The Double Barrel™ Property Shelter
If you are unprepared, investing in residential rental properties can be a very risky proposition. This is particularly true if you have worked hard over the years to build yourself any meaningful amount of wealth. A well constructed property shelter should be the cornerstone of your wealth protection strategy if you are a residential real estate investor.
Risks for Texas Landlords
Texas residential real estate investors face two kinds of risks: internal risks and external risks.
Internal risks are the risks specific to one of your properties. These risks can include things like a tenant, guest, or contractor suffering a slip-and-fall type of accident on your property. Other examples might include injuries your tenants suffer because something like an electrical failure causing a fire. Pools create rather obvious risks at rental properties. Typically, when you think of risk associated with a rental property, it’s the internal risks that come to mind.
External risks are the liability risks you face on just a normal day-to-day basis. These are referred to as “external” risks because they are external to your rental properties. If, God forbid, you’re involved and liable for a fiery car crash that kills a family of four, this would be an example of an external risk. Even something as disconnected from your direct actions as your teenager getting into a fight and severely injuring a classmate has the potential to threaten your investment properties.
Property Investors Often Fail to Create a Complete Investment Property Shelter
Placing your rental properties into a corporate entity or trust IS NOT a complete property shelter.
Moving your properties into a corporation, LLC, or trust is a good first step. If structured properly, this first step can go a long way towards isolating your rental properties’ liability from your own personal assets. This step may even prevent the liability on one of your properties from spreading over to your other properties. But it is unlikely this step will help you avoid the risk associated with any external risks. You need to prepare in advance for a tenant / tenant’s attorney to hit you with a large judgment. Take steps now to minimize the effect of a judgment on your real estate portfolio. Your properties need to continue producing rental incomes and increasing in value regardless of what happens to you.
Too often, residential property investors forget that judgment creditor CAN foreclose on shares of stock. When you hear the word “foreclosure” the process of auctioning off real estate likely comes to mind. But judgment creditors can foreclose upon your personal property, too! Therefore, if you own stock in a corporation or in an LLC, that stock is your personal property. If you suffer a large judgment from an external risk, the County Constables could place any shares of stock you own in corporations or LLCs on the chopping block. And placing your real estate investments in one or more trusts is not necessarily the answer; Texas courts have invalidated trusts in the past, too.
There Is No One-Size-Fits All Investment Property Shelter
Properly shielding your investment properties from internal and external risks requires a customized plan. A high asset individual has very different needs than someone who owns only a couple of rental properties. I know – a “customized plan” from an attorney sounds like a really expensive undertaking. But this is just not the case. Our pricing on a property shelter often tracks closely to a couple of mortgage payments (at 80% LTV). Best of all, part of Girling Law’s examination of your investment property shelter needs is finding the least expensive means of protecting your property. We want to work with you through the entire life-cycle of your property investment experience.
Creating your investment property shelter plan is free and so is your consultation. Give us a call today at (817) 809-2412 to get started.