What is the Best Form of Asset Protection in Real Estate?Nov 28, 2023
It’s everyone’s goal in life to work hard, earn a decent living, and choose to make prudent investments that will further increase your earning potential. Real estate is one of the best asset classes with which to invest your hard-earned money. As a real estate investor, you can generate steady streams of passive income and build the foundation for generational wealth.
If you’ve ventured into real estate investing — or you’re considering doing so — you understand the time, money, and energy you must commit to build a thriving real estate investment business. The last thing you want is for all that effort to be undone by legal matters.
That’s why asset protection for your real estate investments is such a crucial step to build your real estate investment empire. But what is the best form of asset protection? Here’s what you should know to acquire the proper legal protection.
The basics of asset protection for real estate
Legal protection for your real estate properties is part of a broad strategy to protect your interests. Its purpose is to ensure any legal action brought forward against your property doesn’t wipe out the value of your personal assets.
Let’s float a scenario to illuminate the idea for a brief moment
Suppose your investment strategy is based upon multifamily property investments — a strategy, by the way, that is highly encouraged by the fastest growing real estate investment community in Canada. Since your multifamily property has dozens or hundreds of different tenants, there’s always a risk that an unsatisfied tenant could bring forward a lawsuit against the property.
A myriad of possible reasons could trigger such legal action:
- Faulty wiring in appliances
- Heat or hydro issues
- Disruptions to water supply
- General property damage
- A slip or fall
All it takes is one unsatisfied tenant, and you could be subjected to a plethora of legal matters. Defending your position as a property owner is a timely and costly affair, and those costs are even more significant if the lawsuit is a personal one brought against you.
Here’s another scenario to consider
Now, let’s say it’s not just one tenant that triggers a legal issue. Suppose a fire breaks out on the property premises. While the fire is ruled accidental, it still posed a significant risk to the health and safety of your tenants. Additionally, repairing the fire damage will be extremely expensive.
Without sufficient property insurance, the onus to pay for those damages falls upon you as the property owner. You may also be subjected to lawsuits brought forward by the tenants in the aftermath of the fire, even if it is ruled accidental. Liability insurance protects your personal interests from most lawsuits that could be issued by your tenants.
Asset protection in the form of real estate insurance
Insurance is one of the best forms of asset protection for real estate investors. Real estate insurance comes in many different forms, but its underlying purpose always remains the same. It’s designed to protect the personal liability of real estate investors for any issues that arise within the borders of their invested properties.
Here are some of the most common examples of real estate insurance that investors should consider as part of the cost of doing business.
As previously mentioned, liability insurance protects your interests as an investor in the event any tenant is hurt or affected by the property in a negative way. Any damages awarded to tenants will be covered by liability insurance so that you don’t have to pay for the costs of those damages out of your own pocket.
Remember the scenario of a fire breaking out on a property? Hazard insurance is the best form of protection for an investor when such tragedies occur. Hazard insurance protects you from any damages that result from fires, storms, or break-ins spurred by criminal acts.
Your building’s proximity to a nearby water supply will dictate whether you should add flood insurance to your business portfolio. However, in light of the rising severity of flooding damage caused by severe summer storms across much of the country, flood insurance may be in your best interests as a property owner.
Sewer backup insurance
Extreme flash flooding can also trigger issues with local sewage treatment systems. As a result, sewer backup insurance will protect your interests if a severe storm causes problems that impact your building’s water and plumbing systems.
Umbrella policy insurance
Some investors opt for a broad umbrella policy to secure additional coverage for all legal defenses against property damages. It’s not a mandatory policy for investors, but it is a helpful addition that further protects your personal liability.
Asset protection in the form of LLCs
Insurance is a very helpful form of asset protection for real estate investors. But there’s one other asset protection strategy for investors to consider, and that’s known as a limited liability corporation (LLC).
By placing the property under the legal ownership of an LLC, you effectively separate your investment assets from your personal assets. Under the letter of the law, a plaintiff can only bring charges and seek damages from the assets owned by the LLC.
Effectively, you create a legal barrier that insulates your personal life from any legal action issued against your property. You worked so hard to acquire your personal assets and build a life for yourself and your family. Take the added step of asset protection by separating your investments from your personal life by establishing an LLC to insulate your various interests.
Want to know more about asset protection strategies?
Of course, the best form of asset protection is acquiring the right knowledge so that you can use asset protection strategies to your advantage. You can research all asset protection options on your own time, but why do all that work alone?
Sometimes, the best insights are acquired from simple conversations with motivated investors on similar journeys as your own. The best way to engage in those conversations is to join the fastest growing real estate investment community in Canada.
As a member of this thriving community, you’ll gain access to people, education, and resources that will help you build a thriving real estate investment business. You’ll also learn how to develop a winning investment mindset based upon knowledge and coaching from experienced investors. With these tools in your toolbox, you can take action to build your own empire and create an inheritance for your future loved ones.
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