Protection in layers
One of things I remember about growing up in North Georgia was the excitement associated with the prediction of precipitation. Snow as a kid was just awesome! And the snow days I remember the most happened during the blizzard that hit us in 1993.
It happened right around my birthday, and we got hit hard. There was so much snow that I could jump my brand-new bike into the deep ditches that lined our road. I can remember how it felt to tumble safely onto my back, swallowed by a cocoon of wet, white coldness.
As I think about that time, I’m reminded of how we had to prepare to face the elements. Because we lived in Georgia, we didn’t have snowsuits or even a set of gloves that could really protect our skin from the melting slush. Instead, we would combat the cold by adding layers.
For instance, we covered my hands with a set of gloves that fit me, followed by a layer of my mom’s garden gloves, which we topped with a thick sock as a mitten. My legs were covered in a set of long johns, a pair of jeans and then a pair of Adidas jumpsuit pants that were all the rage at that time. My torso was three layers deep, as well, and there was a big, fat jacket over everything.
As a kid, I never questioned why my mom was putting all these layers on me. But now I know why. She expected the elements to get through the top layers, but she knew I’d be shielded from any true harm under all that protection.
As investors, we need to think in a similar fashion when it comes to protecting our assets.
The term “asset protection” is normally associated with having an entity like an LLC or some other Corporation. The protection these structures provide is known as a corporate shield. Basically, the corporate shield prevents someone from coming after your personal possessions when suing your company.
But there are many things from which investors need to protect their assets — mainly catastrophe, theft and then, of course, lawsuits.
The corporate shield is good for the latter, but you need protection from the other threats as well.
With that fact in mind, your first real layer of asset protection is your insurance.
Property insurance is the only thing that protects you in cases of catastrophes like fire, storm and other severe damages. And with the right policy, your insurance can cover you in cases of theft.
But make sure your policy has strong liability coverage, too. My experience has been that in our area, landlord policies tend to top out at $300,000 in liability coverage. Push for more, if you can, even if you have to get an umbrella policy to do so. This coverage is there to cover you in case of a lawsuit.
Another layer of protection to consider is debt.
Now, you’ve probably never thought of debt as asset protection, but it really can be one. Consider this: if you have a tenant trying to wage a bogus lawsuit against you, they’ll more than likely seek out a pro bono lawyer to do so.
This type of lawyer only gets paid if they win the case, at which time, they receive a percentage of the settlement. Because of this setup, they’ll be selective as far as which cases they take on. So, if your house is free and clear, you’re a sitting target.
Now, if there is a mortgage against the property — maybe in the form of a line of credit — that encumbers all the equity in the property, that pro bono lawyer is more likely not to take the case because they can’t see how they’re going to get paid. Thus, debt can help you avoid a lawsuit, which protects your asset from harm.
All of these mechanisms provide layers of protection to keep your property from harm. I’ll have to stop there, but we’ll continue next week with another layer of asset protection that provides more of the big, fat jacket you need around your property to protect it from the elements.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.