If You Buy Investment Real Estate What's The Most You Can Lose? by Bill Roberts
Some might say it is the property. You could get foreclosed and lose the property.
Do you think that is the right answer?
Well the answer is NO that is not all you can lose. You could lose everything you have and everything you will ever have. How's that for a threat?
Okay, here's how it works: something bad happens to somebody on your property, or something bad happens to somebody and your property or somebody connected to your property is the proximate cause of their injury. This is a TORT. It is not a crime, but you may have criminal liability as well.
When there is a cause of action arising from your ownership of your property, the damaged party is probably going to hire a lawyer. Lawyers love torts arising from property. They can smell the money.
I hope I've got you scared, because you should be.
You cannot foresee all the things that could happen in, on, and around your property. Nor can you buy enough insurance to fully cover you for a lot of these things. If you have a million dollars of insurance coverage you will probably get sued for ten million dollars. Your own insurance company will become your adversary. They will want to settle and have their liability go away. So if they admit liability what does that do to your position? You can't let them settle, but they'll want you to indemnify them. And you still have this hungry lawyer yapping at your heels.
Then again, maybe somebody was killed and the lawyer thinks that it is worth a hundred million dollars. What are you going to do?
For argument's sake, let's say you get a judgment against you for ten million dollars and you have one million dollars insurance. What is going to happen?
Well, let's see. You've worked for years building up your estate. You just bought this new property for $3.5 million. You did a 1031 exchange moving your one million dollars equity from a couple smaller investment properties. You think that life is getting good. You'll be able to retire on the income from this new property in about five years. Cash flow should be pretty good by then. Then this happens.
Let's take a look. You've got a million dollars equity and you have a million dollars of insurance. That's two million dollars, but the judgment is for ten million dollars. So where does that leave you. Somewhere up the proverbial creek without enough money, I mean a paddle.
The Poor House
Do you really think that the judgment beneficiary and his lawyer are going to take the two million and go quietly away? Not a chance. They want it all. And maybe that is more than you have if you sell everything you have. Too bad. They'll take it all and you'll still owe them the balance.
What could you have done to prevent this debacle? Well, for starters, you could have held the property in some entity separate from yourself and hope they don't determine that the entity is just an alter ego. Because if they do, they are still coming after you for the balance.
Stay tuned for more answers and analyses in Part 2 If You Buy Investment Real Estate What's The Most You Can Lose? Part 2
Call Bill Roberts if you have questions about your investment property, (619) 244-4610.
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Hi Bill, Investments are not for everyone, that's for sure. Property management in general can be a nightmare, not to mention the liability. I've always recommended that my investors create a separate LLC for each property. When it comes down to it, does that really protect their personal property?