Ask any real estate investor what asset class is the safest for their capital investments, and the odds are pretty good that you’re going to hear the same answer time and again: Real estate, of course! Unfortunately, even the most dedicated and diligent real estate investors tend to make a very dangerous assumption about the nature of real estate. They believe as long as they have a company that handles their real estate investments, they cannot (or will not) encounter litigation in a financially damaging way. They couldn’t be more wrong.
Proper Structure is Vital
“96 percent of all small-to-medium-size business owners do not have the correct structures in place to fully protect themselves, and that includes real estate investors!” said Stephen Broadley, executive director at Legally Mine LLC, a Utah-based company dedicated to helping business owners protect both business and personal assets from litigation and tax liabilities. Broadley presented twice over the course of Think Realty’s recent National Conference & Expo in Atlanta, Georgia, first in a feature spot in the organization’s premier Leadership Circle and again in the keynote position during the wider conference.
Broadley acknowledged that in real estate, it is very difficult to avoid litigation entirely, but pointed out that if a business is structured correctly, a great deal of unnecessary litigation may be avoided. Furthermore, he noted, the less time it takes for a case to close, the less expensive that case will be. “Not one of our clients has been sued to fruition,” he noted, adding, “Our whole strategy is to make you as un-sue-able as possible so when the lawsuits come, they go away.”
Minimize Your Risk
Although most real estate investors use corporate entities when they are investing, Broadley warned that most real estate investors tend to have some misconceptions about how their business structures work. Here are three of the toughest truths he revealed over the course of the event:
1| No Matter How Careful You Are, You’re Probably Going to Get Sued Eventually
“In 2016, there were about 100 million lawsuits in the United States alone,” said Broadley. He added, “Medical professionals are the top-sued individuals in our country, followed by real estate investors. You basically have a big neon sign that says ‘Hey, I’m here. Come get me.’” He explained that for professionals in industries like real estate and medicine, the goal should be to appear unappealing to potential litigants rather than simply hope to avoid litigation completely.
2| LLCs are Useless If You Don’t Minimize Exposure
Often, real estate investors believe that as long as they do their investing through a corporate entity, such as a limited liability corporation (LLC), they cannot lose their personal assets. Broadley compared this strategy to putting your family inside a tank in order to protect them. “If someone takes out my tank, my whole family is gone,” he pointed out. “But if I get everyone their own tank, then we’re in much better shape.” He explained that most real estate investors should be using multiple LLCs to get the best asset protection and achieve maximum lawsuit prevention.
3| Asset Protection Can Get Expensive
In asset protection, like real estate, it’s all about location, location, location. Where you register your corporate entities will play a big role in the way they work with your larger strategy and how expensive your corporate structure is to maintain. For example, in Utah, renewing an LLC will only cost you about $15. In Georgia, on the other hand, it will cost $50 per entity.
Broadley concluded his presentation with a reminder that very few attorneys actually specialize in lawsuit protection or prevention. “Fewer than 0.5 percent actually specialized in this important area according to the American Bar Association!” he said. “It’s vitally important to work with attorneys who understand how to assess your unique situation, create a blueprint, establish a system, and then manage and maintain it,” he said.
Carole Van Sickle Ellis is the editor-in-chief for Think Realty Magazine. You can reach her at email@example.com.