Mauricio here.
So you've closed on your real estate transaction.
Now what?
Well, in today's video, we're going to talk about the ten biggest
mistakes most real estate investors make after they close their property.
Number one, keeping the property in their personal name.
This is probably the biggest asset protection mistake most
real estate investors make because you have unlimited exposure.
Doesn't matter how much the property is worth.
If something happens to that property, you as the property
owner are going to get sued and your exposure is unlimited.
I don't care if the property only has $10,000
in equity or it's underwater in equity or whatever,
the owner of the property is 100% liable with unlimited exposure.
So if somebody dies, then you are going to be 100% responsible.
And the judgment is for 5 million, 10 million,
$100 million, you've got no protection whatsoever.
The other pushback I sometimes get is that, hey, Mauricio,
I don't really own anything.
I just started I'm a kid or I just don't have any assets to protect.
Why bother?
The number one asset you have in that case is your W2 job and these judgments,
once they come against you, are good for ten years and can be renewed.
So we're talking about your current streams of income, whatever your job is,
but also the streams of income in the future.
So if there's a $10 million judgment against you out there
or $1,000,000 judgment against you out there,
they can attach your wages today, tomorrow, ten years from now.
So it's critical.
Absolutely critical to make sure that once you close on your property,
if you haven't already closed in an LLC or some other similar entity,
you want to make sure you transfer that title to the property
from your personal name over to an LLC, a limited liability company.
So now that the LLC is legally responsible for any liabilities.
The second mistake I see is even when people set up LLC,
they don't separate the assets from the liabilities
and all that losses are not created equal. Right.
So some LLC, these are designed to hold your valuable assets like your real estate
or your precious metals or your cash or any other investments.
And then there are other LLC
that are designed to be your operating companies,
like you're running a business, or maybe you're the manager.
You want to make sure you always separate
the asset from the liability within your LLC structure.
So for example, if you're in the real estate world,
you want to have one LLC that actually holds the property
and it does nothing else.
It really just sits there holding title to the property.
And then you want to have a separate entity
that actually runs the day to day business.
For syndicators, we call that a management company and a property company.
But even if you're just investing
in single family homes or duplexes, you want to have a management company
that doesn't own anything, simply manage the property, collect some fees.
But in the event that something were to happen,
the management company should get sued
because that's the company is doing all the work,
but that the asset is safely tucked away in a separate LLC.
So make sure your assets and liabilities are separated within your LLC structure.
Mistake number three is not thinking about privacy.
Back in the day, I actually used to work for a plaintiff's attorney
that used to go after people for car accidents, sort of the ambulance chaser.
Right.
And the number one thing a plaintiff lawyer's going to do
before he even takes on a case is they're going to do an asset search
because most plaintiff lawyers, they get paid on contingency, meaning
they don't get paid
unless their clients recover, and usually about a third
so that they recover, you know,
$100,000 in damages, they're going to get paid $33,000 of the legal fees.
But if they recover zero, then they're not going to get paid.
So the plaintiffs lawyers
going to make sure that if they win in a lawsuit,
they want to make sure that there's assets behind there that they can collect.
Everybody forgets that it's a two step process.
Step number one is, is to win the lawsuit
and actually get a judgment against somebody.
And step number two is actually collect on that judgment.
So privacy really helps to sort of prevent either prevent a lawsuit
from from happening in the first place
because plaintiffs lawyers don't want to go after somebody.
Just think about it.
If a plaintiff lawyer spends the next three years of their life
going after a defendant and it's a it's a slam dunk case and it's easy to get,
but at the end of those three years, they can't collect any money.
They're not going to want to do it.
And there are very, very few plaintiffs
attorneys that will do this on an hourly basis.
So having your assets sort of tucked away so that when the plaintiff's
lawyer actually does an asset search, they can't find most of your assets.
Yes. You want to keep a bank account with a little bit of money
so they can find the bank account? Yes.
Maybe they see your personal residence, although that's going to be
you know, we're going to strip away some of that equity.
You want to appear that you don't have that much money
so that the end up settling for whatever insurance limit you have
or maybe they don't even take the case at all
because again, they don't want to spend the time going
through all of that work and not knowing that they can collect.
So privacy is super important.
We're not relying on privacy.
You should always be able to go in front of a judge
and show them your asset protection structure and LLC.
None of this is nefarious
or anything like that, but you want to have the privacy
so they can't even find stuff on the front end.
And it sort of deters people from even filing a lawsuit
or encourages them to settle once a lawsuit has been filed.
Mistake number four is relying on living trusts.
A lot of people I talked to say, Marissa, I've already got a living trust.
I'm protected.
And that's probably one of the biggest misnomers out there,
a living trust has absolutely zero asset protection value.
A living trust sole purpose is to avoid probate.
Meaning if you pass away, you don't want to go through the probate process.
It's expensive, it's public.
You're going to be paying an attorney.
You don't even know. Your estate's going to be paying an attorney.
And it takes six, nine, sometimes more than a year to process.
So you want to avoid probate.
So every single person should have a living trust.
But because the living trust is remarkable, meaning it can be changed.
And you're the trustee and you're basically managing the trust.
It doesn't provide you with any asset protection value whatsoever.
So don't rely on a living trust.
Make sure you have LLC structures in place or asset protection trusts
which are irrevocable but don't rely on a living trust mistake.
Number five is relying on insurance.
Now, this is probably my biggest pet peeve,
not to be clear, every single person should have insurance.
Insurance should be your first line of defense.
If a lawsuit happens, you should have insurance company
that's out there that you're going to submit your claim to.
But the problem with insurance is really three fold.
Number one is that many times your particular issue is excluded
from the policy, meaning you're thinking you're making,
that you're making your premium payments,
thinking you're covered for a specific loss.
But then when the actual loss happens, it turns out you're not covered
because of all these these exclusions.
And if you've ever tried to actually read an insurance policy, it's a nightmare,
right?
Because, you know, in some paragraph they exclude a particular loss.
In another paragraph, they take they put it back in and then they take it away.
I mean, it's super complicated.
So I typically recommend having an insurance
attorney actually reviewing your policy so you understand what's covered.
But it's not uncommon for you to be paying your premiums
and then having the claim being denied, which is why you want to have your entity
structures behind that.
So it is your first line of defense,
but you don't want to rely on that completely number two
is that a lot of times you don't have enough insurance or you're underinsured.
Right? You have $1,000,000 of insurance in there. Great.
But there's a catastrophic loss and you're getting sued for 5 million.
Well, what happens now?
Your insurance covers Amelia.
You're now on the hook for another two or three, four or five.
You want to have the backstop of the anti stop.
And the third one, of course, is there are a lot of companies
that end up going bankrupt, especially if there's a major a major event.
So you're not always assured, depending
on the insurance company, that when it's time to actually
claimer insurance, that they're even going to be there.
So, again, insurance is important.
Everyone should have that as their first first line of defense.
But make sure you have the backstop of some sort of entity, asset protection
structure, whether it's purely entities or some asset protection trusts.