Establishing an LLC for real estate protects your investment in the event of a lawsuit or bankruptcy. Learn about limited liability companies (LLC), their protections, and other options to ensure that you invest your money wisely.

Investing in Real Estate

There are many advantages to investing in real estate that other options don't offer. However, investing in real estate also presents some unique risks. It's therefore important for investors to consider forming a real estate LLC. This is one of the best ways to protect their investments from lawsuits and other risks.

Introduction of Limited Liability Companies (LLCs)

In 1977, oil companies in Wyoming began demanding special protection for their enterprises. This was the start of LLCs in the United States. Before LLCs existed, real estate investors who needed the safeguards of limited liability had to establish corporations instead. Unfortunately, this had some major drawbacks. Florida, in 1982, was the next state to establish LLC statutes. All states have since created laws governing the establishment of an LLC business structure for real estate holders.  

Real estate investors who needed limited liability protection once had to establish corporations, but today, LLCs are often the better option. LLCs allow investors to reduce their personal risk when investing in real estate. However, owning an investment property through an LLC has some other benefits. These entities provide some unique tax benefits, for example, and are easier to administer than corporations.

What Is a Real Estate LLC?

A real estate LLC is a unique corporate structure that protects investors from lawsuits related to the property. This includes the protection of personal assets, such as a private home, personal funds, and other investments, in such an event.

A real estate LLC separates, in a legal sense, real estate investors from their businesses. That is, they are considered two separate things from a legal perspective. So if the business is sued, the investment property is protected. Forming a real estate LLC thus provides the investor some vital protections. However, setting one up can seem very difficult for first-time investors.

LLC Versus Liability Insurances

Establishing an LLC is certainly a good choice for many investors, but it's not the best option for everyone. For many real estate investors, for example, protection against a potential lawsuit isn't worth the trouble of establishing and maintaining a company. For these individuals, liability insurance may be a more affordable choice.

Moreover, liability insurance may not be enough to protect these real estate investors from the risk of personal liability. These insurance policies have limits, and investors may suffer due to exceptions and carve-outs written in their agreements.

Still, LLCs are not right for every investor. A person must carefully weigh the pros and cons of establishing an LLC versus taking out a liability insurance policy. Consider the following carefully before deciding:

  • Every investor and every investment property is unique. This is why a choice of legal entities are available to protect businesses that have different needs.
  • For investors who are at a low risk of being sued, starting an LLC may not be worth the effort.
  • You may be at an extremely low risk of experiencing a loss that exceeds your policy limits. The consequences could be devastating, however, if that happens.
  • Entrepreneurs who rely solely on insurance for protection are exposed to certain risks.
  • Liability insurance policies can be convoluted. Things like exceptions and limits may deny policy holders the protections they expect when filing a claim.

Liability insurance can leave you exposed even when you think you're covered. This makes establishing an LLC a wise choice in many cases; even if the risk of being sued is low, you can avoid policy issues by going this route and be protected against surprise lawsuits. In fact, business owners can be devastated by lawsuits that their liability policies do not cover. The same is true for real estate investors and their companies. In the event that insurance does not provide the coverage needed, a person's investment property may be lost.

LLC laws across all states afford many benefits to real estate investors, making them an even safer and more lucrative opportunity for business owners. 

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