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How To Protect Yourself From Catastrophic Loss
Joe: Hey, it’s Joe. This question I’ve got is, “Joe, how do you protect your assets from catastrophic loss?” There’s no way to protect yourself from some loss. There’s always loss in business because you’re going to make mistakes. You’re going to have failures, you’re going to try things, and if you’re not testing and trying new things, then you’re not really in business. You’re not really going to every grow. So you’ve got to keep trying new things and you’re going to have failures and you’re going to have loss.
Joe: But the goal is to not ever have any catastrophic loss. I’ve told the story to you in the past about my catastrophic loss back in 1991 when everything crashed for me. The market had crashed, and my business crashed, and I lost a $17M business and you know, I moved in with my parents. Absolutely horrible when something like that happens, and I’ve not had that problem again because I knew what to expect. I knew what to watch out for and how to keep that from happening again. I also knew how to break up my assets so that I wouldn’t be damaged. If one corporation goes down, it’s not going to take down everything in a daisy chain. You know, you get things out of your own personal name, you get them into multiple businesses or multiple corporations or multiple LLC’s or, you know, set up different ways to do it.
Joe: One of the ways that I would suggest that you do it is put only a certain amount of properties in each limited liability corporation. So, have holding companies for you your property. Let’s say you have 50 properties. Maybe it makes sense, and some of those properties are subject to, and some of them are cash properties. You might want to break those up. So you put your subject to’s into one deal, and let’s say you’ve got subject to’s and each one of them is worth, just throw out a number here, $100K, and you’ve got $80K mortgages on all of them. So, you’ve got $20K on five different properties, so about $100K worth of equity in that particular LLC.
Joe: So you took all 5 of those subject to’s into one LLC. And the most you have at risk is those 5 properties that have that equity in them. Now, let’s say you’ve got 5 properties, each worth $50K. Now, you take, you have $250K that you can put into that LLC. If those 5 properties are the only 5 properties that you’ve got other than your subject to’s, you might want to split them up into a couple of different LLC’s so you don’t have your entire nest egg in one place.
Joe: So, let’s say you put two in one, and three in another. And maybe you never want to put more than, you know, a third or a half of your income or your assets into one LLC. And you may even want to split it up when you start getting larger and larger portfolio. Maybe it makes sense to put, you know, 20%, 20%, have 5 or 6 different LLC’s. You know, I’ve got quite a few of them. I’ve got a lot more than that right now. Because I don’t ever want to have too many of my assets in one place. And I have a lot of properties that are free and clear and I want to make sure that I don’t take down a whole bunch of them if one of them were to go down.
Joe: Now, how would one of them go down? Let’s say I get into a lawsuit, somebody breaks their leg on my front porch and they decide to sue me and my insurance doesn’t pay for it, and you know, it goes into, maybe it’s negligence, you know, where they say, hey, you did something that was not only got us a broken leg and you pay for the hospital bills, but you also, we want you to pay for damages because it knocked me out of a job for the rest of my life. I was long distance runner – you know, who knows?
Joe: But they decide to sue me for $5M and they go after everything that I’ve got. So they’re going to go after, they’re only going to be able to access, or they’re going to be able to get to the money that corporation holds because that property is held by a corporation and the corporation is responsible for it. And they’d have to pierce the corporate veil to get to my other corporations or to get to me personally. And that’s the way you want to keep that set up so that there’s no way that they can really get very much of your assets. They can’t drain you dry. And so it saves you from catastrophic loss.
Joe: There’s other things that you can do, too, like, having insurance on your properties and things like that. We have $1M in liability individually on each property. It’s not very expensive, it adds maybe $30, $50 a year to each of those properties, so it’s not expensive to have it. I’ve never had to use it before. I probably won’t. But it gives me a little bit of peace of mind knowing that we’ve got that there. You know, we also do things like put alarm systems on all of our houses. They are, when you rent a property from us, it comes with an alarm system in place and if the house gets broken into we find out about, you find out about it and it’s, hopefully will scare away the thief. And it keeps our, it tends to keep our washers and dryers and refrigerators from getting stolen when the property goes vacant between times.
Joe: Anyway, that’s how you get rid of, how to avoid catastrophic loss in your business. Good luck.