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Asset Protection Tips for Real Estate Investors & Owners

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This is a guest post by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends.  I have spoken with Ike many times for advice on client asset protection issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix.  Though Ike focuses on high net worth professionals and physicians as clients, his advice for “real estate owners, flippers, and developers” is applicable to anyone involved in the ownership of real estate.

Real estate management issues fall into several basic categories: debt, liability, and loss. We provide an introduction to these issues to help you get your house in order below. As many business owners and professionals also have investment in real estate outside their business itself, I’ve included issues of wide applicably.

Debt 

The nature of real estate debt and the significant guarantees that often accompany it can have grave consequences. We’ve covered some of these in detail including the effects of real-estate investments on financial solvency.

Make sure you clearly understand the limits and extents of the personal guarantees you sign. Many investors are signing as “jointly and severally liable” for 100 percent of the total debt when they only own 20 percent of the deal, as one example. Limit your liability share to your ownership share and understand if the loan you are signing for is a “non-recourse” loan or not.

Have your leases, indemnity agreements, and other legal docs drafted by a lawyer, or at least reviewed by a lawyer BEFORE you use them. Asking us what we think after the fact is useless. Always have these agreements reviewed by an experienced real estate attorney. Having your brother-in-law the DUI lawyer look at it could be the most expensive $500 you ever saved.

Don’t sign blanket personal guarantees, be specific in what you agree to collateralize as much as possible or the bank will value what you own at pennies on the dollar and try to take it all.

Get professional accounting help to maximize tax deductions. Use strategies like energy studies and cost segregation studies to reduce your fixed long term costs and maximize what you keep. Some real estate lawyers and accounting firms also offer “lease audits” these verify all the mysterious monthly expense add-ons you may face if you rent rather than own the building, the calculations are often wrong, and not in your favor.

Liability 

Protect yourself from your, clients or patients (or renters, their guests, and business invitees); you are liable for their health, welfare, and safety related to the property and conditions on it. Have specific leases, written policies on conduct and the use of the properties and penalties for violating them. Insure yourself to hilt against liability incurred on the property. You will almost always be more collectible and a better lawsuit target than your renters. That said, don’t ever forget that insurance alone is just one layer of defense and is not adequate protection.

Don’t put too many eggs in one basket. Divide properties based on use, equity, and danger or liability. If you have multiple pieces of property in a single LLC, for instance, remember that ALL of them are potentially at stake for an exposure at one property.

Implement personal asset protection planning and consult with legal counsel on how you are protected and which of your other personal assets are at risk and should be made legally distinct. If he or she says, “just by more insurance” fire them and get better help.

Loss 

Adequately insure yourself against loss and property damage, as distinct from liability. Use only top rated national carriers that you can sue for bad faith if they don’t pay under the policy as they should. Yes, this is common, “bad-faith” lawyers exist for a reason. Remember that vacant property is often not covered by general loss and liability insurance after as few as 30 days if you don’t let the insurance company know and pay them extra.

Get ALL the right insurance. If you are a owner/manager you need general liability, E&O (like professional malpractice), and potentially D&O insurance (directors and officers) if you are a director or officer of a company that may be personally named for professional acts or omissions, i.e. “I made the call that reinforcing the balcony railing was too expensive and not required at the property…”

As always, act today, anything you do after an exposure is more expensive and less likely to work. Be proactive and tactical in defending what you have earned.

Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com

As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation. 

Please feel free to contact me with your financial planning and investing questions. 

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Photo Credit:  Wikipedia

 

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Comments

  1. Suzanne says:

    Great article Ike! The information about personal guarantees is especially helpful. I made the mistake years ago of not understanding this – it’s something we should all take care with. Great info!

  2. andrewthomas says:

    thanks for your suggestions and guidelines for the Protection of Tips for Real Estate Investors & Owners.

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