No one gets into real estate investing thinking, I'm going to work really hard to make a bunch of money, and then in a few years I'll give it all away to a bunch of lawyers.
But if you don't take steps to protect yourself right from the beginning, that's exactly what can happen.
Consider this: the average American gets sued seven times in his or her lifetime. The more you have, or the more people think that you have, the higher your chance of getting sued. And while you might not feel rich yet, when people find out that you own multiple rental properties all over town, they see dollar signs.
Here's how it usually goes down: somebody slips on the steps at one of your properties, and hurts himself. Maybe he's really hurt, maybe he's not – but he finds a doctor willing to say that he can't work anymore. He finds a lawyer who's willing to take on his case for a percentage of whatever he gets. The injured person has nothing to lose in trying to get something out of you – and a whole lot to gain.
And you have a whole lot to lose! If you haven't taken the proper steps to protect yourself, it'll only take a lawyer a few clicks on the computer to find out everything you own. And pretty soon it's all tied up in a lawsuit that threatens everything you've worked so hard for.
Hopefully, this won't ever happen to you. But it's just not worth taking the risk – especially when there are simple, easy steps you can take to prevent it. You've learned to avoid the crap shoot approach to real estate investing – so don't gamble with legal dangers, either.
The object here is to make it as difficult as possible for a lawyer to find someone to sue. Time is money, and no one knows that like a lawyer. The longer it would take them to file a lawsuit, the less likely they are to take the case. You want to add as many layers of complication as you can to protect yourself.
Layer #1: The Land Trust.
I'm amazed at how many people title investment properties in their own name. This is like walking around with a target on your back. Even if you only own one investment property, just don't do it. Instead, you want to put each property in separate land trusts. That means one land trust for each property – the easiest way is to name each trust for the property address, i.e. the “123 Main Street Trust.” The deed will show the trust as the owner, so if someone searches for the owner of the property, it won't show your name. And since each property has its own separate trust, it won't show all the other properties you own either.
Layer #2: The trustee.
A land trust has a beneficiary and a trustee. The beneficiary is the owner of the property – you – and the trustee is like the manager of the trust. Here's the important part: the name of the trustee is a matter of public record and the beneficiary is not. But in a deposition, the trustee could be forced to disclose the beneficiary's name – unless the trustee is an attorney. In that case, the trustee can claim attorney-client privilege – and keep your name out of it.
Layer #3: The corporation or LLC.
It's even better if you're not listed as the beneficiary at all. Instead, form a corporation or an LLC (limited liability company) and have that business entity listed as a beneficiary of the land trust. And here's another tip: file those papers in Nevada, which has the best asset protection laws in the country. In every other state, the officers and shareholders of corporations and LLCs are public record – but not in Nevada. It's just another way to make it more expensive and more time consuming for a lawyer to find you.
This is just the tip of the iceberg, of course – and of course, I'm no lawyer – everyone should have a good real estate attorney on their power team and should consult him or her before acting on any of these issues. But I hope this gets you thinking about how to protect yourself and everything you've worked for. Because this isn't just about building wealth – it's about keeping it.