Investing in real estate can be a lucrative business. Nevertheless, it comes with risks. One lawsuit could ruin your entire portfolio.
There are several ways to protect your property and minimize your equity risk. Some strategies include purchasing landlord insurance, establishing an LLC and placing properties in a land trust.
- Homeowners’ Insurance
Homeowner’s insurance is required by mortgage companies to protect the lender, but it also helps homeowners deal with a total loss of their most significant financial asset. As a real estate investor, you can add on additional coverage such as builder’s risk policies to cover renovation projects that last longer than 60 days and can’t be covered under a typical landlord policy.
Dwelling property insurance is an essential addition to your real estate investment coverage, as it can provide fair rental value coverage (which makes up for lost rent when a claim keeps the property unoccupied) and liability coverage. This can help
you avoid costly lawsuits if guests, repair people, or even employees of general contractors get hurt on your properties.
A good insurance broker can be a valuable member of your team, as they can offer many different insurance solutions and can work with several carriers to find creative ways for you to obtain the coverage you need. Ideally, your insurance broker should have experience with providing insurance for rental properties.
You may understand insurance but might be asking, “What are home warranties?” They are different from home insurance so be sure you understand the difference between the two.
- Landlord Insurance
If you’re planning on renting out your home real estate, you’ll need landlord insurance to protect your investment. Landlords’ insurance typically covers the property itself as well as landlord liability for tenants who rent your space.
This specialized protection can safeguard you against damage from natural disasters, theft, vandalism and accidents caused by humans or Mother Nature. It can also cover lost rental income if your investment property is rendered unusable.
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While typical homeowners’ insurance covers owner-occupied homes, a landlords’ policy will cover rentals – including sheds and garages that can be attached to your property for rent. And it’s generally more affordable than you might think.
It’s important to get the right coverage in place as soon as you start your investment journey. Contact your insurance broker to discuss your options and ensure you’re fully protected. They can help you find a balance between cost and coverage so that you can start building your portfolio of real estate investments with confidence.
- Land Trusts
A land trust is an effective and affordable method of holding title to real estate that
offers investors an added layer of privacy, security and asset protection. Land trusts work by assigning beneficial interest in the trust to an individual or company that acts as trustee. Beneficiaries of the trust can deal freely with the property, including renting, leasing, refinancing and selling without a cloud on their own personal assets.
Land trusts also protect against judgments and liens by keeping the sales price private, which makes it harder for would-be litigants to find out the size of an investor’s real estate portfolio. They also help avoid the due-on-sale clause and allow beneficiaries to transfer their beneficial interests between properties in a tax efficient manner.
However, a land trust alone shouldn’t serve as your complete asset protection plan. It should be used in conjunction with other entities such as LLCs and Series LLCs to fortify your strategy.
- Limited Liability Company (LLC)
An LLC offers many benefits for real estate investors. For example, forming an LLC for each property allows the owner to compartmentalize investment risks. If one investment faces financial or legal challenges, it will not impact the other investments within the firm.
In addition, an LLC can provide pass-through tax treatment and limited liability. This means the business will be treated as an independent entity for federal income tax purposes, and owners will pay taxes on their share of the profits separately from their personal incomes.
An LLC may also be easier to obtain financing for rental properties since the business can establish credit in its own name. However, it’s important to note that some lenders require that an investor sign a personal guaranty or use their personal name when applying for mortgages. In these cases, the LLC does not offer full protection. In addition, an LLC cannot shield personal assets from lawsuits filed against the company.
