As a real estate investor, you likely know that lawsuits can devastate your finances and personal savings. That’s why it’s important to have a solid asset protection strategy in place before you buy your next property.
There are a variety of methods you can use to protect your investments, from insurance to land trusts and LLCs. These techniques work best when used in conjunction with one another and can include legal hurdles like DAPTs or irrevocable trusts.
- Homeowners Insurance
Homeowners insurance is the most important investment you’ll make in protecting your home or real estate property. It not only covers the house itself, but also any structures like sheds or unattached garages on your property. It also provides liability coverage to protect you from lawsuits if someone gets injured on your property or damages your property. While you may not need a homeowners policy if you rent out your space as a rental, it’s still worth having to cover personal belongings and potential natural disasters.
Separate from homeowner’s insurance a warranty protection plan can help save you from unexpected repairs or replacements. This is different from home insurance and provides homeowners a peace of mind on appliances and such breaking down. For example, a dishwasher repair can be very time consuming and costly. Under a home warranty, you can possibly have a contractor under your policy come out and repair it for you or replace it at no cost. It is important to note that it is based on the coverage you choose and pay for.
- Renter’s Insurance
Whether you rent an apartment, house or condo, having a good quality renter’s insurance policy is a must. It’s not expensive and can be very valuable if the unexpected happens.
Landlords have their own property insurance to cover the physical structure of the building, but that doesn’t cover your personal belongings. Renters’ insurance covers your personal property, including electronics and furniture, in addition to covering liability expenses.
Before purchasing a policy, make sure you have a current inventory of your belongings and take photos or video of items like your clothes, jewelry and electronic devices. It’s also a good idea to inquire about discounts for smoke detectors, dead bolts and other safety features. It’s best to choose a policy that offers replacement cost coverage instead of actual cash value.
- Home Equity Line of Credit
Home equity lines of credit, or HELOCs, allow homeowners to borrow against their ownership stake in their homes at a low interest rate. While they are often used for home improvements or debt consolidation, they can also be an asset protection tool if properly managed.
To qualify for a HELOC, you must have enough equity in your home and prove that you can afford to pay back the loan. Lenders will review your income, debt-to-
income ratio and credit score to determine your eligibility.
A HELOC can help protect your property from lawsuits. Careful tenant screening, reviewing a credit report and calling references can also help prevent tenants from damaging your investment property or causing financial loss.
- Mortgage Insurance
Mortgage protection insurance, or term life insurance, is an affordable way to help protect your real estate investment and keep family members from financial distress in the event of your death. This type of policy pays off the remaining mortgage balance, giving your loved ones cash proceeds that they can use to pay the debt, without having to sell your property.
Putting your investment properties in separate LLCs is another effective strategy to protect your assets. It’s important to have a legal professional set up these entities to ensure that any lawsuit against one of your properties does not affect the others.
Avoiding excessive risk is another asset protection technique that includes implementing strict tenant screening policies and asking for references and proof of insurance from contractors and handymen. This prevents a liability claim from arising in the event of an accident on the property.