- Almost every property can be classified as either Class A, Class B, or Class C, depending on their quality and proximity to cities and highways.
- Forming an LLC is a great way to protect yourself and your business.
- If you’re an advanced investor and/or are growing your business, you should consider a trust or an entity to protect your business.
Asset protection in the real estate industry couldn’t be more necessary, especially as you scale and grow your business. While there are several asset protection strategies, they range in their budget and effectiveness. Discover how to protect yourself and your business with today’s best asset protection strategies.
What Is Real Estate Asset Protection?
Asset protection in real estate is exactly what you’d expect: it protects you and your investments incase any unfortunate situations arise. The last thing any investor wants after spending his or her hard earned money growing a business is to lose it all due to unforeseen circumstances.
Whether you choose to safeguard your investments through insurance or an LLC, asset protection should be high on your list of priorities. However, before you can decide which asset protection strategy to pursue, you must first understand how to categorize your investment properties.
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Real Estate Asset Classes
There are three real estate asset classes in which every property type can be classified. While some investors may categorize properties differently — based on that specific property’s characteristics — most will rank properties on a general scale from A to C. Certain investors prefer to rank properties from A to F (while some even add their own plus or minus categories), as keeping it simple is typically ideal. Read on to learn which traits help identify a particular property type.
As you would probably guess, Class A properties are at the top of the food chain. They are well maintained, in ideal locations, and in lucrative markets. Another way to identify Class A properties is to note what is in that property’s general vicinity. If there are great school districts, market places, cityscapes, hospitals, major highways, or malls nearby, you’re likely in the presence of a Class A property. While cash flow tends to be lower with these types of properties, potential for growth is usually high.
Think of Class B properties as the ideal investment for real estate entrepreneurs. Class B properties may not stand up in quality against their Class A counterparts; however, they make for great investments due to their sale prices and lack of necessary maintenance. Class B properties tend to be about 50 percent owner occupied and 50 percent investor owned, and can range in age anywhere between 30 to 60 years. While Class B properties may not be in proximity to the nicest school districts, they are typically still close to major cities and highways. For this reason, Class B properties should be a part of any successful investor’s investment portfolio.
Class C properties should mostly be considered “high risk, high reward” investment scenarios. This property type is almost solely investor owned and/or occupied by lower income tenants. Class C properties are typically older in age and have the potential to provide significant cash flow depending on how the investor chooses to upgrade the property. If you plan to invest in Class C properties, be prepared to give your new investment a bit more TLC.
Top Asset Protection Strategies For Real Estate Investors
The importance of protecting your assets as an investor is unparalleled. If you’re looking for ways to ensure the success of your business, consider the following options:
Debt: If you’re looking to protect your assets on a budget, the debt route is the ultimate strategy. Think of it this way: if you have little liquid capital in your savings from various investments, there won’t be much people can take from you. The strategy works like this: if you continue pull out the equity from your existing properties and reinvest that money into new investment mortgages, you are continually avoiding excess liquid capital. Otherwise known as equity stripping, most people will follow through with this strategy by using a home equity line of credit (HELOC).
Insurance: The easiest way to ensure your real estate assets are protected, is to purchase insurance. It is, of course, important to have insurance for your primary residence, but it is equally, if not more, important to consider insurance for your rental properties. As you grow your investment portfolio, you run the risk of becoming personally liable for more expensive problems. Before you decide to save money on insurance, think about things like earthquakes, flooding, natural disasters, and other maintenance problems.
LLC: The benefits of setting up an LLC are next to none. For one, an LLC will limit your personal vulnerability. When your investment properties are owned by an LLC, your risk exposure would be insulated by the protection of the company, leaving only the assets owned by the LLC (as opposed to all of the owner’s personal assets) exposed to potential lawsuits. In other words, personal finances would not be in jeopardy. There are a number of benefits that come with forming an LLC. For starters, the structure presented by an LLC makes delegating management responsibilities and positions a lot easier. Whereas a corporation is required to have officers and directors, LLCs are free to be managed by their owners, or even a third-party. Secondly, unlike that of an S Corp, LLCs promote foreign ownership and investment in U.S. real estate.
Trusts, Entities, & Structures: If your business continues to grow, there’s a chance you may need to “up” your real estate asset protection. The debt strategy and insurance can only go so far; eventually you’ll need to consider expanding into trusts, entities, and other structures. A combination of the three, in addition to onshore and offshore accounts, may be the best option for advanced investors.
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