With year over year growth that's stayed at twice the rate of inflation, real estate investing has long been one of the most reliable ways to build wealth. However, as you build wealth, the market could tank, you could get sued, or you could make a bad call that drags everything down. Protecting your real estate investment is vital because it takes a lot more work to build up its value than to lose it.
Here is everything you need to know in order to protect your investment and build its value.
Get Robust Liability Insurance
Your best bet in protecting your assets is having strong liability insurance. Calling an insurance broker to talk about your options should be your first step once you've made a real estate investment. If you set up your account to have just the most limited liability limits, consider increasing your limits.
Your personal liability coverage needs to be at least equal to the worth of your entire estate, including all of your investments. If everything you have is worth $1 million, make sure that you have at least that much in coverage.
Rates aren't terribly expensive and can be paid annually or monthly. Expect to pay around $250 per $1 million in coverage you get. For serious investors, have a minimum of $5 million in your umbrella policy to ensure you don't have any major issues.
After working hard to build your investment portfolio, it would be a mistake to lose it all because you were inadequately insured.
Keep Assets Separate
If you were to spend all of your money on a small business or use your own personal account to keep the profits for your business, that would be a mistake. That means that if you personally are sued or the business receives a lawsuit, you risk losing everything.
In some states, if you deposit money in a joint account with a spouse or business partner, then they have 50% of the say in an asset immediately. While this isn't an issue for everyone, it can be a serious issue if you get into a spat with the person you share an account with.
Children from a previous marriage could lose out on their inheritance if you share your account with the new spouse. If you're going through a divorce or separation from a business partner, you could also lose out.
Create an LLC or Business Entity
Business entities shield your assets. Most people who run a small business or do part-time work on the side without a formal business set up are considered to run a "sole proprietorship". However, you don't need to hire employees to set up an LLC or a corporation.
Doing so can ensure that you don't have to mix assets, as stated above, and that if you do work with partners, that you're protected. If your business is shared with others and they mismanage the operation, hitting you with a lawsuit, you shouldn't have your personal income drawn in. A business entity protects your assets from suits against the company.
Sudden wealth can be a life-changing experience that can improve your life and the lives of those around you, but only if you keep it. Those with more assets are bigger targets for lawsuits. Don’t let your sudden wealth suddenly get stripped from you. Protect your assets before you get the windfall and you will sleep a little easier knowing your assets are better shielded.
Get Protection From Renters
Disgruntled tenants can bring down the value of your property if you're not careful.
If someone gets injured on your property, they could file suit against you. If their property is damaged due to a burst water pipe or a fallen tree, it could come down on you. Many things could happen to them and then fall on your shoulders if you're not legally protected
When you get sued while your assets are all intermingled, you could be in for trouble. A renter can attack everything you have. If you have an LLC, they'll file suit against the corporation and leave your personal assets intact.
Renting is a great way to bring in lots of passive income but if you're not carefully protected, the people offering that money can turn on you. Being an attentive landlord and protecting yourself ensures that you stay safe. Consider putting your properties into their own individual LLCs.
Make Partnerships Formal
If you're working with a business partner, you're better off ensuring that you're always on the same page than letting anyone try to tip the balance. A business partner can be a fantastic way to get twice as much done as you would alone. However, it's common for business partners to file lawsuits against one another.
Even if you have a good relationship, make it official. Make sure you have a formal written agreement with roles laid out for each party. This allows you to protect one another from your individual actions.
An LLC or corporation is the best solutions rather than a "partnership".
Invest in ADUs
Accessory Dwelling Units are a good investment for getting an additional stream of income on your own property. Rather than having to build or invest in another property, get your feet wet with your own.
The right structure that contains a bedroom, kitchen, and living space can be great to rent out to college students or family members. This is the best way to try your hand at managing a property and learning about what it means to own an additional property.
Real Estate Investment is a Reliable Way to Build Wealth
If you're looking to build wealth that lasts for generations, there's nothing better than a real estate investment. Not only will you be able to pass down a roof to put over the heads of your kids and grandkids, but you'll also have something they can sell for more than you paid.
If you want to start building your wealth with ADUs and really take your investments to the next level, check out our guide.