Real estate and other debt is often key to a physician's wealth building and investing strategy. Unfortunately, most doctors don't discover that managing the serious legal and financial exposures this creates must be done proactively, or it will be too late to act.
Many physicians acquire investment assets like real estate and other businesses in the course of building their long-term wealth. I regularly get calls from physicians about an exposure on these issues when they are facing the prospect of a default or some other financial difficulty. Over the years, I have had to turn the vast majority of them down for several reasons:
•You usually can't take steps to protect your assets from a voluntary creditor, like a bank you obtained credit from, after you have entered the agreement, that's fraud.
•Any assets you have specifically collateralized cannot be moved out of the creditor's reach.
•You can't provide financials listing assets that are the basis for you receiving credit and then subsequently move those assets into safe structures that are remote to that specific creditor.
What this really means is that asset protection is, as always, proactive. The best way to protect yourself and limit your exposures is before you get into the obligation in the first place, including having core personal assets in the right structures well in advance and having counsel that can help advise you on what your obligations are, how they can be legally limited and what you are really signing. Here are a few of my tips for property owners and investors.
1. Many investors are signing for loans as jointly and severally liable for the total six or seven figures in debt when they only own 20 percent of the deal. Limit your liability for the debt to only your proportionate ownership percentage where possible.
2. Avoid general blanket personal guarantees. Be specific about what you own, what you are collateralizing and its value, or the lender may value what you own at pennies on the dollar and try to take more than they should.
3. In addition to your loan agreements get your leases, indemnity agreements, and other legal documents drafted by a lawyer. It's hard to pay your bills and mortgage if you are not being paid or if you are spending money that should be used on debt service on legal fees and lawsuit judgments.
4. Protect yourself from your renters, their guests and business invitees, you are liable for all of them and their health, welfare and safety. Have specific leases, written policies on conduct and the use of the properties and enforce penalties for violating them in addition to having very heavy (seven figure) liability insurance policies.
5. Divide title to your properties based on equity and risk or liability. If you have multiple pieces of property in one single LLC, for instance, remember that ALL of them (and the income streams they produce) are potentially at risk for an exposure at any one location. It will often make sense to have them in separate entities.
6. Adequately insure yourself against loss and property damage, as distinct from liability which I mentioned above. Find top rated national insurance carriers that you can hold accountable (sue) if they don't cover you as the policy requires.
7. Remember that vacant property is often not covered by general loss and liability insurance after as little as 30 days, if you don't let the insurance company know and pay them extra.
8. Get professional accounting help to maximize deductions. Using strategies like energy studies, property tax reviews, and cost segregation studies to reduce your fixed long-term costs and maximize what you get to keep.
Although this list is full of very basic, commonly overlooked issues, it is by no means complete. It provides a good start and a basic checklist of issues to consider before you start making these kinds of investments. It also points out an issue that has come in the context of many of our discussions, the need for all physicians to have good relationships with banks that they know, that know their income, business model, and who want to be long-term partners in your success.