Defense wins championships.
Does everything have to be a sports analogy with you?
Sports is life.
Deep Brian, real deep.
Offense is exciting, it is what everyone wants to do. No kid dreams about the clock ticking down in the NBA finals, just a few precious seconds left, if only you can come up with one more defensive stop.
If defense is the forgotten half of the equation in sports, what is it for investors?
As you rise up in the world, you have more to lose. I plan to one day be there, so better start planning now.
There are all kinds of different ways to limit your risk. Diversification. Savings. Profit margin on your rental properties.
Everyone should do those.
For rental properties there are other risks like the pipes exploding and flooding the house, or a tornado ripping off the roof.
Everyone should have a strong homeowners insurance policy.
But what else?
What Slips Through the Cracks?
Most lawsuits. Plus damages over what your standard policy covers.
- The tenant’s dog gets out of the backyard because your fence isn’t good enough. It mauls a neighbor who sues you for loss of work damages of hundreds of thousands.
- The water heater is turned too high and gives first degree burns, which results in a lawsuit.
- That crack in the sidewalk the tenant complained about actually leads to them falling and hurting their back. Boom lawsuit.
These are worse case, horror scenarios that you hear as excuses for not getting involved in rental properties. They are one in a million type things that likely won’t happen, but it still isn’t a good idea to bet your entire financial future on it.
Yet most people don’t realize they are already at risk in their personal life. Do they just sit inside all the time?
Remember this commercial?
It seems kind of silly, but is just another example of a gap in your personal coverage.
But it doesn’t even have to be a gap, it could be covered the damage goes beyond your limits. Like causing a 10 car pileup or running into a particularly expensive building.
A couple more examples from the best intro article I have found:
- Your daughter gets into a fight at school and punches another girl, breaking her nose. The girl’s parents sue you.
- You send sandwiches to your son’s school for a field trip lunch. Several students become sickened with food poisoning and their parents sue you.
- Your teenager throws a party at your house while you’re out of town. Someone brings alcohol to the party, and one of the party guests gets arrested for driving under the influence on the way home. You get sued.
Somehow the worst case, horror scenarios for children don’t stop people from having them. Just for rental properties.
An Umbrella Policy
This is where the umbrella policy comes in. It acts as an umbrella over all your various insurances in your life. Homeowners, car insurance, you name it.
You can think of it as a catch all.
Of course there are things that are excluded and tons of fine print. For example, if you do the act intentionally. Or if the damage is caused by war.
It isn’t perfect, but the good news is it is affordable. Talking with Michael at Financially Alert and doing some initial research online, about $25 a month will provide $1,000,000 in coverage.
Wouldn’t an LLC For Rental Properties Do the Same Thing?
Many rental property investors hold their properties in LLCs. This is another way to limit your personal risk – rather than the tenant suing you, they would actually be suing the LLC. Worse case scenario is you lose the LLC.
So some people do complicated multiple LLCs with 2-3 properties in each. What a headache.
Furthermore, in California this is a horrible option because each LLC is $800 a year. Ouch.
In my mind, this is putting the cart ahead of the horse. If you live outside of California and setting up this structure doesn’t dissuade you from actually getting started with rental properties, good for you. But it doesn’t make sense for my current situation.
Starting the Research
I’ll admit I don’t know a lot about umbrella policies right now, but I am going to start learning. I have the goal of having one in place in the next month.
I’m curious to hear from the community – Do you have an umbrella policy? If you do, can you do, please share any recommendations. If not, does this article change your mind?