by Drew Sygit
When you’re a real estate investor, you’re at a lot of risk just as a part of doing business — any number of disasters can leave you holding onto a property that isn’t worth what you paid for it. The kinds of dangers that you face as a real estate investor require some very ordinary but easy to overlook kinds of protection.
3 Fundamental Tips for Protecting Yourself Legally as a Real Estate Investor
Don’t Own the Property
The first step to being a successful real estate investor is making certain that any accidents that incur liability are pointed directly at not you. By creating a limited-liability corporation and putting the property in the corporation’s name, you can create a barrier between your personal funds and any liability that might arise from an accident on the property.
Those property owners who want to go above and beyond can also use other strategies to help obfuscate their ownership. They can be important if you’re concerned about someone looking up the property owner online and discovering that it’s you. These include tricks like putting your property in a land trust, filing under your spouse’s maiden name, and more.
Don’t Manage the Property
Similarly, if you’re directly connected to the management of the property, you’re liable for anything that goes wrong with the management process — and there’s a lot of things that can go wrong. Set up a (different!) LLC to manage under, or actually just take the logical step of hiring a professional outside property manager to handle the details while you watch the profit come in.
If you do decide to manage directly through an LLC, get intimately familiar with the law — because you will be seeing the inside of a courthouse. Few professions outside of a law office are more consistent about putting you in front of a judge than property management. Protecting yourself means either hiring someone who knows, or personally being deeply aware of:
- Fair Housing Laws
- Fair Credit Reporting Laws
- Discrimination Laws (Both Federal and State)
- Privacy of Information Laws
- The Americans With Disabilities Act
- Your State’s Landlord/Tenant Laws
- Premises Liability Law
Make no mistake — many judges see it as a sacred duty to protect innocent tenants from abusive landlords, even when the tenant is clearly the one in the wrong. If you’re not adapting your business practices to the legal landscape you work in, you will end up on the wrong side of a lawsuit.
Insure Everything Generously
The name of the game when it comes to investing in real estate is risk avoidance. In the modern world, the single most effective tool for abrogating risk is insurance. You need to have several kinds of insurance in ample amounts, including:
- A Dwelling Policy for each property. This is separate from a Homeowner’s Policy in that it doesn’t cover goods inside the property (which would presumably belong to the tenant) — just the structure itself.
- A Vacant Property Policy for each property that you anticipate will be without a tenant for a month or more — available as a rider on the Homeowner’s Policy or as a standalone policy.
- A Construction Policy for each property that is undergoing major repairs or renovations.
- A Liability Policy for you. Yes, even though you’re owning via an LLC.
In all of these cases, pay the extra for a policy that pays out for “replacement cost,” never “cash value.” Cash Value pays out what you could have gotten for selling the property on the open market after depreciation. Replacement Cost pays out what it takes you to rebuild the property, which is what you actually need.
In addition, if you’re doing the property management yourself, you’ll also need:
- A Landlord’s Policy for each property.
- An Errors and Omissions Policy for you. Again, even though you’re managing via an LLC.
All of this should be considered the minimum level of protection that a property investor should have between their funds and the properties they invest in. Anything less is asking for a disaster to leave you in an unrecoverable situation.
How have you protected yourself as an investor? What advice would you give a newbie investor just starting out?
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