Contrary to popular beliefs, trusts do little to protect your assets. Instead, they make it hard to claim our assets.
So why should you not jump into the whole entity setup? There are several reasons why. Apart from the obvious tax implications, it might be hard to obtain financing when in such arrangements. With that said, the question of how to hold property remains relative. At the end of the day, it’s about what's important to you.
I think the bigger picture always boiled down to when and not whether you should start an entity. If it were up to us, we would have an entity for most things we did.
Real Estate is About Finance
As a real estate agent, I know a thing or two about the residential and commercial real estate investing space. Frankly, the difference between the two influenced what I did. Most people venture into real estate without knowing what they are getting themselves into.
I was lucky to have a background in this industry before I started out. In campus, I worked in a construction company and later owned a painting company. My goal was to build a real estate portfolio and get as many properties under my name and my wife’s name as possible.
We wanted to receive good rates and terms from our tenants and build wealth fast. My decision to delay setting up the entity helped me build a portfolio in the shortest time possible.
I used the following strategies to limit my risks before going the entity route.
Substitute Ways of Protecting Your Assets
1. Using debt as asset protection: This approach entails having properties in my name but making sure mortgages cover them. This way, there is little equity.
2. By increasing the liability coverage on your landlord policies, you make things easier for attorneys. It’s easier for them to chase policies than real assets.
3. Consider taking out additional insurance coverage that has an umbrella policy.
4. Understand the titling advantages and disadvantages in your particular state. For instance, the law in Pennsylvania stipulates that if you title a residential property through ‘tenants by the entity” jointly with you partner, creditors cannot force you to sell the property.
The Bottom line
The strategies you might take now are bound to change time. Some property advisers will instruct you to haves some properties in your spouse’s name for tax purposes, but this is variant depending on the size of the estate.
My strategies may sound a little unconventional, but they helped me build a portfolio. To date, I still employ these strategies. As I pay some off, I now adopt the entity structure since I own them free and clear.