One of the challenges that business owners and investors face as they grow their assets is protecting those assets. After all, if you’re spending all this time and energy building your empire, the last thing you want to do is leave it open for a frivolous lawsuit.
I used to co-host a nationally syndicated radio show, “Wealth Talk America.” I’ll never forget when one elderly gentleman called in with a problem. He owned five houses free and clear in Northern Arizona. He had just gone through a trauma with a tenant from “you know where.” Although the landlord-tenant laws in Arizona are pretty reasonable for a landlord, he had not followed the rules in evicting his deadbeat tenant. Somehow it all ended up in court. There is a lesson there as well with making sure you get good advice before you try to take legal action. At any rate, during the court case, the elderly owner exclaimed, “I want her out. She’s crazy!” When asked why he rented to her in the first place he answered that she didn’t use to be like that. For some reason, she just went crazy after she moved into his rental property.
He was able to get her evicted and then discovered the bad kind of black mold growing in the house. This is the kind of black mold that caused all kinds of mental and physical problems for a young family in Texas and ultimately got them a $125 million judgment.
His “crazy” ex-tenant heard about the black mold and brought suit. She had the perfect story. In fact, she had, sworn in a court case, the owner himself saying she went crazy after she moved into his property. And since black mold can cause psychological problems, she should get a lot of money.
He was worried that he might lose the case and wanted to know what he could do now to protect his property.
The answer was “not much.” He had missed out on the three strategies for protecting his property:
- Debt. Did you ever stop to think that debt on your property is actually a way to protect it? The N Arizona landlord faced a major challenge because the property was free and clear. It was a big fat bulls-eye for aggressive litigators.
- Business Structure. We strongly recommend to all of our clients at my CPA firm that they hold their investments inside safe business structures, such as an Limited Liability Company (LLC). In this case, if the landlord kept all properties free and clear, we might recommend that he hold each property in its own LLC. If something then happened with one property, it wouldn’t put everything else inside the LLC at risk. The best way to determine how many properties to put in an LLC is to consider the equity of the properties. Limit the amount of net worth in an LLC and you’ll limit the risk.
- Insurance. Even if you don’t follow the first two pieces of advice, make sure you carry additional insurance if you have investments. Find out how much an umbrella insurance policy would cost you. The peace of mind will be worth the cost!
Sometimes we get too carried away making money to think about how to protect the wealth we’re building. Don’t make that mistake!