Nobody gets into real estate investing with the intention of losing all the money they earn in litigation, taxes, or probate. You are an investor, and you have a business to run. That’s right, a business. Therefore, you have to protect your business and yourself, as a business owner. This means you must do a little bit of planning to save yourself (or your loved ones) a whole lot of backend cleanup and paperwork if something goes wrong along the way.
The most basic way you can do this is make sure you have the proper business structure in place. Whether it be a sole proprietorship, a general partnership, or an LLC, you have to decide how to protect your assets from the get-go. For most investors, they prefer to set up an LLC to separate their personal assets from their business assets. Setting up an LLC is easy to do and an excellent way for every investor, experienced or not, to have better control of their wealth management.
As long as you are earning money on your investments, you are going to be exposing yourself to greater taxes on that money. There are many legal ways real estate investors can use deductions and other tax strategies to protect from unnecessary taxes. One common way of doing this is deferring taxes through 1031 exchanges or refinancing. A common tax imposed on real estate investors is capital gains tax. On top of that, if you consider your later-in-life strategies, there are also gift tax and death tax an investor must consider. Strategies to address these taxes can be an Intentionally Defective Grantor Trust or a Grantor Retained Annuity Trust. These are things you want to have addressed with an estate planner in order to protect your wealth after passing.
Another thing investors should be asking is, are my investments covered? Making sure you have the proper insurance coverage on your properties, title, renters, etc. will protect you from expensive risks. This is especially true if you find yourself being a lender to another investor. You want to ensure your investment and your partnership will be covered. Properly insuring yourself and your business will not only help you maintain the current income you are making, but also open you up for new opportunities with the assets you are saving from litigation, repairs, or any other type of insurable incidents.
Over time, you may decide to simplify your real estate investing to enjoy retirement, extended vacations, or even to make passing the business on to your children easier. Even if you are doing a more passive form of investing, you need to pay attention to and plan for the risks that come along with it. The protection and simplification of your estate will mean that even after you have passed, your wealth is still yours. That means you will need to have planned for dissolving any partnerships or joint ventures, or how you’re going to pass on your wealth and inheritance on to your family or through charitable giving. While not as easy as forming an LLC, creating an Estate Plan is the most important thing you can do for yourself and your business.
Many people do not like to think about end-of-life, and it can be a difficult subject for many to consider. However, would you rather take the time now to make sure you, your business, your family, and your wealth are protected during any point of your investing rather than wait for something to happen and have to spend more time, money, and effort to fix it? Take the time to meet with an attorney to either start your plan or review an existing plan you’ve already created. You should be reviewing your estate plan every three to five years just to make sure you’re prepared for any new laws or regulations to continue to fortify your assets. Don’t wait, you’re not a gambler, you’re an investor! Lucky for you, AZREIA has our Wealth Fortification for Every Real Estate Investor coming up on October 16th & 17th. This is the perfect time to create or reevaluate your asset protection in order to be a more successful real estate investor.
Alan Langston, Founder
Mike Del Prete, Executive Director