New Blog Contributor: The Reformed Investor

As an employee of Nabers Group since the beginning of 2009 I am constantly opening my eyes to the realities and possibilities of investing.  As I learn more and more, I’d like to share my experiences, perspectives, advice and interests with you on this blog. Any entry posted by the “ReformedInvestor” is from me – not Jeff Nabers.  I thank Jeff for giving me the opportunity to guest post on his blog.  Please be sure to share your thoughts with me along the way too!
Sincerely,
The Reformed Investor

Reader Interactions

Comments

  1. Hi-
    I am researching the lawsuit protection that can be provided by a solo k. It appears that a solo k may be viewed differently than a regular 401k plan in terms of assests being immune to lawsuit. Additionally, I am finding that the rules differ from state to state. Do you have any insight into any rules or previous rulings….or any information for that matter regarding this subject and a solo k ?

  2. Thom,

    I haven’t researched this topic extensively (or conclusively) yet, but here are my findings thus far:

    ERISA (the law that created defined contribution retirement plans) has two titles. One title applies to all DC retirement plans. The other title applies only to “employee benefit plans” which are generally qualified plans (such as a 401k) that have multiple participants (the employees). Because a Solo 401k doesn’t have multiple employee participants, a Solo 401k is not considered to be an “employee benefit plan”.

    I believe the “federal protection” is contained within the title that only applies to employee benefit plans. Therefore, the Solo 401k is probably viewed the same as an IRA when it comes to statutory federal protection. In other words, there is none, and each State will have its own laws.

    Anyone concerned with asset protection should separate each asset into its own LLC. That said, if residential real estate is the asset, I don’t feel there is a need for asset protection beyond homeowner’s insurance.

    For instance, if I own a condo inside my IRA, and the condo is leased… in most states the lessee is responsible for the condition of the property once he or she takes possession. So if they are hurt on premises it is their own fault. Even if the owner is at fault, the homeowner’s hazard insurance should normally cover it. Additional liability is usually only experienced when the property is a multi-family or commercial property with common areas. Those common areas are usually kept by the property owner or the landlord and in that case the tenant might not be responsible for keeping themselves safe in the common areas.

    How these matters are specifically treated in a specific state is something you’ll probably need to determine with the help of an attorney in that state.

    Jeff

  3. Jeff,

    As a 15 year, full time real estate investor…I have to tell you that that is REALLY bad advice. I couldn’t disagree more that insurance alone is sufficient. As you noted, each state is different and it is wise to consult an attorney in that state…but not only will insurance NOT cover certain liabilities for residential real estate (some of which are the MOST often litigated with HUGE awards, which is why they’re excluded in virtually all insurance policies), it will only cover up to a specified limit. Even a $1MM umbrella policy might not suffice. Furthermore, as a landlord (lessor), you are liable not only for providing safe habitation for your lessee, but also for any non-related parties that might be injured on the property for any reason, such as slipping on the sidewalk. Courts have been increasingly hostile to landlords too. Multi-million dollar awards are not uncommon.

    And that’s just for inside liabilities…liabilities caused by the property itself. There are also outside liabilities to consider. If you have five residential properties in one LLC, for example, if ONE property is subject to a judgement, ALL properties can be attached…and you could lose every single one.

    Over the years, I’ve seen all sorts of bad things happen to investors who thought insurance was sufficient liability protection…or who kept more assets in one entity than they should. All professional investors I know, and all advisors I’m familiar with will tell you the same thing.

    If you’re going to play with real estate, I strongly suggest discussing the matter with a qualified attorney (familiar with real estate) and discuss all sides of liability…inside and outside liabilities. You need protection from your asset and your asset needs protection from you and your other holdings.

    Real estate investors, and particularly lessors/landlords are one of the most sued categories of people in our country. Don’t toy with it.

  4. Jerry,

    Thanks for your input 🙂 … I was a bit worried because it’s been a long time since anyone disagreed with me on this blog and I thought that was a bit odd. Alas, now the stars have realigned and things are as they should be.

    I don’t know everything, but here’s what I do know:

    – In many states, the lessee is (as created by the precedence of court decisions) responsible for the condition of the property they possess. Yes, landlords get sued a lot, but there’s a difference between getting sued and losing a law suit, and getting sued isn’t avoided by having an LLC. The fact that the courts’ positions on this topic vary from state to state is the reason why it makes sense for a person to talk to an attorney in his or her state. Using an LLC or not using an LLC for real estate ownership isn’t universally good or bad advice. Also, when you talk about slipping on a sidewalk, it makes a difference whether the sidewalk is in the possession of a particular lessee (such as on a single family detached residence) or a “common” or “shared” area (such as in a condo building) maintained by the landlord. If it’s in the possession of a particular lessee and the property is in a state that is pro-landlord when it comes to property condition responsibility, then the outside visitor slipping on the sidewalk is no different than the tenant himself falling in the bath tub. In a pro-landlord state, the tenant is responsible and it is unlikely for the landlord to lose in court. Also there is a big difference between a standard “hazard” insurance policy designed for owner occupied homes and a “landlord” insurance property designed for non-owner occupied properties. The latter costs more because it covers more. Not only is it a good idea to have “landlord” insurance because of the increased coverage, it is also the policy of most insurance companies that you cannot rent the property out when it is covered only by a simple hazard insurance policy.

    – Many investors get excited about buying property in an LLC, and soon find that the mortgage loans they want are not available to an LLC. As a response (and partly due to the suggestion of many real estate books) they sometimes will buy the property in their name and quit claim deed it into the LLCs name. This is problematic because the insurance that was setup upon the initial acquisition of the property insures the individual who is no longer the owner. But then if the LLC manager (probably that individual) asks the insurance company to change the named insured to the LLC, the insurance company will sometimes automatically notify the mortgagee/lender which will trigger the due on sale clause (or acceleration clause) and the lender will call the loan balance due. So I try to shy away from just saying “oh yeah and put everything in an LLC” because sometimes more problems are created than are solved.

    What you call “outside liabilities” is not within the scope of my brief blog comment response provided to Thom. I agree with you and had published a post on this exact topic about a year ago. You can read it here: http://jeffnabers.com/2008/07/01/asset-protection-multiple-llcs/

    Thanks for the thoughtful discussion, Jerry.

    – Jeff

  5. Hey Jeff…just getting ready to leave my office early for the day and saw your post come through.

    I think we agree on the importance of consulting advisors for your particular state. I would just like to point out that much of the reasoning you gave above is based upon things that can easily change. Court precedence is broken every day by upper and lower courts in our country. Precedence is used in litigation as an argument, but the idea of “settled law” hasn’t really been as ironclad over the last 20 years as it used to be. Anytime you go into court, you risk losing…no matter how cut and dried a case is. Just ask any attorney.

    Also, keep in mind that because a state appears to be landlord friendly doesn’t mean that won’t change. States are progressively becoming anti-investor…and at an increasing rate.

    Both of these things are based upon educated guess and “past results guarantee future outcomes”. Isn’t it better to rely on actual statutes and legal mechanisms designed specifically for asset protection?

    You do bring up a good point regarding financing a property in an LLC. You are absolutely correct in your scenario as far as the potential issues that can arise. However, due on sale clauses are rarely called as a practical matter…but even so, it’s easy to avoid if you know what you’re doing (all legal and fully above board and accepted). Also, that concern is really only present if you’re limiting your financing to Fannie and Freddie conventional/conforming loans on single family residential class properties. There are certainly more financing options, much more friendly to investors, such as common portfolio loans at your local bank where taking title to property in the name of the LLC or LLP is readily accepted, if not expected. Fannie and Freddie are not investor friendly and weren’t designed to be funding sources for investors in the first place.

    One thing that I would note regarding LLCs and LLPs as entities of choice for investment real estate…don’t overlook the privacy factor and the deterrent factor. You mentioned that an LLC won’t prevent you from being sued. Strictly speaking, that’s true…but it’s not really a full picture. LLCs and LLPs can prevent you from being sued under certain circumstances by way of providing a layer of privacy as well as a deterrent for a potential suitor, particularly if they have a weak case. I won’t go into the boring detail that I’m sure you already know, but this can be a benefit for both outside and inside liability.

    Another source of deterrence that most people don’t think about is…debt! Debt can be a deterrent for a lawsuit. When a litigants attorney looks at a case, they usually look for assets. If your asset is highly leveraged, there isn’t much equity to “win” in a lawsuit. Now, I’m not suggesting everyone go out and load up on debt. But it’s a concept to throw out there…and it does work.

    Anyway…sorry to hijack your blog here. I just couldn’t resist throwing my two cents in for a different perspective on the issue. I simply would never consider not placing my investment property in an entity. Similarly, I would never consider running my business as a sole proprietor. I guess the one thing to take from this is that this stuff can be far more complex than most people realize, as can be seen from our posts.

    Thanks for tolerating me Jeff!

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