As a real estate investor it is important to protect your business at all times. Regardless if you close one deal a year or one a month you need to treat it like a business. Not only should you keep an eye on numbers and policies but you should think about your business as an entity. With every decision you make you should consider if you are protected in the worst case scenario. If there is any doubt you need to pass until you are completely comfortable. One bad decision can wipe away years of hard work. One deal or one tenant is not worth ruining your business over. Here are four areas that will help you protect your business at all times.
- Using Licensed Help. As a real estate investor we are trained to keep an eye on the bottom line. We are constantly looking for ways to maximize profits on every deal. While this philosophy is great it should be done within reason. Working with an unlicensed contractor may save you money but they open the door for potential issues down the road. You are responsible for everyone you employ on every property you own. In the event of an onsite injury you are on the hook for any costs. It is your responsibility to ask for a business license and insurance. Assuming that everyone is licensed is no excuse if there is damage or negligence. Saving a few bucks on a job is a fraction of what you will pay if things go wrong. Everyone you have ever worked with will come out of the woodwork and claim injury. Regardless of the price only use licensed people on every job you do.
- Avoid Verbal Agreements. In real estate you walk a fine line between being trustworthy and naïve. It would be great to trust everyone you come in contact with but business isn’t always that easy. You never want to let your trust get in the way of protecting your business. Every agreement you enter should be done with a written contract. In some cases verbal agreements could be binding but many times they are not. If all you have is a verbal agreement it ends up being your word against there’s. This makes it difficult, if not impossible, for a judge to side in your favor. You have every right to ask for your agreement to be put in writing. Even if you know someone very well you should never assume that things will go smoothly. There are times when you and a contractor or subcontractor will differ on the execution of a job. They may think the work is finished and deserved to be paid. You may have wanted additional items completed. Instead of relying on a conversation your written contract will be your guide. Verbal agreements are certainly much easier but written contracts offer the most protection.
- Choose The Right Legal Entity. Nothing can wipe your business out quicker than choosing the wrong legal entity. Most people that go into business do so as a sole proprietor. Under this scenario they are doing business as an individual and have no legal asset protection if things go wrong. The same can be the case if you opt to close as a general partnership. There are many horror stories of real estate partners who break the trust of the partnership. Under a general partnership every bad action they take you take with them. The best way to hold a rental property is in a limited liability company (LLC). LLC’s offer the best asset protection as well as the best options come tax time. They are fairly simple to set up and offer flexibility down the road. It is wise to talk to an attorney and get the best options for whatever you plan on doing in your business. The wrong legal entity can wipe away your business with one false step.
- Lease/Insurance. There are two main areas of protection when it comes to rental properties: lease and insurance. It is often too late to protect yourself once a tenant is in the property. You need to make sure your lease has everything you want before any tenant moves in. There are many different generic lease forms available online. The problem with them is that they don’t have specific language that you may need in the event of an issue. It is best to spend some money to have an attorney draft a professional lease. You can update the lease every year but you will at least have the foundation you need. The same is the case with your insurance. You probably haven’t looked at your homeowner’s policy in years. While you can never anticipate an emergency or disaster you should prepare for it. If weather issues strike are you protected if a tree limb falls on the roof? How about if your basement is flooded? Do you have replacement coverage if there is fire damage? There are dozens of things that can happen with a rental property. You may be surprised at what items are not covered. With each insurance renewal you should make a list of potential issues and ask your insurance agent if you are covered for them.
You should start exploring legal protection even before you close your first deal. If your business is already established you should constantly look for ways of protecting it.
