Maximize Your Profits and Protection with these tips for Long-Term Buy-and-Hold Real Estate Investing
The greatest mistake that investors make when it comes to asset protection for real estate is not understanding the risks that are waiting out there for them. This article reveals the structure you should follow to ensure your hard earned money is protected from frivolous lawsuits and costly tax mistakes.
Imagine a thug sticking a .357 magnum up to your throat and demanding you turn over your wallet, credit cards, jewelry, and keys to your luxury car. How do you feel?
Scared out of your mind?
Vulnerable?
Violated?
You will feel exactly the same way (and maybe worse) when you are hit by a lawsuit and you know you haven’t done anything wrong. Lawyers have their sights set on real estate investors. But asset protection does not have to be complicated.
You Don’t Want to be on this list of Ludicrous Lawsuits
Lawsuits are an ever-present threat to your financial well–being. It’s not of matter of if you’re going to be sued but when; even if you’re not in real estate.
Setting up the right plan has potential to protect you from costly litigation. These cases are not random occurrences, these types of lawsuits happen every day in every state of our country and are rapidly increasing (for the untrained and unprotected):
› A building owner was held vicariously liable with a demo-sub under the ‘particular risk doctrine’ who failed to turn off the electric, causing death to the electric-sub worker. The jury awarded $2,884,557.
› An apartment builder owner (husband and wife) went bankrupt to allegedly avoid execution of a judgment for sexual battery. A new fraudulent conveyance of $5,000,000 of real property (to wife) action was then sought against defendants (landlord-owners).
› Owner of apartment building failed to clean and repair loose tiles caused by a leak and accumulation in the kitchen from the above unit which landlord was aware. Plaintiff’s wheelchair caught the edge of a loose tile causing him to fall off the chair causing soft tissue injuries. Binding arbitration awarded $893,550 on a $1,000,000 policy.
› The apartment management company and the employer-roofer were held jointly and severally liable for $3,279,000 to a roofer-employee who slipped and burned himself with hot tar. Since, it was held, that the roofer did not have valid workers compensation insurance and a valid contractor’s license both were liable at law, precluding plaintiff from contributory negligence
› Landlords insurance coverage was denied (in bad faith) in a wrongful death (negligent security) lawsuit brought by tenant’s estate for the murder of the tenant by an unknown assailant.
› Landlords may be liable for lead paint based injuries even if they do not have knowledge of the hazard!
“Just as a motorist is presumed to know the laws regulating motor vehicles, the court reasoned, so a landlord is presumed to know the requirements of the local housing code pertaining to the habitability of leased premises. Landlords need not inspect the premises before leasing, the court said, but because of the implied representation of habitability that accompanies the making of the lease, they fail to do so at their peril.”
› Landlords! Punitive damages can be awarded even with no compensatory or nominal damages in race discrimination cases, under the Fair Housing Act. Owner (landlords) lied to prospective tenants about the availability of apartment, while waiting for the ‘right tenant’.
› The general contractor and the worker’s employer were sued along with the concrete-sub and safety rebar cap supplier for injuries to a negligent iron-worker who fell some 40 feet impaling himself on vertical rebar with only 8′ rated rebar safety caps. The jury awarded $1,285,000.
› $1.08 million in Delaware when the landlord failed to fix a leaky faucet and mold grew; even though the tenant had not reported the problem to the landlord.
HERE’S THE SOLUTION
Learn how to become a tough target! The following are the real estate asset protection strategies you need protect yourself from being a target for the “bloodsuckers” and “ambulance chasers” by building impenetrable walls of protection around you, lawyers and greedy plaintiffs won’t be able to touch you or your assets!
Asset protection planning is a way to reduce exposure to future lawsuit risk. It encompasses insurance and how real estate is titled to make it and other assets less vulnerable to the claims of individuals who may sue in the future.
The best personal, business and real estate asset protection strategies explained by 30 year Indiana real estate lawyer to maintain a formal legal separation between their real estate business, corporation or LLC for safer investing in Fort Wayne.
We’ll start with a basic, but very important, asset protection strategies that is business entity concept, definition and explanation called the Corporate Veil.
Corporate Veil
A corporate veil is legal concept that separates the personality of a corporation from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations.
This protection is not ironclad or impenetrable. Where a court determines that a company’s business was not conducted in accordance with the provisions of corporate legislation (or that it was just a facade for illegal activities) it may hold the shareholders personally liable for the company’s obligations under the legal concept of lifting the corporate veil.
Why Investors Choose to Incorporate
A key reason that real estate investors choose to form a corporation or Limited Liability Company (LLC) is so that they won’t be held personally liable for debts should the business be unable to pay its creditors. But sometimes courts will hold an LLC or corporation’s owners, members, and shareholders personally liable for business debts. When this happens it’s called “piercing the corporate veil.”
A Limited Liability Company is perfect for most investors because an LLC is
- Well suited to hold real estate investments,
- Not paperwork intensive so accounting costs stay low,
- provides maximum personal liability protection,
- Flexible enough to move around assets and money,
- Easy to update bylaws and log the Annual Directors Meetings.
You can dramatically reduce your risk of lawsuits and liabilities using the asset protection strategies explained by 30 year real estate attorney for safer investing
In Times Of Trouble
In these tough economic times, many small investors are scrambling to keep their companies afloat or are closing down. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business’s debts. But when cash is tight and owners aren’t careful, if an unpaid creditor sues for payment a court might “pierce the corporate veil” (lift the corporation or LLC’s veil of limited liability) and hold the owners personally liable for their company’s business debts.
Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.
You are Not Your Company
There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners’ alter ego) and that the owners are personally operating the business as if the corporation or LLC didn’t exist.
For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn’t entitled to the limited liability that the corporate business structure would ordinarily provide.
The company’s actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn’t pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn’t apply.
The company’s creditors suffered an unjust cost. If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by piercing the veil.
Factors Courts Consider in Piercing the Corporate Veil
The most common factors that courts consider in determining whether to pierce the corporate veil are:
- whether the corporation or LLC engaged in fraudulent behavior
- whether the corporation or LLC failed to follow corporate formalities
- whether one person or a small group of closely related people were in complete control of the corporation or LLC, and
- whether the corporation or LLC was inadequately capitalized. Because if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own.
The Little Guy Is At A Greater Risk
Some corporations and LLCs are especially vulnerable when these factors are considered, simply because of their size and business practices. Closely held companies are more susceptible to losing limited liability status than large, publicly traded corporations. There are several reasons for this.
Failure to follow corporate formalities. Small corporations are less likely than their larger counterparts to observe corporate formalities, which makes them more vulnerable to a piercing of their corporate veil. To avoid trouble, it’s best to play it safe. It’s important for small corporations and LLCs to comply with the rules governing formation and maintenance of a corporation, including:
- adopting company bylaws,
- making sure that officers and agents abide by those bylaws,
- holding Annual Directors Meetings and shareholders or members, and
- keeping accurate, detailed records (called “minutes”) of important decisions that are made at the meetings
REIA offers one the most complete investment business startup packages available. Straight from the desks of the most successful Fort Wayne investors you’ll get all of the above paperwork and more to make yourself bulletproof ›
Are you ‘Commingling Assets’
Small business owners may be more likely than their larger counterparts to commingle their personal assets with those of the corporation or LLC.
For example, some small business owners divert corporate assets for their own personal use by writing a check from the company account to make a payment on a personal mortgage — or by depositing a check made payable to the corporation into the owner’s personal bank account. This is called “commingling of assets”.
To avoid trouble, the corporation should maintain its own bank account and the owner should never use the company account for personal use or deposit checks payable to the company in a personal account.
GET PREPARED
2023 is expected to be have record-breaking lawsuit filings
As if you need more reasons, mainstream publications are warning people about the high risk of losing assets by lawsuits and how important it is to protect yourself:
Newsweek Magazine reports,
The average amounts paid to plaintiffs in personal–injury cases has risen dramatically”
The Wall Street Journal acknowledges:
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:
with trial lawyers running riot, insurance may not be enough.”
ABOUT THE AUTHOR
In addition to owning several successful companies and investing in real estate Scott FladHammer writes on real estate and business for Investor Bargains™ and provides money for investors. Read more of his helpful articles and sign up for his unreleased real estate deals .
