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Cedar River Properties Newsletter (2/18/23)

This week’s newsletter briefly discusses liability when it comes to owning real estate.

Liability issues used to be my biggest fear before jumping into real estate. I was always afraid of something going wrong.

What if I get sued?

What will I do?

These are legitimate questions to ask prior to investing. After further research, I learned more about LLC formations and umbrella insurance policies to protect myself.

Limited Liability Companies (LLCs) are created to take ownership of the property leaving it out of people’s personal names.

For apartment investing, passive investors own shares of the LLC, but the property is owned by the LLC.

Umbrella Insurance Policies are also helpful to protect yourself from worst case-scenarios. These are reasonably priced policies that you can get through your insurance agent.

However, as a passive investor, they have no reason to worry about any of this.

That’s because as a passive investor, they are protected from lawsuits related to the property since they are not active in the deal and bear no responsibility.

The highest amount passive investors can lose in the deal is their initial contribution. Obviously, that scenario would not be good, but it is better than somebody going after personal assets.

Passive investors are also not liable for the mortgage since they are not personally signing on the loan.

Typically, a loan guarantor or key principal will sign on the loan and earn a piece of the deal.

This should take a lot of stress off being involved in real estate and owning equity in apartments.

Before making any big decision, I always ask myself, “What is the worst-case scenario if I move forward?”

If the worst-case scenario is something that is covered by insurance or by business formations, then it helps me sleep better at night.

Prior to making any investment decision, especially ownership of real estate, consult with an attorney to make sure you cover everything necessary.