How To Deal With A Real Estate Catastrophe

ID-10039279Have you ever considered what could happen if a disaster occurred with one of the properties in your real estate portfolio?

I received a phone call in the middle of the night not too long ago that was enough to take anyone out of the deepest slumber. I was informed that one of our buildings were on fire. My first concern was making sure all of my tenants were safe and we were very fortunate to not have any injuries. A building can be replaced but the people inside it cannot.

I then went online and watched the fireman putting water on our building, streaming live from the local news site. Once the fire was out, it was time to start the process.

I’m going to tell you my personal experience but keep in mind that this from the perspective of a real estate investor. That’s my disclaimer so you don’t misinterpret my story as specific advice related to insurance or legal matters in a catastrophe.

The important moral of the story is to work with professionals that can assist you, before and after a real estate catastrophe occurs.

Step 1: Secure The Asset

Once the firemen left we had to hire security to ensure the asset was secured and that nothing further would happen to what was left.

Step 2: Phone The Insurance Company

We phoned the insurance company while the building was still on fire to give them the heads up right away. This is where I was especially thankful I had gone with a great insurance broker because he pulled up the policy and immediately started going through what was covered (and what wasn’t covered, more importantly).

Step 3: Take Care of Any Refunds

Obviously the first thing you lose is the cash flow from your rent. The first order of business was refunding all the people that were renting from us plus a little extra to help the families that no longer had a home.

Step 4: Address Your Cash Flow Situation

Once everything is cleaned up, the bills will start piling up, including a large “post-fire inspection” bill from the fire marshal. Oh ya, and don’t forget about your mortgage!

We proved that we had insurance to our bank and they were excellent in working with us through the process. We called them to let them know we had no money coming in from tenants and the bank manager immediately stopped all draws.

Step 5: Consider The Tax Ramifications

Here’s a curve ball for you…have you considered if your insurance payout money is taxable or not? This might come as a shocker but it is taxable.

You must work with your tax advisor immediately upon the occurrence of a catastrophe to look into your eligibility for something called the Replacement of Property Rules. If you don’t qualify then you’ve created a taxable transaction that will have taxes associated with that disposal.

Every Process Is Different

Every process and insurance policy is different so it’s imperative that you understand what you’re insuring. Had we not been properly insured, we might have had to cover unexpected costs like paying for the clean up or other potential issues. We were properly insured so it allowed us to turn a bad situation into an acceptable situation.

Don’t delay in getting proper tax advice after a catastrophe and ensure you have proper coverage before anything bad happens. The last thing you want to do is turn a bad situation into a worse situation.

Have you ever dealt with a real estate catastrophe before? Tell us about it in the comments below.

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