. At this time, you need to treat your new home as an asset that requires proper protection. Home insurance ensures you have adequate coverage to protect the value of your investment.
The same logic applies when you invest in property for your real estate investing business. You need to have property insurance to protect yourself in the event damages or other unforeseen circumstances risk devaluing the property you’ve invested into with valuable capital.
Landlord insurance is another valuable acquisition, particularly if you’re investing in multifamily properties. Multifamily real estate investors become landlords to dozens, sometimes hundreds of tenants who rent space within the boundaries of the property. Should a tenant sustain an injury on your property and commence with a lawsuit, landlord insurance will protect your investment and reduce the risk of being found personally liable for any damages.
2.- Structured holding assets
The other real estate asset protection tactic is to establish the proper structure to hold your invested assets. In layman’s terms, you want to distance your personal association with your real estate investments by transferring legal ownership to a corporation, a limited partnership, or a limited liability company.
If you’re new to real estate investing, you should know that it’s very uncommon to hold ownership of invested properties in your personal name. Doing so places yourself — and your loved ones — at risk of financial liability in the event a lawsuit is brought against you and your invested property.
Establishing structured holding assets transfers that risk and liability from your personal family to the legal entities that hold the deeds to your properties. There are also potential tax advantages to using structured holding assets, which you can discuss with your accountant or financial planner.
5 useful tips to protect yourself as a real estate investor
Now you have helpful knowledge to protect your personal interests when you successfully acquire a new property. The next piece of knowledge to protect yourself as a real estate investor is to understand the best ways to select properties with the greatest wealth generating potential.
Here are five useful tips to help you select properties with high-value potential. Use these and other investment strategies to make sure you get the most bang for your buck.
1.- Conduct proper due diligence on all properties
Similar to your real estate asset protection strategies, this first tip is another approach to protect your personal and financial interests. Simply put, don’t invest in the wrong properties.
As an investor, you want to find real estate assets with the greatest potential to appreciate in value over time. You’ll also feel a natural inclination to acquire those properties at the best possible price. Buy low and sell high, right? That’s the basis of any good investment strategy.
But don’t forget to conduct your own due diligence before you complete a purchase. If a list price seems like a deal that’s too good to be true, there’s probably a reason. You don’t want to acquire a property, only to find out after the deal closes that you’ll need to sink thousands of additional dollars into the property before you can make any money in return.
Conduct a thorough due diligence on any property before you even put an offer on the table; this includes a walk through of the property, perhaps having a tradesperson inspect an area of concern (i.e. the roof or electric wires/panel), finding out what the current owner’s motivation is for selling, or digging up some history of the property through the municipal archives. It may seem like overkill, but thoroughly researching every property ensures you don’t end up owning a lemon with no juice to squeeze from.
2.- Diversify your real estate portfolio
Part of human nature is to rely on things that feel comfortable. There is merit to this mindset, but it can be as much of a hindrance as a mental security blanket.
An investment strategy that incorporates diversification is a winning formula for success. Diversification can be broken down in any number of ways. It can mean investing in different types of properties (apartments, triplexes, condos, and other multifamily listings) as well as owning properties vs passively investing either as a JV partner or as a private lender.
Diversity can also relate to geographic considerations. In a country as large and vast as Canada, there are markets with high-growth potential from coast to coast to coast. Research government resources to find the fastest growing markets so that you can make lucrative returns on investment on a national level.
3.- Use OPM (other people’s money) where you can
Many investors throw around the acronym OPM, and they do so for good reason. It’s a strategic decision to lessen your personal risk when acquiring property by pooling your capital into a shared investment with fellow investors.
There are several advantages to taking this approach:
- Your upfront investment is far smaller than a solo acquisition
- Liability risk is a shared undertaking that reduces your exposure
- Qualifying for financing is easier with multiple stakeholders involved
- It frees up more of your own capital so you can diversify your portfolio
If you have opportunities to join a group of investors in a lucrative deal, strongly consider the benefits of teaming up with them. There are plenty of advantages to using OPM, and they can all help you build a path towards personal wealth and financial freedom.
4.- Have the foresight to know when it’s time to cut your losses
When you boil it down to its basic summation, real estate investing is a form of gambling. You’re gambling on the potential return on your investment and the conditions in the market that will help create those healthy returns.
However, like any form of gambling, there are gambles that pay off and there are an equal number that do not. You need to prepare yourself for the reality that not every real estate investment will result in lucrative returns. Sometimes, the healthiest decision is to cut your losses on a property so that you can move onto bigger and better investments. For example, you may want to keep a property that is being swallowed up by urban sprawl. This will increase the value of the property. Contrary to this, if the neighbourhood is falling into squalor, and people are moving out, this may be a property you sell. It is important to follow the progress and notice trends in the region to have foresight into making these decisions. Is the city building more infrastructure that will create jobs? Or, has the area been constantly devastated by weather, crime or other undesirable trends that cause the value of the property to decline?
Some investors fall into the fallacy of sunk costs, meaning that they continue to throw good money after bad to justify the time and resources invested into a particular property. Don’t fall into this trap.
Instead, lay out a plan for each of your investments. Set a predetermined break-even point that allows you to walk away from any property acquisition if conditions cause the value to turn south. When you have a healthy exit strategy in mind, you’ll avoid making the sunk cost mistake that befalls too many investors in this space.
5.- Learn the ropes of successful investing from a real estate mentor
Finally, the best way to acquire knowledge that will help you become a winning real estate investor is to learn trade secrets from other successful investors. After all, why bother doing it all alone if you can lean on experienced investors for practical advice?
A real estate mentor is someone who has gone on the very same journey into real estate investing that you’re embarking upon yourself. Choose a mentor who has spent years building their own real estate empire by carefully selecting deals that have generated healthy returns. A mentor shows you how to navigate through this world and avoid making costly mistakes.
Join a real estate investing community to grow and thrive
Successful real estate investing begins with a winning mindset and the right knowledge to navigate through the complexities of the market. When you have both of these assets, you’re poised to take affirmative action and build your own real estate investment empire.
The best way to build your own confidence and acquire valuable pearls of wisdom is by joining a thriving real estate investing community. You’ll learn helpful tips from experienced pros, and you can network with other investors on a similar path as your own.
With support from a community that shares your passion for building wealth, there will be no stopping you!
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