Insurance Is Your First Line of Defense When Real Estate Investing
Your first line of defense to protect your assets is insurance. This is not a new concept. If something happens to the house you live in, you have home, fire, and perhaps flood insurance. If something happens to your car, you have vehicle insurance.
Thus, there's no reason not to aquire insurance for your real estate investing.
It doesn't matter whether you are pursuing residential or commercial real estate investing. You should have insurance on every house or building you own. In fact, no bank is going to give you a loan unless you have insurance. If you pay cash for a property, no lender will be there to require that you get it, but you should have it anyway. It's crazy not to pay $500-$1,000 a year on a building worth $800,000 or more. So always get insurance--whatever the cost.
If you have insurance and somebody slips and falls, they first have to file a claim with the insurance company. The insurance company may decide to fight it or pay it, but either way they will handle it.
Now that we've established its importance, let's look at some of the different types of policies you may want to evaluate.
Workers' Compensation Insurance
If you are buying and rehabbing houses, be sure you're insured for those activities. A big hole in a lot of real estate investors' protection plans is not addressing workers' compensation. If the repair people who work for them regularly get hurt and have no coverage, they could sue the investors.
If someone works for you three to five days a week and you direct their activities, the courts could deem them to be your employees, even though you have subcontractor agreements with them. Therefore, make sure they have an in-force, up-to-date workers' compensation insurance policy. Get a copy of it and keep it for your files. If they don't have this policy--and you still want to use them--make sure you carry a policy that will cover them.
Property Insurance
Call your insurance broker and find out whether you're insured for all the activities you're doing. Some of the lawsuits in the United States right now are directed at property managers, so if you manage property, inquire about special insurance to protect against management lawsuits. At the very least, make sure you're properly insured and perhaps incorporated as well.
Umbrella Policy
An umbrella policy generally costs between $10 and $20 more a month for an extra $1 million of coverage. It covers your car and home, and may include up to five rental properties. Please check with your insurance broker about umbrella policies.
When it comes to asset protection, your first line of defense is ALWAYS insurance. You may choose to incorporate as well, but make sure--for a few hundred dollars a year--you have a policy on every property you own.
Related Training
Wealth Preservation Retreat
Incorporate Your Business
Join Trump University's Network
Weighing the Pros and Cons
Most businesses in the United States operate through a corporation or partnership of some kind. These entities provide you with some asset protection, make you look more professional, and can smoothly be transitioned to a purchaser or bequeathed to your heirs--often without taxation.
The answer to whether or not you should incorporate depends on what kind of activities you are engaged in. Many savvy investors incorporate the management aspects of their real estate investment businesses because that's a high-liability activity. If you’re buying and fixing up houses, you may want to incorporate to limit that liability. You can take each activity and form a separate corporation. The downside is that there is extra bookkeeping to keep track of and some ongoing costs involved.
Our recommendation? Earn some money from your real estate endeavors first, and then let those revenues pay for your incorporation. Don't spend a lot of money to make a lot of money. After purchasing property, incorporating would then be wise to help protect those assets. If you own assets and others sue you, they can get everything in your name. If only a percentage is in your name and the rest belongs to a corporation, those suing you can’t get it all--only what’s in your name. A corporation is viewed as another entity under the law--separate from you--even though you still control its activities.
Types of Corporations
There are basically three types of corporations: the S-Corp, C-Corp, and Limited Liability Company (LLC). We don’t have space here to list the pros and cons of each, but here is the bottom line: If you ask most attorneys which is the best entity to own real estate in, the majority of them will tell you the LLC. This is because the LLC:
- Can generally do everything the S-Corp and C-Corp can.
- Can be set up anonymously in many states.
- Provides all the protections of every other type of partnership and corporation.
In short, the LLC category was created to use the best of the other categories and leave out the worst. Some attorneys object to LLCs because they are newer than other time-tested entities. However, LLCs are incredibly flexible, easy to set up, and rock-solid asset protectors if you manage them properly.
Setting Up Your Corporation
Before setting up anything, first determine your risks, activities, and tolerance for paperwork. The more complicated you make your asset protection, the more complicated you make your life. Make sure you deal with referred, competent professionals concerning any aspect of asset protection.
It is possible to handle your own incorporation. In today’s world, it can all be done online. However, we recommend you have an experienced real estate attorney complete your incorporation papers, and help you file your paperwork every year. A lot of people file corporate forms but don’t follow all the rules and file all the documents. If they ever get sued, their corporation can be torn apart because it isn’t valid. It's almost always better to have professionals do your paperwork.
Related Training
Wealth Preservation Retreat
Incorporate Your Business
Join Trump University's Network
