All Forum Posts by: Account Closed

If you are still interested in expanding your investments the technical answer to your question is neither. You should be able to generate a greater return that your mortgage rates investing in real estate so paying off a loan would only decrease your profit potential. One of the most powerful tools in real estate is leverage and paying down your loans early decreased the effects of leverage. 

Combining the your cash with your HELOC could allow you to make a larger than normal investment that should theoretically make more than the interest rate on any of your loans.

@Account Closed Assuming nothing has been upgraded for 80 years it will definitely be a challenge to get tradition DP3 and REIGuard may actually be a good option. However, if the roof is less than 10-15 years old and everything else has been upgraded in the 70s or after I would think you could find a good traditional policy. Aluminum wiring was used almost exclusively from 1965 to 1973 so unless the property was upgraded then you will likely not have a problem there. 

From what I understand REIGuard is a surplus lines broker (generally reserved for substandard risks) marketing itself as a flipper/small residential specialty program that can compete with traditional insurance companies. 

I have done some research into the coverage provided by REIGuard and found that its competiveness varies based on the type of property. 

It appears to be a good alternative for smaller investors with higher risk properties (older properties in less than great condition) that can only be written in the surplus market. Their pricing seems to be in line with other surplus competitors while offering some significant benefits including the ability to cover properties at different stages of the construction cycle without changing policies, ability to pay monthly and insure multiple LLCs is something not offered by most high risk competitors. 

It does not appear to be a good alternative for  investors with standard properties in good condition. REIGuards special coverage form appears to have a number of limitations not found in standard policies including that they limit the coverage for theft and vandalism to $30,000 with a higher deductible than for other perils (ex. $6,000). Earthquake coverage is also not offered in my market. The general liability policy appears to limit dog bite coverage to $25,000 and exclude coverage for discrimination and wrongful eviction.  REIGuards pricing also appears to be much higher than standard market rates for these homes in good condition. 

@Chance Noffsinger 

The difference between your current rate and the 30 year rate should really not be relevant to your decision. You are currently making $0 off new real estate investments regardless of your low rate. 

The decision should be based on the 30 year rate (4.7%) and your expected rate of return form investing. If you believe you will make a more than 4.7% return refinancing is a good decision. If not it is a bad decision. 

If you want to start growing your real estate holdings as soon and quickly as possible I am not sure why you wouldn't do a 30 year cash out refinance in which you add whatever money you want today to the longer amortization at the fixed 30 year 4.7% rate. This gives you cash up-front and eliminates the interest rate risk associated with a HELOC.

@Garrett Canter The liability portion of your rental property insurance is what I was calling liability insurance. The cost of increasing liability limits from $300k to $1mm is generally around $100 a year which I think is worth the extra protection. An umbrella policy can cover multiple properties and it is not uncommon for one umbrella to cover 50+ different properties if needed.  Umbrella limits can range from $1 to $10 million depending on the size of your operation and can also provide additional coverage over commercial auto if applicable. This is a real estate umbrella that I have had luck with

@Patrick McCandless 

I am a strong believer that investing in condos is a much better cash flow investment than single family homes. (I only invest in A.B  neighborhoods so this does not apply to C,D). The price of homes tends to be significantly higher than condos in these areas while the rental rates are pretty comparable. This represents a great opportunity for a buy and hold investment that generates great cash flow. SFHs probably have more potential for appreciation. However, as a leveraged real estate investor cash is king and I am more than happy to trade cash flow for appreciation. My two condo units are currently generating cash on cash return of 15% and 20% in A and B neighborhoods respectively. Both of my tenants are married professionals with income to rent ratios over 4 to 1 who treat the place like it is their own. 

I am not sure why HOA fees scare off so many BP investors, HOA fees should increase every year just as the cost of all products and services increases every year. This is no different than maintaining a SFH. Condos also have a lower CapEx and Insurance costs, trash collection and water due to the HOA fee. These costs should be deducted in an analysis. There is always a risk the HOA will drastically increase fees out of the blue. However, reviewing HOA policies, budgeting and reserve study before buying a condo can mitigate this risk. SFHs have the risk of being solely on the hook for major structural or roof issues which in my mind is much more worrisome than an increase in fees.

To me the biggest red flag is if governing documents have clearly not been updated for decades.  The governing documents should have strict guidelines that cover all aspects of the association from the Board's rights and powers, to a code of conduct of residents and renters to a process for making exterior modification to individual units. These regulations need to be current and reviewed by a lawyer at least every five years. 

 @Paul Hormann Your are on the right track requiring tenants to carry renters insurance. The liability portion of the renters insurance policy will pay for claims that cause bodily injury or property damage for which the tenant is legally liable (generally due to negligence). Almost all commercial general liability policies state that your insurance is excess over other insurance available for which you have been named additional insured. This gives you the primary non-contributory protection @Derek Lacy mentioned. 

Bodily injury or property damage for which the tenant is legally liable would include 1) negligent care or supervision of an animal that bites a third party. It would also include 2) negligent care or supervision of an animal that leads to property damage to your rental unit. 

1) It is much easier to prove a dog bite resulted from the owners negligence than it is to prove it resulted from the property owners negligence. (Generally speaking it is 100% the dog owners fault). For this reason, I have seen most dog bite claims brought against the renter first. If the renter has insurance that can cover the claim it generally ends there without effecting the owner. If the tenant does not have insurance then the claimant will look to someone else to pay that claim (likely you). 

2) Renters insurance also covers damage to your property if due to the renters negligence. Negligent supervision of a dog would likely be covered here. Oftentimes your property insurance will pay out first to get the repairs going and then subrogate against the renters insurance company to recoup their money.

For smaller and mid-sized apartment owners the best way to ensure renters insurance coverage does not lapse is request evidence of insurance annually and require premium be paid in full (if permitted by state law). For larger apartment owners there are tenant liability insurance programs available that are written in your name adding the tenants as additional insureds that provide liability and personal property limits to all of your tenants without requiring individual policies. This cost is generally passed on through monthly maintenance expenses. 

@Garrett Canter I am not going to touch the LLC vs no LLC debate as their are legitimate arguements both ways depending on your situation and ownership structure.

That being said I strongly believe it is prudent to maintain liability insurance regardless of ownership structure. In the event of a frivolous lawsuit by a personal injury lawyer your insurance will provide you with a competent lawyer eliminating the time you would have to commit defending yourself and pay for those legal fees. These types of claims often result in the insurance company settling the suit for a five figure sum which is also covered by the insurance policy. @Cameron Skinner is correct that lawyers who make a living filing frivolous suits in hopes of a quick payout often drop these suits if there is no path to easy quick money. However, since the insurance company is paying all of the costs anyway this settlement does not effect your assets in anyway. 

The main purpose of liability insurance in my opinion is to protect against unforeseeable honest mistakes that result in a legitimate large claim. Even the most diligent and well intentioned landlords can make an honest mistakes. For example, you have a snow removal company remove ice and snow from your properties parking lot at 7 am the day after the storm but if someone slips and breaks their neck at 6 am they would have a legitimate claim. Monetary rewards can assign current and future personal income to pay for this damage. It is these types of claims for which  insurance is meant and in my opinion the few hundred a year in insurance is well worth that protection. Additionally, many insurance companies prefer to write both property and liability in a package policy and offer discounts that can make up a significant portion of the liability premium. Industry standard is for liability limits to be $1,000,000 per occurrence and $2,000,000 per policy year. If you want additional limits you can purchase an umbrella policy. We offer an umbrella quote to our clients each year and allow them to make a business decision whether or not to purchase this coverage 

@Ronald Perich All good advice. Your theory about the due on sale clauses is interesting but would only be feasible for mortgages that are held by one lender. The majority of mortgages and almost all insured by the government are bundled into mortgaged backed securities which are owned by 1,000s of investors. It would be practically impossible to identify and use due on sale clauses for individual mortgages within these securities. MBS are traded daily based on the change in rates and are generally so the buyer is mostly buying based on credit and not on the actual rate on the loans. 

If you are using a lender that holds all of its own loans your scenario would be a very clever trick I could definitely see be used. I also agree with your end conclusion that it would not make sense to put this property into an LLC when you are house hacking. The other tenant will know you are the owner and you will likely be doing all the work yourself so you get almost no added liability protection or increased anonymity.

@Cliff T. From a liability perspective (both liability covered by insurance and otherwise) hiring some of the contractors yourself and hiring a GC to hire the rest would be a total nightmare. Im happy to pm with you and list those concerns if you are interested so I don't bore all the other readers to tears. 

However, I agree with @James Masotti that you will likely not save as much money as you expect (if any) by hiring the contractors yourself. Most GCs work with the same subcontractors on all of their projects. This work is much more attractive to the subs who know what to expect as getting paid on time, managing workflow and knowing what is expected. For this reason, many subs will charge the GC much less than a one off private project. There are also many subs that only work for certain GCs and do not take on private work. 

Unless you want to get into the project management/GC business I would let the pros handle this for you.