7 Critical Asset Protection Strategies for Investors

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Are you an investor? If this is the case, you almost certainly have valuables that need to be safeguarded. There are several methods for protecting one’s assets, but which ones are best for you? We have prepared a list of seven key asset protection strategies for investors. In this article, I want to talk about the top asset protection strategies for investors. Okay, let’s get started.

So here’s the thing. When it comes to being an investor, there are certain strategies I suggest you follow to make sure that you’re minimizing your overall liability exposure, ’cause you don’t want to put yourself out there at risk personally, and you want to make sure that your assets are going to be protected from anything that goes wrong with your investing.

Now, there’s some certain ways you can do things, or certain ways in which you can do things to help minimize that, and some of it may challenge the way you’ve been thinking when it comes to asset protection planning. So what are some of those top strategies that I recommend people use?

1. Avoid Signing Personal Names

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Well, number one, is to, avoid signing contracts in own name. So what do I mean by that? Let’s say you’re putting in an offer to buy a piece of property or you’re entering into a lease agreement. Whenever possible, try to avoid using your personal name on that agreement. Try to take it in the name of an entity.

Maybe it’s a corporation that’s going to put in the name, or an LLC, so the LLC is making the offer to buy the property or the LLC is going to sign on that lease agreement, because if something goes wrong with that contract, remember, because that’s what a lease is, that’s what a purchase and sale agreement is, a contract, the question then becomes who can that party go after?

Well, they can go after the other party to the contract, which would be your limited liability company or business entity. Now, with that in mind, when you’re signing on behalf of a business entity, make sure the business entity that you’re using to tie up your deals doesn’t have a lot of assets. I mean, here’s a stupid, really stupid move to make.

You’ve got an entity that has $500,000 in it, and you start entering into contracts to buy property with that entity. That’s dumb, because if you default on one of those agreements and they want to sue, they’re going to sue the entity, and it has $500,000 that’s available in the event that that creditor wins. There’s always an exception to the rule.

If you’re dealing with REO properties, buying from banks, well, then, typically you have to do that. You have to have an entity that’s funded that would be able to close on it, but that’s the exception, in my experience. So do not sign contracts in your own name.

2. Do Not Put Vehicle in Business Name

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Now, some other little things that, if you’re getting started in investing, that you should avoid if maybe you’ve set up an entity, and I see people want to do this. So, number two, do not own a vehicle in your business name. All right? So here’s the thing that comes with owning vehicles.

Individuals want to write off the vehicle. I mean, I get this all the time. How do I deduct my vehicle? Can I put my vehicle in the business name? It’s going to provide me asset protection.

Well, the answer is, you could do that, but it ain’t going to do what you want it to do, and here’s why, because when you put the vehicle into the business name, you’re going to be able to start taking deductions, but you can already do that with a mileage deduction if you kept it in your own name.

But when that vehicle goes into the business name, now you’ve just created another avenue of recovery for a party that is potentially harmed in a car accident. What do I mean by that? So think on this, let’s say you’re a real estate investor, And you’ve got your entity set up and you have a truck inside of that entity.

And you’re out driving this truck around, so the truck is titled in the name of your LLC, for example, Freddy’s Fast and Flipping Limited Liability Company. So you’re out there driving around and, you know, you’re paying attention to your cell phone, which you shouldn’t be doing as you’re driving, and you clip someone.

Or maybe you didn’t even see them, they just jumped out in front of you like a deer because it’s one of those what they call homeless people, just walking around on the sidewalk in a daze and they just step right out in front of you. Well, all of a sudden, you’re going to get sued, right? Because you hit that individual.

So who do they sue? Well, they’re going to sue the driver, which, of course, is you, but what else are they going to sue? They’re going to sue the owner of the vehicle, which is the business, and here’s why they’re going to name the business. They’re going to assert that, when you hit this individual, you are driving on behalf of your business.

Hey, you’re an investor. That’s easy to make. Unless you can prove otherwise, the default presumption’s going to be that you’re liable and your business is liable. So now you just drug your business in to that potential lawsuit by having the business listed as the owner of the vehicle, or even worse, or the registered owner of the vehicle.

Really, that’s what matters, who is a registered owner of that vehicle. So I like to avoid putting vehicles into the active business name, because, if you’re driving the vehicle around, you can still pick up your deductions, but let’s say you get in a car accident. The one thing you never want to say, they say, well, what were you doing while this happened?

Oh, I was operating, working for my business. Oh, really? And they take that down in the policeman’s report. That goes into the file. The plaintiff’s attorney gets a copy of the accident report. They turn around, they say, okay, Mr. Freddy, I see that you were conducting business on behalf of your company when you struck my client. Now you’re trapped.

Whereas if I was involved in that situation, I was driving down the street, I’d say, oh, I was just driving around doing some errands, you know, personal errands, looking around, whatever, you come up with some other reason. You don’t say that, okay, because that’s going to bring your business in. So keeping your vehicle out of the company, I think, is really important. Do not own the vehicle in your business name.

3. Protect Cash

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Number three, is protect your cash. So if you’re an investor, how do you make your down payments on properties that you’re making offers on? It’s with savings, so you got to have cash. So the mistake that I see a lot of people make is they keep tons of cash in their savings account or in their personal checking account.

Now, I get it. If you’re dealing with Freddie/Fannie loans you have to go through that seasoning process. They need to see two months of bank statement balances showing that you have the down payment in your account, and they don’t want to see the transfers from other entities because now the camel’s in the tent.

They’re going to bring up a whole bunch of questions that you don’t want to have to answer. But the mistake is that you keep all this cash in your personal checking account, and if something were to go wrong in your life, now you’ve got this asset trapped and you can’t go and set up an LLC and try to transfer it away and say, oh, now I’ve protected it.

Because if you did that and you lose the lawsuit and a judgment’s entered against you, then it’s considered to be a fraudulent transfer and they can undo it. So what I find for investors, I mean, this doesn’t matter. You have not even bought a property yet. You should protect that cash. And so, what you want to do is you want to put it into an entity like a limited liability company.

Typically, I like to use Wyoming, that’s where I put my investible cash. I put it in my Wyoming LLC, and then, as I need it, if I’m going to go on a loan personally, I’m not buying for cash and I know I’m going to do financing, I’ll pull the money out and I’ll season it for two months. Just the amount of money that I intend to use for the acquisition that I’m looking at. So protecting your cash, that’s an important aspect. Don’t keep the cash in your own name, protect it.

4. Holding LLC

Holding LLC
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All right, the fourth mistake that I see people make when it comes to investing is not setting up a holding LLC. So this should be the first thing you create. If you’re going to go out there and you’re going to start investing, the first entity you need to set up is a holding limited liability company. Now, this is not a special LLC.

If you went to your secretary of state’s website and you said I want to set up a holding LLC, not a traditional LLC, they’ll say those things don’t exist. They don’t, that’s just a term of art that we use. What is it, though?

A holding LLC is essentially a limited liability company that it’s set up to hold other LLCs that you’re going to be creating to own your real estate. Its sole purpose, a holding LLC, is to provide you two important things, anonymity for your investing, so people, if they look at your business interests, it doesn’t all point back to you, and charging order protections, meaning that if you get sued personally, that a creditor cannot take your LLCs from you.

That is why setting up a holding LLC, and again, this would be maybe a second Wyoming LLC. I don’t like to mix my cash LLC with my real estate holding limited liability companies. I like to keep them separate.

5. Separate LLCs

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Keep properties in separate LLCs. All right, so we want to keep properties in separate limited liability companies. We don’t want to put three, four, five properties in one LLC, because if anything goes wrong with that LLC, or with one of those properties, then all of them are at risk.

Now, if you come, or if you’ve been a reader of my site for a while, you know that there are some limitations here that I talk about when you hit certain amounts of properties. But, essentially, what you’re doing is you’re taking your holding LLC and you’re setting up child LLCs that are all owned by it, and inside of these child LLCs, you’ll own your real estate.

6. Equity Harvesting

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Now, from there, I think there’s another step that you may want to consider taking, and that is called equity harvesting at a point in time. So consider harvesting the equity in your real estate, that is getting an equity line, pulling that equity out as it starts to build up. Because the thing about your real estate that you have here is that that equity is what a creditor’s going to go after.

So if somebody sues the LLC, it’s a policy, right? They go after the insurance, they get your policy limits, they could get, and then if it’s beyond policy limits, then they could go after the equity in the property. So if I strip that equity, and I don’t say you have to borrow it.

If you’re able to get an equity line of credit against your property, that would accomplish the same thing, ’cause you could always borrow it out at a later date if you thought something might be coming down the line. So harvesting equity, I think, is a great technique to use.

7. Friendly Lien

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The last point that I want to bring up here is consider a friendly lien on your property. If you have a lot of equity in your property, then you can institute what’s called a friendly lien, which means you harvest your own equity on paper.

You make it appear as if your real estate is fully encumbered, and what happens in that scenario is you enter into a line of credit agreement with your business interest, where you agree to loan these entities,up to, say, $150,000, whatever the equity is in that property, and in exchange for that, you take back a deed of trust that you give back to this.

So it becomes an encumbrance that gets it recorded against your own property. In simpler terms, you’re doing this, you’re liening your own real estate, but people don’t know that because you’re using your own LLC to make this work. And so, if they look at that encumbrance, they’re not going to see your name.

Oh, Freddy just liened his own property. No, they’re going to see an LLC in Wyoming that doesn’t relate back to me filed a lien against your property, and they’re going to assume that you borrowed some money, and you want them to think that there’s no equity there.

Now, this is just purely a smoke screen. It would go away if somebody came after that asset. It’s not going to give you real asset protection, unless, of course, you actually borrowed the money from your entity. Then that’s a different conversation we could have at a different date.

Bottomline

All right, guys, here’s seven strategies that you may consider when it comes to being an investor, asset protection strategies to protect yourself with your investing.

Disclaimer: The information provided in this article should not be construed or relied on as legal advice for any specific fact or circumstance.

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