March 6, 2013 by Dymphna 2 Comments

Cover your Assets!

If you’ve ever heard me speak at a seminar or one of my boot camps, or even just taken a look at my website, then you’ll know how dedicated I am to two very basic ideas in real estate…

The first one is simple, isn’t it?  I’m all about helping you set yourself free from financial worries by acquiring real estate investment properties.  Fortunately, thousands of people have done just that through my real estate investment education seminars, boot camps and mentoring programs.

It’s no secret that my students have done quite well acquiring investment properties–thank you very much–by creating fantastic monthly income streams and manufacturing value in their property portfolios through additions, renovations, lot divisions and other smart strategies that have made many of them their own bosses, independently wealthy, and free to do the things in their lives that they want to do…

When you’ve got something to lose

But the second basic idea–how to protect your assets–is at least as important as the first.  Think about it; you’ve spent quite a bit of time and money educating yourself, then spent even more of your time, money and effort in acquiring properties, then spent additional money renovating them.  You’ve spent all that time, effort and money in order to create a nice pile of equity value and income for yourself and your family. You now have something to lose, don’t you?

The reality is that as soon as you’ve put your wonderful real estate investment property portfolio together, you’ve become a target.  It’s sad to say, but unfortunately, it’s the truth: If you own valuable assets, you are a prime candidate for a lawsuit of one kind or another.

That’s why asset protection is so important.  Whether you like it or not, we live in a highly litigated world.  The courts are literally clogged with lawsuits, but the top three have to do with people involved in business, owners of real estate, and personal actions involving motor vehicles. Notice that the top two refer to those of us who are in business and in real estate.

That’s you…and me.

When we go into business—and real estate investing is a business–we take on the responsibility of that business, paying debt, maintaining a safe property and everything else.  If the business is in your name and you fail to pay something, or are found negligent in your duty of care for customers, you are holding yourself and your assets responsible.

Underinsured means over exposed

Two very important steps to take in protecting your assets are obtaining the proper levels and kinds of insurance and properly structuring your assets. Most people make their biggest mistakes in these two areas. Let’s look at insurance first.

Make sure that each and every property you own—and whatever is inside—is insured to full market value, that is, its replacement value, and have the insurance updated every year.  That way, if something does happen, your assets are protected. Being fully insured means that any damages that occur will be paid for by the insurance companies instead of coming out of your pocket.

I can’t stress enough how important this is.

What happens, for example, if you’re under insured when an event occurs?  Say you’re insured for $250,000 when you should be insured for $500,000, and the damages or claim against you is for $300,000.  You won’t be on the hook for just $50,000.  Rather, because you are 50 percent under insured, your insurance company will only pay out 50 per cent of the damages, or only $150,000.  That means you will have to pay out the remaining $150,000 in damages out of your pocket!

Starting to get the picture, are we?

The uninvited guest

Now imagine that a burglar breaks into one of your properties and hurts himself, whether he’s mauled by your dog or just slips on the floor and cracks his skull.  The sad fact is that he can sue you for damages, even though he’s violating your property. How can he win? Because he would qualify as an “uninvited guest”, which most insurance policies DO NOT COVER; you must insist upon it and pay extra for it.

What are you going to do the minute you finish reading this?  That’s right, you’re going to get out your insurance policies and make sure that all of your properties are fully insured, including being insured against any “uninvited guests” that may get hurt on your property for whatever reason.

The renovation trap

Or, say you’ve just picked the perfect fixer investment property.  Your inspector tells you about the rickety balcony and the uneven steps on the back stairs, and you hire a contractor who will fix those things, but not right away.  Next thing you know, some neighborhood children are playing on the property; the rickety balcony gives way and the children get injured.

Whose fault is that?  That’s right; it’s your fault.  You are liable.  What’s worse is that your insurance won’t protect you from a dangerous feature like a rickety balcony or an uneven stair step.

Why not?

Because the minute you know about a faulty condition on an investment property—or even your own PPR—and you do not take steps to repair it, and someone gets hurt—even an uninvited guest–you can be sued for criminal negligence…and you will lose.  Therefore, your first priority with a new reno property is to repair the dangerous aspects first.

Separate structures protect your assets

Just like getting the proper level of insurance coverage, how you structure your assets is also a choice you make. You don’t have to do things the way most people do and be vulnerable to law suits; you can choose to protect your assets from being part of a very expensive and bankrupting law suit.  Why wouldn’t you choose to protect your assets?

The way to do that is through creating separate structures—that is, separate ownership–for every one of your properties and business assets.  You create one structure that owns the name of your business, another one for each property, and others for specific or valuable content that is inside of each property. The only property that you might not do this is your PPR; otherwise you won’t get the tax break from your ownership of the property.

But what about everything else you own?  A separate legal structure should be set up to transfer ownership to as soon as you can.  That way, if—or when—somebody does file a law suit against you, you have limited your exposure to only one property or asset, and eliminated the possibility of awarded damages driving you to bankruptcy.

You also want shelter your assets from your debt.  Say a property falls in value and you can’t recoup the cost.  The most that the bank can come after you for is only that one property.

Don’t count on the good graces of fate or your fellow human beings—be they your tenants, your contractor or whomever–take the steps to protect yourself now.  It will cost you some money to do so, but it will cost you much more down the line if you don’t.