Updated October 2, 2021

Real Estate Asset Management: How to Protect Your Rental Property Income

Real estate investments provide a sense of accomplishment and security that is difficult to achieve in the stock market. However, hidden risks can ruin a good real estate investment. Professional real estate asset managers protect your investment, reduce your risk, and optimize the tax benefits of your investments.

Why You Should Consider Investing in Real Estate Asset Management

• Real estate asset management vs. property management
• What is real estate asset management?
• How does real estate asset management work?
• What is real estate protection?
• How to title your real estate portfolio
• Decrease tax liability on your real estate portfolio
• Grow your assets using income-producing properties
• Protect your property from creditors, liens, and lawsuits
• Estate planning for your real estate investments
• Benefits of hiring a professional real estate attorney
• Asset-based lending for residential real estate
• Protect rental property with the right insurance
• Losses your asset management team will help you avoid
• Rental property management
• When you’re the employer: hiring and firing contractors
• Real estate asset management courses
• Real estate asset protection strategies

Real Estate Asset Management vs. Property Management

What’s the difference between asset management and property management? Real estate asset managers are professional investment experts who help property owners maximize their return and manage risks of owning property.

Property management firms, on the other hand, handle the day-to-day work associated with being a landlord. A property management firm screens potential tenants, conducts background checks, collects rent, manages delinquencies, evictions, repairs, and middle of the night phone calls.

What is Real Estate Asset Management?

A real estate asset management company hires professionals that assist real estate investors in making smart decisions related to their investments. Their goal is to preserve your assets and maximizing your returns. The asset management process begins before you buy the first property. The firm evaluates locations, growth potential, options for titling of the property, financing, potential liability, and forecasts cash flow, revenues, and expenses to help you identify the property with the best potential.

The firm will advise you on the best way to structure the titling of your holdings based on your unique circumstances, help you with business and capital expenditure planning, and work to protect your investments.

If you purchased your property before receiving professional asset advice, a review and forecast of the future will help you make decisions about which properties to hold or sell.

How does Real Estate Asset Management Work?

Real estate asset management focuses on strategic decisions that affect the risks and rewards you experience from your real estate investments.

Every investment involves a balance between risk and reward. Generally, the greater the risk, the greater the potential reward. Investors must decide their tolerance for risk and balance that against the potential rewards.

Investors can use sophisticated strategies to avoid or transfer risks without giving up the potential rewards. Transferring or mitigating the risk allows an investor to increase their ROI without taking unacceptable risks.

The goal is to find a winning strategy that puts your mind at ease enough so you aren’t losing sleep, worried about losses and fretting about returns that are too small.

Professional asset managers provide value by simplifying the complexities of the real estate industry. Individual investors often do not know what it is they need to learn. Land ownership comes with inherent risks that may not be immediately obvious.

In one example, a landowner leased a home with an in-ground swimming pool. The tenants drained the pool rather than maintain it during the winter. A storm blew down a fence between the pool and a neighboring home where young children resided. The tenants did not notify the landlord of the fence is down, because the lease did not require the reporting of property damage.

One of the neighbor’s children fell into the empty pool. The child’s injuries, although extensive, allowed for a full recovery. Fortunately, the landlord had an umbrella liability policy that covered the medical bills.

Without the umbrella policy, the landlord would have lost the property. How many errors did this landlord make? What would the worst case scenario be without umbrella insurance?

Professional risk management requires extensive knowledge of the potential risks. When you engage asset managers to help you make good decisions, they will advise you on potential upside and downsides to your choices. Asset managers work with attorneys who specialize in real estate and stay up-to-date on issues that could increase your liability.

The firm will advise you on the federal and state tax implications of your decisions so that you can minimize your tax liabilities, including where your legal entity should be domiciled to reduce state income and inheritance taxes.

What is Real Estate Protection?

Without the right protections, one mistake can cost you everything. There are two types of real estate protection– external and internal.

External risks are threats to your assets arising from personal liability. For example, if you injure someone in a car accident and your liability insurance is inadequate to pay for the damages, their attorney can go after your real estate assets. If your holdings are structured properly, they are protected from creditors. You won’t lose everything you’ve worked for even if your personal assets are insufficient to pay for the damages from the car accident. One of the greatest external risks is divorce.

Internal risks are threats to your assets that arise from something that happens to the property. For example, if the owner of the home where the neighbor’s child fell into the empty swimming pool had not had enough insurance, the child’s attorney may have gone after the owner’s personal assets, the property where the accident occurred, or other properties owned by the property owner.

Maximizing the benefits of the available asset protection strategies involves making the right decisions about titling, venue, and insurance coverage. Experts who understand how these areas affect each other can help you successfully navigate land purchases, management, and the sale or bequest of assets.

How to Title Your Real Estate Portfolio

A real estate asset management company will help you evaluate the tax, privacy, legal, financial, and business considerations of different legal entities so you can make the best decision about the right way to title the legal entity that owns your real estate.

LLC’s aren’t the only option. Land trusts, holding company, retirement accounts, and Series LLCs are all viable titling options.

The right titling protects your real estate portfolio. Investors who don’t use an asset management team often believe that using an LLC for rental property is all they need to protect themselves. Using an LLC is better than titling income-producing properties in your own name but it will not protect your investment from every risk.

The following illustrations show some of the most common titling options.

Holding Company

A holding company provides greater protection against creditors. The complexity of the structure may dissuade suits because the cost of attempting to get to the assets is higher. This approach provides privacy which shields assets from those who look for opportunities to take advantage of landowners.

Individual LLC’s

Individual LLC’s protect one property from being subject to claims arising from a second property. This option narrows the risk from internal risks. A claim against the LLC that owns the first house will not have access to the second house.

Single LLC

Holding multiple properties in a single LLC protects your personal assets, but it puts all the properties in the LLC at risk if there is an internal claim against one property.

Privacy

Privacy is important. In our litigious society, someone who has significant assets in their name is more likely to be targeted by an attorney working on a contingency fee basis. If they can’t find your assets, they are less likely to sue. The name of the entity should not point to the beneficial owner. Joan Reynolds wouldn’t want to name her LLC “The Joan Reynolds Real Estate Investment Company.” JR Assets would be a better name.

Property ownership is a matter of public record. If you own property in your own name, it is an easy matter for anyone to learn you own the property. Some states have strict privacy laws that protect the owner of LLCs from discovery.

A professional real estate asset management team will determine the best way to title your property to protect you from as many risks as possible. There isn’t a one-size-fits-all solution. The right answers change as laws change.

Piercing the Corporate Veil

The purpose of establishing a separate legal entity to own your properties is to protect them from external threats and to protect each property from the internal threats from a problem related to a different property.

In order for the separate legal entity to provide the necessary protection, it’s important to conduct the business as a proper business. If this isn’t done, the court may agree to pierce the corporate veil and make corporate assets available to personal creditors or personal assets available to business creditors.

The corporate veil is safe unless the owners, officers, or directors fail to conduct the business as a separate entity. If they co-mingle funds, commit fraudulent and blatantly dishonest acts, or fail to conduct the business as a business by following the required formal processes, the court can decide to pierce the veil.

If you use an LLC, the protection it provides will depend largely on which state the LLC is domiciled. In some states, the protection provided by the LLC is easily pierced. In other states, the protection is nearly impenetrable. Establishing an LLC in a state where you do not reside and where the land is not located is more complicated than setting up one in your state, but the added protection can be worth the extra effort.

Decrease Tax Liability on Your Real Estate Portfolio

Numerous factors affect your tax liability or the tax benefits you receive from owning real estate investments. The way the property is titled, how it is rented, when you sell the property, whether you buy another property, and how long you held the property all affect the amount of tax you’ll pay.

Your real estate advisor will provide guidance on which records to maintain for deductible expenses.

Grow Your Assets using Income-Producing Properties

Location is important for the long-term appreciation of a property. Do you know which factors affect a property’s appreciation? Do you know the future plans for adjoining properties?

One way to maximize your return on investment in real estate is to make better buying decisions. The real estate market favors the well-informed.

What are the most important considerations when location is considered? Is it schools, available transportation, taxes, health care facilities, or nearby conveniences? Which locations have more stable pricing even during market downturns? Do the benefits of being beachfront offset the high cost of insurance for the risk of hurricane damage?

What should you consider if you’re buying a commercial property? If you’re looking for a commercial location with heavy traffic, how much is enough? What if traffic is so heavy, that potential customers will choose to travel further to a less congested area?

Asset managers forecast returns on properties you’re considering to help you make a buying decision that will stand the test of time. The numbers they provide help you evaluate the decision under the most favorable, least favorable, and most likely scenarios.

Protect Your Property from Creditors, Liens, and Lawsuits

Professional advice is the best way to protect your assets from problems. Experts know the answers to important questions.

Where is the best place to domicile the legal entity to maximize its ability to protect the rest of my assets against loss?

Is there a way to protect assets after a lawsuit begins? 

Does appearing wealthy increase the risk I’ll be sued?

Am I responsible for injuries to a tenant for an appliance that has a recall? What about a guest or a trespasser?  

Can I lose my home because of a problem with an investment property?

What type of insurance should I carry? 

How much insurance should I carry?

Could I be held liable for someone else’s negligence? 

Will the bank come after me if I walk away from a property that is upside down?

If you don’t know the answers, you may be more exposed to risk than you want to be.

Estate Planning for Your Real Estate Investment

For many investors, accumulating assets is not the end goal. Preserving the legacy you pass to your heirs may be equally important.

If you’ve sheltered real estate investments in a trust, transferring assets in the trust to your heirs bypasses probate, avoids probate fees, and can be completed quickly. Because a trust is private, your heirs will not know who the beneficiaries of the trust are which can reduce family squabbles over perceived injustices in how you decide to arrange your affairs.

Selling inherited property can provide significant tax benefits that make it better to wait until after death to transfer the property. Professional advice can help you avoid costly mistakes.

Wills can be challenged, and they become a public record during probate. When real estate is owned by an individual, each state where there is property requires the estate to be probated, which increases the costs and complexity of settling the estate. Trusts and LLCs avoid this time-consuming problem.

Benefits of Hiring a Professional Real Estate Attorney

Lawmakers are influenced by their experiences, personal interests, cognitive biases, and their constituents. Court decisions add another layer of complexity, and their decisions continually create new case law.

Expertise, not common sense, is the best way to avoid obscure legal risks. For example, in Idaho, you cannot evict a tenant during the winter months if the property is on acreage because evicted horses that freeze to death make bad headlines. A real estate asset management company can write a lease that closes the loophole and prevents a tenant from taking advantage of this law.

Lease laws vary in every jurisdiction and can change at any time. Your real estate asset management team will have access to an attorney familiar with the local laws who can review every lease to help you avoid problems.

Suing one’s landlord is one of the latest “get rich quick” schemes. Even if you prevail in court, the aggravation, time, and expense of a lawsuit are best avoided. Limiting your exposure will limit your risk of being sued by greedy tenants or attorneys.

Civil asset forfeitures without due process are frequently in the headlines. A case is winding its way toward the Supreme Court that may slow this trend, but the decision is not here yet. An attorney can help you protect your property from unjust asset forfeiture attempts.

Asset-Based Lending for Residential Real Estate

Banks and lenders are typically not willing to lend LLCs money for properties with four or fewer units. One strategy that can be used to finance new properties is through asset-based lending, where the equity in fully-owned properties is used as collateral to purchase new properties.

Protect Rental Property with the Right Insurance

Carrying adequate liability insurance is a critical aspect of risk management.

The neighbor child who fell in the empty swimming pool is one example of insurance protecting a landlord.

Another strategy landlords can use is to require the tenant to carry renters insurance. Although the landlord is unlikely to be held liable for anything covered by the renter’s insurance coverage, having their own insurance reduces the likelihood the tenant will look to the landlord for restitution.

Understanding your coverage is important. For example, a policy that protects your asset while a tenant is present may not protect the asset if it is vacant. An asset management professional will be able to advise you on the fine print of the insurance policy.

Losses Your Asset Management Team Will Help You Avoid

Landlords can make a lot of mistakes if they do not have professional guidance. One common mistake landlords make is attempting to make a rental property as nice as their home. Spending money on improvements that do not increase rental income eats into profits and cash flow. Over-improving rental properties is not a smart financial move.

Rental Property Management

Property managers shield you from time-consuming and heart-wrenching interactions with tenants. Your real estate asset manager can recommend reputable property management companies. A bad property manager increases your risk. Your portfolio manager can provide you with specific questions to ask the property manager you are considering and provide you with a forecast of the financial effect on your cash flow and profits of hiring a property manager. ARM certified property managers have professional credentials that add a layer of assurance that they won’t make terrible decisions.

When you’re the Employer: Hiring and Firing Contractors

The relationship between an employer and employee creates potential liability. Employment laws are complex. You may be responsible for the acts your employees commit while they are working for you. Wage and labor laws, licensing, insurance, background checks, and how to maintain a worker’s status as an independent contractor are all areas where an asset manager can help you prevent problems and reduce expenses. Using a property management firm transfers many of these risks.

Real Estate Asset Management Courses

Real estate asset management courses are offered by presenters who want to sell a service.

The courses provide good information, but it is a mistake to believe that they prepare you to manage your own real estate with the same level of skill and knowledge that a professional asset management company provides.

The best way to protect your assets is to be a moving target. You can learn how to protect your assets this week, and by next week a court decision can change all the rules. Keeping up with the changes is a full-time job best left to professional asset managers.

Real Estate Asset Protection Strategies

The benefits of an asset protection lawyer and real estate strategist stem from the knowledge they bring to the table. A good strategy team like Anderson Advisors will create a customized plan for each property that helps you make profitable decisions at the right time. As the saying goes, knowledge is power.

On the surface, to anyone who has ever bought a house, investing in real estate may seem simple. Digging into the potential risks makes it obvious that building a portfolio of real estate assets is a complex subject that deserves the benefit of expert advice.

Some of the most effective asset management strategies are quite complex. One highly effective strategy involves offshore accounts and mortgages.  Cross-collateralization is another method of protecting equity in a property from creditors, but it requires partners.

The protection continues past the end of life when your estate planning desires are considered as part of the plan. Your real estate holding can pass to your heirs privately and effortlessly.

Hiring knowledgeable industry experts with experience and the ability to stay on top of legislative and case law changes is the best way to manage the risk associated with real estate investments.

The experts at Anderson Advisors can evaluate your property to see if it is a superior deal in the current market, so you can begin investing with a smart buying decision. We will help you establish a legal entity that minimizes potential losses, considering jurisdictions that provide privacy protection and the least risk of having the corporate veil pierced. With our guidance, you will be able to keep on top of changing tax laws, maximize tax deductions, and minimize taxes, and optimize profits when you sell properties.

Real estate provides profitable investment opportunities. The nature of real estate investments is such that the amount at risk can be more than you invested. Bad decisions put all your assets at risk. The best way to enjoy the benefits of investing in real estate without risking everything is by partnering with a professional real estate asset management firm such as Anderson Advisors. We’ll help you make the right decisions, so your real estate assets are protected.

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.

Additional Resources:

• Claim your FREE Strategy Session
• Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
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