Many people view investing in real estate as an opportunity to maintain and grow a passive income stream as either a primary or secondary source of revenue. There are several issues that real estate investors need to consider in order to protect both their personal and business assets from the risks involved.
- There is potential exposure to one’s personal assets (or potentially other business assets) unless the investor takes steps towards forming a legal entity to be the titled owner of the real estate. If the real estate is held in the owner’s individual name then he or she risks exposing his or her personal assets (bank accounts, investment accounts, personal residence, etc.) to the risks involved in the business such as tenant, contract, and premises liability. The personal assets could also include the investor’s ownership interests in other assets such as another business that they own unrelated to the real estate investments.
- The investor should also take steps to separate the risks involved in owning multiple properties from the assets of the real estate investment. Each piece of real estate carries with it its own risks that an investor should consider separating from the other pieces of real estate in the business. If all of the real estate is held in one entity, then all of the real estate will be exposed to a claim brought against the entity owning the real estate. An owner should consider whether having a separate entity own each piece of real estate makes the most sense for his or her own situation. That way, if there is a claim related to one of the investor’s properties, the only asset exposed to the claim is the assets in that individual entity as opposed to all of the assets of the real estate investment or the owner’s personal assets.
These decisions can be driven in part by advice from the investor’s tax advisor, so, in addition to legal counsel’s advice, an investor should also seek the advice of his or her own tax professional over the course of structuring his or her real estate investment company.