In our March teleconference, I suggested a new strategy for protecting real estate from lawsuits. Kent would like some clarification on this strategy.

Q: Dear ProVision: I have a question from your teleconference in March. You spoke of "scaring away" by using an equity line on a property which was good, but even better was to place a lien on your own property. Could you please clarify? I have listened to it several times and I am unclear on this concept and it's exact purpose and when it should or could be used. Also, from the same March teleconference: can you use your own IRA as a hard money lender to your RE business? Thank you Kent

A: The most common way someone buys real estate is to put a downpayment (typically 20-30%) on the property and borrow the remainder from the bank. Even if you put your real estate into an LLC, this still leaves your downpayment at risk in a lawsuit. My newest idea on this is to borrow the downpayment from an entity that you own. Once you purchase the property, be sure to record the loan as a second mortgage on the property with the appropriate lien documentation in place.

In doing it this way, now the LLC that owns the property has no equity in the property (except for possible growth in value, of course) and your downpayment is protected from creditors, both those on the outside of the LLC and even from your renters. Garrett Sutton, the attorney who teaches the Rich Dad Education Tax and Asset Protection course with me, calls these attacks 1 and 2. This is one of the few ways to protect you from both attacks in a single transaction. Pretty simple, actually.

Warmest regards,

Tom