Real Estate Holding Best Practices
Separating and managing properties, insurance, equity stripping, land trusts, and other strategies for protecting real estate.
Real estate is both inherently risky and valuable. It makes a tempting target for frivolous lawsuits from vendors, tenants, and contractors. Threats can be deterred by proper planning to avoid making your property a tempting target. There are several factors creditors look at:
Is the property titled in a person's name or a company?;
Can the owner of the company be easily found (is it an anonymous LLC)?;
Is the property owner liable, or is the property management company?; and
How much equity or cash flow is there?
Use the above factors to make your property unappealing to potential creditors. Most claimants want low hanging fruit, and placing barriers in their way means they'll pursue other lawsuits and leave you alone.
Checklist for New Rental Properties:
1) Titling Property:
The property should be titled in the name of your LLC. Putting it into your personal name, perhaps to obtain more favorable loan terms, only makes for increased work and cost down the line. It also places your personal name in the public record, and makes it difficult to avoid the bank accelerating your mortgage when the transfer does take place.
Related Resources:
How to Obtain an EIN
Open a Business Bank Account
2) Property Management via Separate LLC or 3rd Party:
When there are many properties you may begin considering using a separate property management company. This may be either a company you form, or a 3rd party. This helps to push the risks of property management away from the companies which own the real estate.
Related Resources:
Annual Fees & Requirements
3) Anonymous LLCs & Nominees:
Appearing poor in the public record deters lawsuits. If a search is done for your name and many assets appear, then you make a tempting target. If nothing appears, the claimant knows they'll have to spend much more money just to determine whether you are worth pursuing.
We say that if you wouldn't consider putting your bank account and other personal financial information on Facebook, then why would you put it into the public record? The easy answer is you wouldn't and shouldn't.
The real estate should be titled in an anonymous LLC, and any public documents should use a nominee.
Related Resources:
Funding a Company
4) Insurance:
Insurance doesn't always like to pay, but it shouldn't be overlooked. In addition to the corporate veil, using subsidiaries, and maintaining your privacy, insurance acts as an important barrier in this layered approach to protecting your assets.
5) Favorable Lease Agreements:
Do not hold valuable or risky assets in a single entity. Place each asset in a separate LLC and use holding companies to consolidate those interests instead.
Related Resources:
Setting up a Holding Company
Checklist for Existing Rental Properties:
1) Move Subsidiaries Under Holding Company:
Assets by themselves typically create little liability, but the management of the assets does. Creating a management company can isolate liability.
2) Move Properties (if in personal name):
Keeping your assets from being easily found can prevent frivolous lawsuits. It also raises the cost and deters creditors when there is a claim.
Related Resources:
Wyoming LLC Privacy
3) Update Leases & Insurance:
Be mindful when signing documents about your capacity and potential liabilities. Are you signing personally or as the officer of the company? Is there a personal guarantee? Will the document be made public?
Related Resources:
Nominee Document Signing
9) Equity Stripping:
Minimizing equity in an investment reduces its perceived value to creditors. This is most frequently used in real estate, but may be used with subsidiary companies and other assets.
Related Resources:
What is Equity Stripping?
