Real Estate ownership title is a very key component to holding any type of real estate. It is even more important when you own investment real estate. When many people buy investment property, whether it is a single family home, commercial building or apartment building, they don’t always think about how to hold title. Oftentimes, owners are overjoyed to have bought their first investment property and end up holding title as tenants in common, partnership or sole owner.
However, there are many problems that can arise when holding investment property, not the least of which is being sued. The real estate ownership title is one of the most important things to worry about if you plan to buy investment property. The biggest reason for this is the owner’s liability.
Let’s take a real life example if a tenant slips, falls and gets injured on your property. Now, many might think that liability insurance would cover that kind of problem. In most cases, IF you have enough liability limit to cover that type of injury. But, let’s say you don’t have enough liability coverage AND someone finds that a crack in the floor had not been properly sealed before the tenant moved in. This could be considered negligence and you could be open to a lawsuit.
If the ownership title was set up as joint tenancy, say with your wife or business partner, you could be opening up your personal assets to a lawsuit. We live in a litigious society where everyone in America believes it’s ok to sue everybody and their brother and sister. Don’t think that the happy tenant that signed the one year lease won’t sue you and try to attach other personal assets as well.
So, how do you protect yourself from this type of unfortunate situation from getting out of hand? Many real estate investment owners form separation corporations for each of their properties. In fact, creating separate Limited Liability Corporations (LLC) to “hold” a property is both simple and cheap enough to warrant doing. Holding each property in a separate LLC, at least gives property owners a shield to protect each separate property as well as one’s personal assets.
A property’s ownership title is then put in the name of the LLC. Within the LLC, you name the owners or shareholders. It could be as simple as one person or a number of co-owners of the property. If a tenant wants to sue you, he or she would first have to “find” you as one of the owners and, if they are successful, then pierce the “corporate veil”, which is not an easy task to do.
Surely, going after a property owner who has not put their real estate investment in a corporation will be a much easier target to sue than one who has. During these tough economic times, ensuring that you have enough protection as possible is a very prudent idea. There have been cases of tenants suing landlords just because the water from the spout came out too hot and scalded them. Or, another case, where an elderly woman sued a landlord for touching her hand, calling it sexual harassment.
These types of cases may be thrown out of court. But, in some tenant friendly cities, every case has the possibility of creating a problem for the landlord. Real estate investment property ownership title is best put into some type of corporation. It is so easy and cheap to create an LLC that the setup of one should be a no brainer.