Why You Need a Business Structure

Sometimes I feel like I’m beating a dead horse about the need to have a business structure when you hold real estate. I figure I’ve been talking about it practically non stop for 20 years now. Surely everyone has heard it by now?

Then I heard someone saying that “someone” told them they only needed insurance and probably not even that for their property. I ended up going round and round on the issue. There are times I feel like just giving up on it. I want to say, “Fine! Don’t have a business structure. Maybe you’ll be lucky.” But it always bugs me. Well, I heard a story that made me realize how important it is to get this information out…even if people don’t always want to hear it.

Are You Protected if the Unexpected Happens?

This came from a client of mine in Florida and it’s the true story of what happened to him that made him vow to ALWAYS use land trusts and limited partnerships (LLCs would work as well) to hold property.

Early on in his investing career, he and his wife owned an apartment building. There was a news bulletin out! A suspected murderer, presumably armed, had escaped and was in the neighborhood of his apartment. One of his tenants said he’d seen the man and they called the police. Another tenant came forward and told the police that he’d ridden the elevator with the man and he pointed to the apartment that he saw him go into.

The police (along with my client) went to the door. They heard a baby crying inside. They knocked. No answer. They knocked again. No answer. That’s when the decision was tough. They could break down the door, but it was a possible hostage situation with an armed suspected murderer and a baby.

That’s when my client said, “I have a key!” And he gave the key to the police. They used the key to go inside.

It turns out it wasn’t their suspect. Not only that, the tenant (a single mom) was furious. She said she’d been harassed by my client by unlawfully giving the key to her apartment to the police and so she sued him for one million dollars.

She got a pain of a lawyer and my client called his insurance company. They brought in their lawyers as well…focused on how it wasn’t their fault. At one point he spent day after day with 3 lawyers at $300 per hour (that he paid for). In the event, the insurance company settled with the tenant and it all went away.

Why did he fight so hard? He had EVERYTHING he owned at risk because he had no business structure in place.