Special Bonus:
Four Wealth-Preserving Secrets of Real Estate Masters
This is a book about risks: the risks of not having enough insurance, of buying a building with structural problems, and of not choosing the best financing option.
Those risks are troubling, to be sure. But there is a bigger risk we should also mention: the risk that, after you spend years of your life amassing a fortune in real estate, you are going to lose it all because of some unfortunate event that is largely beyond your control. We are talking about the kind of disasters that insurance cannot protect you against.
But with the right kind of outlook, you can protect yourself. Let’s take a closer look.
Risk #1:
A Partner’s Bad Judgment Sinks You
It does happen. You spend years building a good name and amassing a fortune, then the actions of an associate bring you down.
Here’s a quick case study that illustrates the point:
Sarah and her partner, Jeanne, bought and renovated an apartment building ten years ago. When they were buying it, an inspector found asbestos covering many of the pipes in the old heating plant in the basement and said that it needed to be removed. Jeanne met with an asbestos-removal company, which said it would cost $25,000 to remove the asbestos and file all the appropriate paperwork and permits. When Jeanne turned pale after hearing that estimate, the abatement company offered an alternative; they could simply remove the asbestos for less than half that amount of money and nobody would be the wiser. Jeanne agreed without telling Sarah. But now one of their tenants has developed lung cancer and is asking questions about whether she might have been exposed to asbestos. Spurred by that, Jeanne has finally leveled with Sarah about her lapse of judgment about getting the asbestos removed. It could become the kind of problem that costs them both a fortune and destroys their reputations as developers – not to mention the remorse that comes from an unwise decision that might have harmed an innocent person.
Sobering story, isn’t it? Everyone stands to lose so much over a lapse of judgment. How can you protect yourself from such problems?
• Avoid partnerships. Now, partners can be great assets. They pool their investment money with you and enable you to acquire more property. Their skills augment yours. But doing business with a partner is always risky. And let’s face it, “Only do business with a partner you trust” is not intelligent advice. (You are certainly not going to do business with a partner you don’t trust.) You cannot predict everything a partner might do that could land you in trouble. Generally, it is safer to go it alone.
• Talk about this issue with an attorney before entering into a partnership. Ask about strategies you can implement to insulate yourself from unwise or dishonest partners.
• If you are already in a partnership, consider converting it into a corporation instead. A corporation, as we discussed in Chapter One, can protect your personal assets from business losses and liability.
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