All Forum Posts by: Account Closed

@David Krulac

1. Of course. I understand the need for liability.

2. Yes, but at some point thats the same as self insured while still giving money away!

3. Yes but why should I care? I am really not going to erect a new building anyway. If I get my investment back plus years of rent collections, I am happy to sell the land for whatever I can get and walk away!

@Elizabeth Colegrove You really have to have a larger number of properties before self insuring makes sense. I pay on average $600-$800 per year for each property that I bought for around $50K. So I pay like 1-1.5% of the purchase price each year. You are also paying like about 1% per year for your house. The key is, how many houses do you need before your cost far exceeds the risk? Insurance companies work on the same model. Collect premiums from everyone and pay out very few claims. I think that around 20 homes I could diversify the risk enough. Maybe the correct number is 30. I dont know but at some point you are better off self insuring. Even accounting for minor damage etc, a reserve fund equal to the insurance premiums will always keep me ahead. Of course, I still have to pay for liability so cost is not zero.

@Brian C.

That is correct. The way I think about it, I invested a sum of money say X. After expenses I get Y back. I have a choice of what to do with the Y. I can reinvest it all in the same investment (i.e pay the mortgage), or take it all out (if I had a interest only loan) or anything in between. So to make a fair comparison I just look at Y/X as that years return. Now because you reinvest in the mortgage, you have the effect of compounding your money which is the huge advantage of leveraged RE. If I paid cash for the house, I get the cashflow in my hand but then I have to find another place to invest it to keep it growing. So while I am in the asset accumulation phase of my life, I keep compounding. When I stop working and use the cash flow to live on, then no more compounding.,

I've been dealing with insurance companies and am convinced this is the biggest scam in the world. Every year the premiums go up and if you have the audacity to ever make a claim, they raise your rates and try to pay you far less than the actual damages. I just learned from my bank that they dont require full replacement value and as long as the insured amount covers the loan, they are okay with it.

So here is my plan: Tell me if I am crazy.

1. I am dropping my coverage to the value of what I paid for the home or a little more. That satisfies the bank and covers me if the house burns to the ground.

2. I currently have a portfolio of 8 homes and plan to get up to 25-30 by the end of this year. Once the homes are paid off (plan is to do it in 7-10 years) I would carry only liability insurance. The way I figure is this: I am paying at least $600 per home per year. If I have 20 homes thats 12K per year in insurance. Each home average buying price is $50K. So in 4-5 years of premiums, I could buy a home. Now I figure the chances of 1 home burning to the ground every 5 years is really small. Why wouldnt I just self insure and put the $12K aside in a reserve fund for 5 years and then forget about it? I would just pay for all repairs out of pocket and still come out far ahead.

Am I nuts or does this actually make sense? I know math is approximate and I will still pay for liability so cost is not zero but still..

You wanted to compare to other investments. If you think about stocks, think of principal pay down as a re-invested dividend. Your invested amount is always the initial investment. There is another measure called ROC or return on capital. In that case you can add the principal paid down to the denominator. In that case your return in future years will actually go down until the loan is paid off at which time it will equal the cap rate. But I look at it the first way. Its more meaningful and allows comparison with other asset classes.

@Brian C. Thats not how you do ROI. So using sample numbers. Lets say a house is $100K. You put 20K down plus 4K closing costs. So your total cash in is $24K. That always remains the denominator for the calculation. In the first year lets say your cash flow as $200/month or $2400 per year. Lets also say you amortize your mortgage and paydown principal by another $2000. So your total earinings are $4800. Your ROI is 4800/24000 or 20%. The next year you may still make 2400 in cash flow but you pay a little more principal down. So your ROI goes up a little but it doesnt double. As you get closer to the end of the loan, your ROI starts to go up more rapidly. Does that make sense?

@Jason L. I own several homes in the Indy market. I dont know of many 3/1.5 that would command $1K rent. Most of the 3/1.5 homes are older since most recent construction would be 3/2. Even many of those may rent for $900-$950. If you give the address, people could comment more on the area.

20% ROI in the first year is definitely doable with a 4:1 or 5:1 leverage. But why does it double in the second year? I dont factor appreciation in the return numbers but I do include principal paydown.

I know many on here are fans of Solo K plans. I cant find too much detailed info online and even my tax guy is not too familiar with them. So let me post my questions here for the experts

1. Does having passive rental income in an LLC qualify me to start a Solo K?

2. If I have access to a 401K at work, can I still open a Solo K? Does the max employee contribution still hold ie would it be 17.5K total in all plans?

3. Does it matter if my LLC has more than one member (other than spouse)?

4. Is the max annual contribution $17.5K plus 25% of company profits?

Thanks for your replies.

Wow, I just found this thread and feel compelled to comment. I also invest in Indy and have done through @Mike D'Arrigo and Pinnacle investing. I have 6 homes so far and have had one really bad experience. So let me tell you the difference between Will's story and mine. I bought a package of 4 already rented homes through Mike. It was a sale from another investor who also managed those properties through his PM company. The first thing Mike ever told me when I started was 1. No Duplexes, 2. Nothing in Center Township. That kept me away from the D class properties.

In this property set of 4 there were 2 excellent properties and two average properties based on the numbers. I examined the rent rolls and saw that one tenant on the average properties was often late. I asked the current PM about it and they said she always caught up. I was skeptical but thought the worst I would have to do is replace the tenant. Well this tenant didnt pay and when I put an eviction notice she left but totally trashed the place in the meantime. My lesson was learned. But the PM company I used was quick and efficient in the eviction process which was good to know. Of course I told Mike about the issue. Now in no way can I say he was responsible for that particular tenant. It was not him that selected the PM that placed her. But he totally took the problem to heart. He spent countless hours screening contractors and finally found me one that would do it at almost half the price of the other bids. He supervised the contractor, coordinated with the PM company and stayed totally engaged until the property was fixed and a new tenant was in place. That was my definition of good turnkey service.

Yes it cost me several thousands in repair and lost rent. But still over the year I made money on my portfolio. I learned some important lessons in due diligence and I tested the mettle of people I am doing business with. Not a pleasant experience but actually going through it gave me confidence to scale up the investments because I have seen what is most likely the worst case scenario already. And I saw first hand the value of diversification. As a result I will probably add some B class higher end properties to my portfolio to balance the risk. I have implemented a stringent screening criteria for tenants and my due diligence list grows stronger after every purchase. Its a process and some learning is to be expected. It did not turn me off from the business model and in many ways made me more comfortable as an investor.