Privacy protection is a critical aspect of real estate investing. If you want to know why, look no further than today’s headlines.
Dr. Mehmet Oz recently faced some major hurdles in his bid for the US Senate, partly due to the fact that the media learned he owns ten valuable residential properties—after he publicly stated he owns only two.
Last year, a similar story broke, involving Patrisse Khan-Cullors, cofounder of the Black Lives Matter organization. Cullors had allegedly purchased four residential properties of substantial worth. Social media got hold of the story, and Cullors was accused of misappropriating funds raised by the BLM foundation to buy real estate for herself.
No evidence was produced to link Cullors’ home purchases to ill-gotten BLM funds, but the damage to her reputation was already done.
I’m not making a political statement here, nor am I saying whether I think either of the above parties was “right” or “wrong.” The point I’m making is that both of these individuals—and thousands of others every year—could have saved themselves a world of trouble if they’d done a better job protecting the privacy of their real estate holdings, as is their legal right.
Often when I speak in public about privacy protection, people look at me askance and say, “Come on, Clint, the only reason people want to hide their assets is they’re trying to commit fraud.” Not so. There are legitimate reasons for practicing good privacy protection. Not only is it the wise thing to do; it is often the right thing to do as well.
First of all, as the above stories suggest, when people find out you own property, they use that information to their advantage, not yours. They may use it to create a misleading and unflattering picture about you or to build leverage against you. Second, it really is no one else’s business what property you own. The law allows you to protect your privacy, so why not do so?
Third, and most important, is the “low-hanging fruit” phenomenon. When a lawsuit is filed, the plaintiff’s attorneys inevitably take the simplest route to getting paid. One of the first things they do is perform an online property search. When they discover you own real estate, they can go after it. However, if they can’t find anything under your name, they’ll usually move on and settle for whatever limits your insurance policies may stipulate.
The point is, you don’t want to make your property the low-hanging fruit. You want to make things as difficult as possible for would-be plaintiffs who would come after your real estate.
There are several strategies you can use to shield your assets from being traced back to you. These typically involve creating legal entities to hold your properties, rather than holding them under your name. Setting up a trust is one way to do this (I’ll talk about this in a future post).
However, the most common strategy I teach my clients and recommend in my books is to use limited liability companies (LLCs). The “magical” three-step process I endorse, in very simplified form, is this:
- First, set up an LLC in a state that does not collect information on who the LLC’s members or managers are, usually Wyoming or Delaware. This LLC becomes your general holding company.
- Next, set up a second LLC to hold the individual property itself. Do this in the state where the property is located, and designate this LLC as “member managed.”
- Then, list your Wyoming or Delaware holding company as the sole member of the in-state LLC.
You’ve just created a privacy wall that is difficult to penetrate.
This strategy works beautifully but is not appropriate for all situations and should not be attempted as a DIY project. Always consult a qualified legal advisor. But whatever you do, get serious about privacy protection. Don’t become fodder for vultures who seek to sue you or damage your reputation.