There is a line from the movie “Rounders” that states we rarely remember our winning poker hands, but we can cite with incredibly accuracy the big ones we have lost. The same can be said for the world of real estate investing. For every success story it is easy focusing on the ones about the terrible tenant that prompted an eviction or the unexpected issue with a properties foundation. These negative stories leave the average investor hesitant to act and apprehensive to conduct business. The reality is that these negative stories are truly the exception rather than the norm. Furthermore, in most cases they are usually caused by an oversight, negligence or even overconfidence. Running into unexpected situations happens from time to time, but you can take measures to minimize your downside. Here are four ways to always protect yourself and your business.
- Consider worst case scenario. The most basic thing you can do to protect yourself is take a minute and think before you act. In every scenario you should at least consider what the worst case may be. This doesn’t mean you have to be paralyzed by it, but you shouldn’t blindly run into a deal either. If you own a rental property your tenants may stop paying, the furnace may suddenly break or there may be damage to the property. You can’t expect these things to happen, but you should put plans in place to brace for them if they do. The same is the case with a rehab property or any other potential deal you may have. By thinking of the worst-case scenario and playing every potential option in your head you will always be one step ahead. This doesn’t mean you will be able to prevent issues, but you will act quickly to minimize the damage instead of waiting and making them worse.
- Attorney review all contracts. The primary goal of any investment is protection. Sure, we all look for upside, but the downside is usually much lower. Think of how badly getting involved in a legal mess would impact your business. You would stop focusing on other areas and devote all your time to fixing your problem. There is a good chance you would probably look back and wish you took the time and paid the minimal expense to have an attorney review your contract. It is not a stretch to say that it could be the best money you spent on the deal. Whether you are on the buy or the sell side it is imperative you have an attorney review the contract. Once a contract is signed it can be difficult, if not impossible, to get out of. The language on the contract can be misleading and the next thing you know you are fighting to get in or out of a deal. A dedicated real estate attorney knows what to look for and what sections could be a red flag. If you want protection you need to have an attorney on your side, you can trust.
- Partner with the right people. Another common area where investors often get in trouble is blindly jumping into partnerships. If a deal, or situation, looks too good to be true, it usually is. There are legitimate cases when time is of the essence and you need to act quickly. However, these are few and far between. If a potential partner pressures you to act or asks you for money it should be a giant red flag. As unfortunate as it is, there are people in the real estate world who look to take advantage of inexperienced investors. They promise the moon and ask for money to get involved in a once in a lifetime opportunity. If you are slow or don’t have as many deals as you would like this can be a tempting proposition. The internet has made it easier to vet out potential partners than ever before. If there is something you want to know about a potential partner, ask. If you don’t like the answer do some independent research until you are completely comfortable with who you are working with.
- Insurance. In addition to a strong contract the next most powerful piece of protection is insurance. As we mentioned, there are many ways to save a buck in business, but protection should not be one of them. Make sure every property you own has the necessary amount of coverage. The same is the case with your short-term rehabs. Even though you may only need insurance for a few months, you must consider the worst-case scenario. If there is an accident on site are you liable or open to litigation? In addition to personal insurance you also need to make sure you work with people who are licensed and insured. Getting a great bid on a job from someone not licensed can be fools gold. Sure, if things go well you can save some money but if there is a problem with the work or an injury you open yourself up to much bigger issues.
Protection is the name of the game for any business. If you are worried about losing money or getting involved in a nightmare scenario there are plenty of things you can do to protect yourself. Start with these four basic tips and go from there.
