The Biggest Dangers of Owning Real Estate Investment Property in Your Own Name
Recently, I was speaking with a couple regarding their rental properties and other investment properties. This couple owned properties in the state and out of the state. In addition, they were also silent partners in a small business which was generating them a decent amount of revenue. When I asked the couple how they titled their investment properties, they told me that they own them jointly.
Unfortunately, this is far too common when it comes to being a part-time real estate investor or a part-time investor in order to generate an additional extra revenue and income. The main legal issue from titling property jointly in your own name is that it subjects you to unnecessary liability exposure.
John and Jane owned a home, two luxury cars, and approximately $500,000 in financial assets. They also owned a rental property that was fully leased to several tenants. John and Jane owned both rental units jointly in their own names as husband and wife.
One of their tenants slipped and fell down the stairs because the lighting was poor and one of the steps was missing. John and Jane’s tenant sued them and obtained a $1 million judgment. John and Jane only had a $500,000 policy on the rental property. Therefore, John and Jane had to pay the remaining $500,000 themselves. As a result, John and Jane had to liquidate several financial accounts to pay the judgment that completely wiped out their savings. In the end, John and Jane had nothing.
How a Limited Liability Company can help
If John and Jane had titled their rental properties in the name of a Limited Liability Company (LLC), then they would not have been subject to personal liability and potential loss of their life savings. A Limited Liability Company is a separate legal entity that many people use to shield their personal assets from liability. For instance, John and Jane would establish the John and Jane Real Estate Investment, LLC, through the Secretary of State’s Office. Thereafter, they would retitle their two rental properties into the name of the John and Jane Real Estate Investment, LLC.
If John and Jane were sued in the same manner, only the Limited Liability Company could legally be subject to a lawsuit. This means that John and Jane’s personal assets would not be subject to loss. Only the assets of the LLC would be subject to loss. Therefore, in the worst-case scenario, the rental properties may have to be sold to pay the judgement. This is much better than John and Jane liquidating their entire life savings to pay the $500,000 judgment from the lawsuit.
For more information
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