074: Protecting Your Downside – Friday Fundamentals

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It’s human nature to be on the look out for threats. Our early ancestors had to be aware of threats every day. This same caution has been passed down thousands of years. Only today, our threats are much different. While threats like predators stalking our villages, or entire populations being eradicated by the plague no longer exist, we still have our own threats in today’s society, from litigation to financial loss and health.

As real estate investors, we’re aware of the risks associated. Litigation and financial loss are legitimate threats that happen all too often. We are aware of these risks, and therefore appropriately protect ourselves from them when possible. We carry insurance policies to protect against damages. We protect our assets with legal structures. We screen our tenants. All of these help protect our downside.

“The first rule of investment is don’t lose money. And the second rule of investment is don’t forget the first rule. And that’s all the rules there are” – Warren Buffett

Another way to protect your downside is by a supplemental insurance called a Home Warrant Policy or a Residential Services Agreement. A home warrant policy is an insurance policy carried by the homeowner, which covers standard appliances, HVAC systems, and plumbing. If one of these items breaks, you can be faced with a large repair bill or an even bigger replacement cost. A home warranty policy insures these items will remain in working condition, so long as the damage isn’t from neglect or lack of maintenance in most cases. These polices typically range from $500-$650 per year and have a deductible of $75-$100.

Many beginning investors will try to do things on the cheap, and some even forego a Home Warranty Policy. If your systems and property are relatively new, then it might not be as much of a risk to elect out of a home warranty policy. However, if your property or appliances are on the older end with deferred maintenance, then it might be wise to pay for a home warranty policy. In many cases the seller or seller’s agent will pay for this home warranty policy for the first year.

There is no one right way for everyone when considering insurance, asset protection strategies, and personal risks. Be mindful of protecting your downside, and look to increase your upside. With this principal in mind, you’ll be more prepared to deal with the inevitable threats on your path to financial freedom and beyond.

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