Righting the Ship

[Brett Allen Crisp]

Hello Bigger Pockets community! Other than my newbie intro, this is my first official post on the boards: of course it involves a question, but first a little background:

I currently have a rental home in Florida (my first house), and I live in Texas. I bought this house on the peak of the "great bubble", was ordered overseas on military duty, and am now retired in Texas. Needless to say to this crowd, the bubble popped (more like shattered on that market) and the house has since been upside down in value. My shining light has been: a) I was able to weather the storm and hold onto the property, b) have managed to keep it occupied 85% (conservatively) of the time since 2007, c) the property has almost always cash flowed—albeit just barely above break-even in 07 and 08—and d) is currently cash flowing anywhere between $100 to $150 monthly now depending on maintenance expenses. However, in my eyes the biggest bonus of this venture has been the fact that since I purchased it in late 2006, less than 30 monthly mortgage payments have been made from my money…my various tenants over the years have paid for it! Incidentally, this fact is the primary reason that I am now seriously diving into real estate to secure my retirement years.

So, as a real estate investing "newbie," my 1st goal with this home is to maximize my positive monthly cash flow. My second goal is to rescue this capsized ship and turn it right-side up as quickly as possible. I have evaluated my numbers and the only real solution that I can come up with is to decrease expenses (without refinancing) and pump as much extra cash into principle; yes, I fully realize by simply breaking even I no longer have an asset.

To decrease expenses, I can't raise rent, at least until my current tenant’s lease expires in Feb 2017. I also can't reasonably expect to fire my property manager (and all the accompanying maintenance expenses associated) since I'm some 1100 miles away and too much of a newbie at this point to take it on myself. I definitely can't do a whole lot regarding taxes other than annual protests. So the only expense I see left to attack, which happens to be everyone’s favorite topic, is insurance.

I am not schooled [yet] on the ins-and-outs of property insurance, and I realize the following questions are pretty much opened-ended and every situation is different, but any practical advice or rules-of-thumb will be greatly appreciated!

So my question to all the landlords out there in the trenches is how do you approach insurance on rentals? I know, as @Brandon Turner says, this is not an area you want to skimp on, but how much should we conservatively carry on a SFR? I know various policies carry certain bells and whistles, and they all vary from state-to-state, but are there any general rules-of-thumb out there that dictate what we should carry?

As an added bonus, I don't just want to take [advice] without adding value. As such, in this newbies opinion, the Fort Walton Beach, Shalimar, Destin, Crestview (et.al.) areas of the Florida Panhandle are all excellent buy-and-hold investment opportunities due to the very large movement of military personnel (both large and small families) in and out of the area while they serve at one of the many large military installations; i.e. Eglin Air Force Base, Hurlburt Field, Duke Field, etc.

Coincidentally, this area just happens to be one of my target markets as I know the area very well for anyone interested in more? I bring capital, excellent credit, an MBA (for what that’s worth in this industry), and that all important newbie passion to the table!

Thanks for any and all advice,

Brett Crisp

[Walter Key]

@Brett Allen Crisp I'm also active duty, I'm also hundreds of miles away from some of my investment properties and I'm currently living in Jacksonville. So, with all that said, I'll give you my $.02 for what it's worth to you.

First, you're not doing as bad as you think. Just keep that in mind. By your own admission your property has cash flowed a little for the most part and your mortgage has almost always been paid by tenants. There are many landlords out there in a worse situation. Take a deep breath for just a moment and know that you've got something to be grateful for there. 

OK, on to the meat and potatoes...property managers can make or break you. How good is your current management relationship? Do they call you to discuss issues before they act, do you have specific parameters set up with them so they don't spend over a certain amount without your permission unless it's an emergency, etc etc. Are you happy with the fee structure? 

Remember, in Jacksonville there are lots of investors and lots of property managers. It never hurts to shop around for better terms if you're not happy. You can always re-negotiate your terms as well. Another thing to consider if you're in a position too; negotiate a lower fee if you let them manage multiple properties for you then get a second rental in the Jacksonville area. I've done this with my rentals in Nebraska and I only pay a 6% management fee monthly. That's awesome compared to the average 10% fee most PM's charge.

Another strategy that I use is to maintain a home warranty on all of my investment properties. I pay a small monthly premium (less than the traditional 10% of rent for maintenance expenses) and if there's an issue reported by the tenants my management company knows that they call my home warranty company first. I pay a $150 deductible and if something needs fixed or replaced, it's done. No $1500 AC repairs, no $700 plumbing fixes, etc. Some will argue that paying a monthly premium for insurance isn't worth it but for a long-distance landlord of many years now, I swear by it. My maintenance and CAPEX numbers are lower than the traditional 10% each when I factor in my premiums and deductibles.

You can work with your management company to write their management contract to stipulate that they should call the warranty company for all repairs and if something isn't covered by the warranty, they have to get your permission before spending more than a set amount that you determine ahead of time with them. I actually had an instance early on where my management company didn't call my warranty company (or me) and they sent one of their maintenance contractors out to fix an issue. The bill was over $1,000. When I pointed out that the PM failed to execute the maintenance in accordance with our written contract, they ate the $1,000 because they knew it was their mistake. 

I think that's enough about management at this point; lets talk about taxes. While trickier, there are some things you might be able to do in order to lower your properties taxes. You can petition to have your tax assessment reevaluated if you think you can justify why the current tax assessment is too high. Perhaps you know the property isn't in as good a condition inside or outside as the properties around you because the tenants have produced a significant amount of wear and tear. Perhaps there is another oddity that makes your property worth a little less than the surrounding properties. These are the kind of things that might lend you to ask for a lower assessment. In the grand scheme of things though, this may not be a decent return on investment in regards to your time and effort if you feel like the current tax assessment is a fair assessment for your property.

As for insurance, keep a good insurance policy on the property. Last thing you want is for the tenants to accidentally burn the house down and you aren't able to claim the damages because you tried to save a little money by getting cheap on the premium. It's not worth what little cash flow you may be able to generate to take that kind of risk in my opinion.

Lastly, rents...when was the last time you and your PM discussed market rents and when was the last time your property's rent was raised. A good PM should be assessing this every time there is a tenant turnover. The Jacksonville market is appreciating right now so it's logical to assume that you'll be able to improve the rent (assuming then property's condition supports it) in Feb of '17 when the current tenant rolls out. 

Man, sorry about the novel. I hope that helps. Best of luck to you.