Asset Protection in Multifamily Real Estate

Asset Protection in Multifamily Real Estate

Disclaimer: I am not an attorney or CPA. My knowledge in this post comes from my own investing experience. Please consult your own attorney and/or CPA on your specific investments.

When you invest in a multifamily real estate syndication, you want to make sure that your new investment asset is protected.

Asset protection is simply the steps one takes to guard their wealth legally, without tax evasion. Guard from who, you might ask? From any creditors claims, including those involved with legal action.

Multifamily real estate syndications, when set up by a savvy sponsor, provides investors with some asset protection that you would find difficult to receive from other investment types. They can provide a more robust form of asset protection than dreaming of a Swiss bank account or stuffing cash into your mattress.

Again, I recommend you consult your own attorney and/or CPA to help you understand the best way to protect your personal assets and investments.

Multifamily Asset Protection: The LLC

The first step in multifamily real estate asset protection is setting up an LLC. LLC stands for limited liability company, a business structure where the owners are not personally liable for the company’s debts.

The regulations of an LLC vary by state, so it’s important that sponsors of multifamily real estate syndications rely on their team of attorneys to keep them in the all-clear when it comes to asset protection. This means not only filing for an LLC, but maintaining it for the long term.

By putting a syndication into an LLC or multiple LLCs, for example, sponsors have given their investors the added asset protection afforded by this legal structure. When the sponsor (a single purpose entity) goes out and purchases the multifamily real estate (for multi-investor profit), the risk of losing the capital it took to do so is mitigated.

In a country that seems bent on suing for everything, we’ve all heard of the horror story of someone slipping on the sidewalk in front of your property and suing for millions. Even if such a case were to occur, a lawsuit could only involve the LLC’s capital while an investor’s personal assets would be protected.

Multifamily Asset Protection: Multiple LLCs

An LLC by definition protects an investor’s personal assets from any possible litigation, but what about the multifamily real estate investment itself? If you’ve invested in a syndication of 10 properties, can one sue-happy individual take it all down? Not so fast… that’s why sponsors set up multiple LLCs as added asset protection.

It’s not uncommon to see real estate investors set up separate LLCs for each multifamily real estate asset acquired. That way, even if a lawsuit were to occur, the opposing party can only go after the single LLC involved in the litigation. A syndication of 10 properties with 10 separate LLCs is not treated as a whole in court–– a lawsuit can be made against a single LLC, and the other 9 are not involved in the litigation.

Somes states apply a “series LLC.” In this form of LLC, unlimited segregations of membership are allowed, making each an independent series.Each series operates like a separate entity with its own members, managers, books, and records. Your attorney can best advise you on which type of LLC works for you, and if a series LLC is available in your own state.

Multifamily Asset Protection: After the LLC

Once you have your LLC, you can use it to further protect your assets via these two methods:

Equity Stripping - Use your LLC to mortgage the multifamily real estate’s equity. This “strips” the equity from the property. Why would you want to do this? Because this transfer of equity from a positive to a negative significantly reduces the chances of facing litigation. A lawsuit against an LLC with no on-paper value has nothing to gain.

Estate Planning - You can also move your LLC into a living trust. Should you pass away, you have the added asset protection of direct beneficiaries. This prevents a jump in expenses for estate taxes and the drawn-out legal process of probate court.

Multifamily Asset Protection and Structure

Multifamily Asset Protection and Structure

To learn more about how multifamily real estate syndications are structured to make the most of the asset protection strategies available, I recommend this video that gives a great overview.

For more details on assets, look out for my next blog posts in this series of ten advantages of passively investing in multifamily syndications.


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Delphine Nguyen, Investor

Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.

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