All Forum Posts by: Eric Belgau

Ah, okay. The 50% rule is very easy to work with, and I agree with @Jon Holdman that it gets terribly dicey to start projecting with too much detail, especially on things that can be unpredictable.

Coming from a family of lawyers (3 in the sibling pool, none of them practicing on the West Coast) I tend to rely on counsel more than the average person, and I don't want my analysis to be off.

Thanks, guys!

My keyword settings keep me seeing forum posts about LLCs. Inevitably, discussions of LLCs (and the constellation of issues related to them) reinforce the need to work with professionals: attorneys and CPAs especially.

I also hungrily read the deal analyses because I'm here to learn from the BP sages how to go about building my portfolio when the time comes.

The deal analyses don't include a line item for Professional Services. We all need them sometimes; most of us should probably use legal and financial advice more than we do.

So I wonder, especially from the more experienced BP members who have done a lot of deals over many years and can see a realistic average, what should I project for professional services per property per year, if I'm going to build a portfolio over time?

I'd expect to deal with evictions, other tenant issues, disputes with contractors, tax complexity, etc., etc.

Is there a reason why professional services isn't a line item in deal analyses?

Type recommended: When talking to insurance agents, call it a landlord policy. Insurance companies have been adding services to Dwelling Policies, and some call them by different trade names, so it's best to forget the jargon and use plain language. You want a special form (open perils) landlord policy.

If this is your first rental I would strongly suggest a replacement cost policy. You can save some money by changing the valuation, but you'll retain risk. After you've managed the property for a couple of years and know how it performs as an asset, you can take a closer look at nuances to see if you can squeeze more cash flow out.

Landlord policies don't cover personal property because you don't have an insurable interest in your tenants' property.

Most policies automatically cover lost rents for 12 months. The limit for lost rents is time, not money.

Medical at $1000 is fine for a landlord policy, but you should require your tenants to get renters insurance.

$300k is not good enough in my opinion. $1M liability on your property and a $1M umbrella. If you're getting a quote from a company that won't go to $1M on the liability portion, make sure they can provide an umbrella with that underlying limit.

Worst companies... Honestly, all of the big ones behave in pretty much the same way, since they all embraced some iteration of the "deny, defend, delay" tactic. I generally like smaller, regional insurers for this reason. I also think the agent you work with is important. Just ask "what recourse do I have if a claim is denied" and work with someone who doesn't squirm.

The exclusions on landlord policies tend to be pretty straightforward. In a rental I would make sure you're covered for water damage every way you can be, which sometimes requires an endorsement. I would definitely check on the lost rents. If you're planning to do repairs yourself I would make sure that doesn't impact the coverage, especially if you're likely to touch wires and pipes. If you're into fine print, ask for the exclusions on the policies you're quoted along with the quotes. I'm always a LITTLE more on my toes when someone does that. :)

Put the deductible at the maximum amount you can come out of pocket. You don't want to file small claims, especially if you plan to grow your portfolio, because you'll pay for it in the long run. In the event of a larger claim, you'll be out the deductible, but you'll save money the rest of the time.

Liability: I firmly believe that every landlord should have an umbrella policy. Ideally, you should have $1m in liability on the property policy and an additional $1m in an umbrella.

Deductible: Look at your situation. Determine the maximum amount you can come out of pocket, and make that your deductible.

Replacement cost: insuring a property for its replacement value means that the limit for your policy is set at approximately what it would cost to rebuild the property in a total loss. ACV (actual cash value) means that you insure the property for the depreciated value of the building materials.

Again, which one is better depends on your risk tolerance and financial situation. Assuming that you would rebuild the property if it were to burn to the ground, getting an ACV policy means that you are self-insuring for the difference between the depreciated value and the cost to rebuild.

If you can afford to do that, and if you don't mind retaining that risk, then you can save money on your premiums. Also, some property owners who insure for ACV plan to build something different (and less expensive to construct) in the event of a total loss.

There are some risk combinations that I just don't feel go together in the rental marketplace. One is barbecues and balconies. Another is water and kids. Given that families tend to like vacation rentals, I would pass.

To answer your question the insurance wouldn't be the same as if it were a pool. But to be very sure you're covered on liability I would take pictures, measure the depth, and make sure your agent has all that information.

I'm an insurance guy, and I actually don't think you're crazy. Insurance is a financial tool, which I believed should be used intelligently like any other financial tool. If you have the financial strength to act as your own insurance company, you can save money, just as you can save money by acting as your own bank.

In my opinion, self-insuring requires a significant amount of liquidity. It's not as simple as looking at premiums through the narrow lens of an unwanted expense (although I agree it's tempting!) because there are real-world issues to consider.

For example, the liability insurance that comes with a property policy is cheap, but you won't find those rates without a property policy. If you buy a liability policy without property coverage, you'll realistically cut your savings in half.

Also, reducing the valuation of your property has to be done carefully. Replacement cost policies carry a coinsurance clause (normally 90%), meaning that the property has to be insured for at least 90% of the cost to replace it. If it's insured for less, even a partial claim will be reduced. (If you insure for 50% and a claim is adjusted at $10,000, you'll get $5,000.)

And because partial claims are far more common (and realistically routine with a large portfolio) I would encourage you to dig a little deeper into the numbers and look at what a smaller claim ($20,000 for the sake of argument) will do to your cash flow. Can your business model absorb that on a regular basis?

Rather than throwing the baby out with the bathwater, I would encourage you and other investors to arm yourself with the knowledge that will enable you to use the insurance tool well. Find an agent who counsels as well as sells and who isn't afraid to sift through exposures so that you can pick and choose the risks to retain. Read a couple of books (like "From Good Hands to Boxing Gloves") so you can understand the machinations of the industry and be prepared to deal with them when you have to.

I notice that much of the distaste for insurance companies comes from the unfortunate fact that many of them do minimize claims payouts. There are two strategies for dealing with this. One is to research the claims service of the companies that supply quotes and to work with one that has a reputation for settling well. Another is to make friends with the best public adjuster in your area.

In addition to business, look into vocational classes that will teach you the basics of building. Also, working at a hardware store or lumberyard will also teach you a lot about building materials, their names and uses, benefits and disadvantages, etc. Working at one of the big box home improvement stores will also introduce you to construction people, and you'll pick up some of their language and vibe.

Knowing that will give you a significant head-start, and it's something that career-minded students on a professional track often overlook!

Yes, I agree. That was almost 18 years ago, and I did go back. Just a different school - and I had to pay for it. :)

I should start with my disclaimer: not only am I not a coach, I'm a guy who walked away from a full college scholarship over an argument with my "Foucault in Context" prof. I zealously differentiate "study" from "learning." The former without the latter is a tragic waste of time. I have a very short fuse when it comes to selling useless "education."

With that disclaimer in place, here's my rant.

My dad always told me to ignore the details of a thing until I understood its basic operating principles, and this is one of the best pieces of advice he ever gave. In our humble real estate journey, we bought a rental and studied everything that related to it and its performance over a few years. We bought a home at a significant discount and rehabbed it as our primary residence, and we studied every aspect of that deal. These are pretty simple, but they've taught us a ton of basic stuff. Our next deal will be a combination of the two, which will teach us more. We're learning basic operating principles and moving slowly enough to learn well as we go.

Increment over excrement.

Being on BP and reading the insights posted here makes that synapse (or brain gap) fire in regard to those basic operating principles. It presents a diversity of perspective, which really helps to ferret out the disadvantages of various approaches (some of which seem very good at first glance) and to see issues from multiple points of view.

In contrast, gurus don't present diverse perspectives. They present a single perspective. They have to. That's the formula they've created, the inefficiency they've identified, the loophole they've discovered. They don't present basic operating principles; they present prefabricated systems that you can follow (on faith) without understanding the principles.

In my opinion, that's dangerous. Using somebody's formula can easily involve using some kind of exotic deal-making. If the students don't fully understand all the ins and outs of that exotic deal, they can open themselves up to significant liability. And as real estate law gets more complicated it's easier and easier to inadvertently break laws.

@Bill Gulley is right. Taking some courses and drinking with construction workers is a great education. If you drink enough, who knows, maybe the girls in the dive bars start to look like bikini models!

@Jeremy Baker Could it be that the utilities are $1,988/year? I notice that the revised figure for HOA matches the number you listed for utilities.

If you don't mind, what does one of those condos go for these days?