Long Term Business Damage To Avoid
By JD Esajian on May 31, 2019
Real estate investing should be treated like a business. Regardless of the number of deals you close or how much time you dedicate, you must treat real estate like a business. All it takes is one misstep to wipe away all the hard work you put in. Something as seemingly minor as not including specific language on a lease can leave you in a prolonged legal battle. That is just the tip of the iceberg. If you are vulnerable with your insurance or how you structure your business, it is not a stretch to say that you can lose everything in a matter of weeks. As important as generating leads and closing deals can be, you also need to remember you are running a business. Here are five things you need to avoid that will do real damage to your business.
- Poor Insurance: With any business you need to pick and choose your financial battles. There are certain areas you should look to save and others where it makes sense to spend. One of the areas to spend money is with your insurance. If you are like most people, you never expect anything to go wrong with your business, or on a property. In real estate it doesn’t take much to quickly throw things in a spiral. Not having the right insurance on a short-term rehab can cause great financial exposure. On the flip side spending just a little more to make sure you are covered in the event of a disaster can really save your business. The same is the case on buy and hold properties. Paying a little more every month to get the right insurance is one of the smartest financial decisions you can make. You may not appreciate in the short term, but if something ever happened you will be glad you did.
- Poor Lease: If you own a rental property, the single most important thing you can do is get yourself a quality lease. As we mentioned, most investors never consider the worst-case scenario. This is especially the case with rental properties. They only assume that the tenant will pay on time every month and there will never be any issues with the property. The reality is that unexpected things happen all the time. Depending on where your property is located weather can be a real concern. In the winter you have to worry about pipes freezing and branches hanging over your roof. In the summer you have thunderstorms, tornados and flooding. Even without weather you have tenant slip and falls, issues with compliance and end of lease concerns. Your lease is the one thing that can quickly settle any disputes. If you go cheap with the lease you may not have any recourse and the resolution will be left up to the courts. Spend a little money one time to have an attorney craft a lease you can use repeatedly. Without it there is simply too much left to chance.
- Uninsured Contractors: There are many examples in business of walking over the dollar to pick up the penny. As you consider who you want working on your properties it is important to think of the bottom line. A contractor, or any laborer, that is uninsured or does not have a license is simply too much of a liability. They may offer the lowest quote, but they are doing so for a reason. They come with too much liability to consider, regardless of how low their quote may be. As much as you may try to ignore it accidents happen on work sites. In most cases they are innocent and the damage is minimal, but what if it is not? You will be caught in a firestorm that can take months to solve and thousands of dollars to rectify. Additionally, your reputation will take a hit by hiring someone who is not licensed and insured. This can be difficult to rectify and can have a lasting impact on your business.
- Wrong Business Set Up: The first thing you should do after you make an offer is to reach out to a real estate attorney. Whether your offer is accepted or not, you need to know you have the right business entity. Many novice investors make offers and close in their own name. What they don’t know is that if something happens to them personally, their portfolio may be at stake. A quality attorney will help guide you as to what to do with your business. Something as simple as getting the property into an LLC can save you immensely if something unexpected happens.
- Verbal Agreements: The sad reality of life is that you need to enter every situation with both eyes open. As many quality people as there are in the real estate business, all it takes is one untrustworthy one to spoil everything. You should never take a verbal agreement as gospel. Even if you have worked with someone in the past always get everything in writing. This works on both sides of the coin. You can’t trust that someone will honor your verbal agreement. This is the case with real estate agents, tenants, fellow investors and contractors. Get as much as you can in writing prior to proceeding with anything.
Every business has their fair share of ups and downs. Never let neglect or oversight wipe away everything you have worked overnight.