Real estate asset protection is a favorite strategy of effective real estate investors. It is essentially using every effective rule and legal tool available to give yourself maximum leverage should you find yourself in a lawsuit. There are several options available to you as an investor, but the safest and most effective tool you can have is an effective contract. Oddly enough, a sound contract is also one of the most underutilized means of protection for investors even though it’s probably the most obvious. A contract can contain remedies for common issues that will provide you with a simple solution should there be a dispute. This can go a long way towards avoiding an expensive lawsuit.
Using an LLC for Protection
Whether you get sued yourself or you need to sue someone, you should always use an LLC for protection. An LLC – or limited liability company – acts as the plaintiff in a lawsuit when you sue instead of you. This means that the defendant can only look to the LLC if there is an award for attorney’s fees or other damages. The cost of filing a new LLC is much cheaper than paying off a judgment, so it works almost entirely in your favor. Remember that any judgment that is filed against you shows up on your credit report, something that will hurt you in the lending business.
Since you cannot sue or be sued by anyone you don’t interact with either in person or via a contract, any business you do should be through an LLC. As a rule, you should have an operating shell LLC that doesn’t own any assets for all of your business dealings as well as a separate LLC that holds all of your assets. You technically shouldn’t own any assets, so the only thing that will be hurt in a lawsuit is a credit score, which is fairly negligible damage in the long run. In short, using LLCs to protect yourself allows you to treat lawsuits like business transactions, and that is often the best and safest way to view them.