How to Protect Your Real Estate Investment

The principles behind investing don’t change much depending on where you choose to invest your money. If you’re investing in real estate, for example, you’ll still want to …

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The principles behind investing don’t change much depending on where you choose to invest your money. If you’re investing in real estate, for example, you’ll still want to take steps to protect your assets and lower the accompanying risks. All real estate investments have their dangers, even if you choose multifamily real estate, the safest type of property investing out there. The key is learning how to lower that risk and continue to protect your investment. Here are just a few things you can do.

Look at Historical Performance Before Making a Purchase

If you’ve been in the real estate business for long, you know how easy it is to overpay for a property if you don’t do your homework. The best way to ensure that you’re investing wisely and won’t lose revenue is to purchase property based on the historical financial performance instead of the pro forma numbers. Oftentimes, the pro forma numbers are much higher than the property is actually worth.

Before making an offer, request at least a year’s worth of the property’s income performance and expenses. As a bonus, try to look up multiple years worth of financial performance. This information will help you negotiate with the property owner as well as the bank for a reasonable price.

Purchase All-Encompassing Property Insurance

Comprehensive property insurance will keep your investment safe in the event of a disaster. However, it’s important to note that all insurance policies are not created equal. Inadequate coverage will often leave you high and dry when you need it most.

To ensure that your insurance company is good enough to adequately protect your investment, purchase a policy that includes fire, flood, hail, wind, snow, and other forms of natural disasters. Also, choose a policy with an easy claims system that will replace your monthly income, should a disaster cause the property to shut down.

Take Steps to Protect the Physical Property

Just because you have insurance, doesn’t mean you should ignore certain safety features within the home. You’ll want to start with fire prevention, since that’s the most common form of property damage. Teach your tenants about fire safety, and include certain provisions in the contract that prohibit open flames and other fire hazards.

Next, look into installing security systems to protect the home from vandalism and theft. This is especially important for when a property is vacant. Empty properties are attacked far too often, simply because there are no security measures in place to protect the home.

Invest in Real Estate as a Separate Entity

If possible, make your investments a separate entity such as a limited liability company (LLC), a corporation (INC), or a limited partnership (LP) rather than putting them in your name. This significantly reduces the gamble for you, since it puts all of the liability, hazards, and financial audits on a company name rather than your personal credit. If the investment goes sour, it’s a reflection of your company rather than you.

Don’t Try to Do It Alone

Those who have invested in real estate for years generally have the necessary expertise to tackle an investment without much outside help. But those who are just beginning or struggling to make it will benefit from a knowledgeable team that’s committed to making the best investment possible.

There are a lot of moving parts when it comes to investing in property. You should have a good investment group, including an agent, banker, accountant, property manager, and any other professional that fits into your investment plan. These experts can significantly lower risks and help you avoid making mistakes that you might not have known about on your own.

Real estate is a great place to invest your money, especially now, with the market improving. However, it can easily go downhill if you don’t have the proper protection in place. Be sure to follow these steps and talk with a professional in the field before diving into the industry and making a mistake you can’t undo.

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