All Forum Posts by: Mitch Kronowit

First off, the 90's were an era of very flat home values. Of course you didn't see much appreciation. And your longest holding couldn't have been more than 12 years (87-99), what I would consider the LOW-end of long-term investing. We normally start buying real estate in our 20's and 30's, then retire in our 50's or 60's. That's a 30-40 year window for realizing appreciation.

Second, looking at the Case-Shiller index for evidence of appreciation is like looking at the S&P 500 index and concluding no single stock ever returns more than 10%. When I buy a piece of property, I'm purchasing one home, not shares in a broader index. In South Orange County, homes that sold brand new in the 70's are now, roughly, worth 20 times more, POST-bubble. Have salaries and wages increased by the same amount since then? If so, I'd be earning around a cool $1 million per year. Hot damn, I'm getting screwed.

There's more to account for the increase in values than simply inflation. Homes just across the street from each other can experience significant differences in values, so imagine how much houses clear across the country can differ.

Most wood-framed houses in California fair pretty well during most quakes because they're engineered to roll with the shakes, instead of crumble like a brittle brick house. Therefore I'm not too concerned with "near misses", but rather an 8.0 with the epicenter smack dab underneath our coffee table. The deductible for any earthquake damage is typically 10-15% of the policy's insured value. I'll have to look at ours again, but I think our home would be about $200k to rebuild, so we would have to pay $20,000-30,000 out of pocket before the insurance policy even kicked in. For the not-so-big-one like you say, I'm guessing most of the damage will be on me, not the carrier. Still, we're in the minority of about 10% of Californians that carry E.I. So either we're one of the well prepared homeowners or just one of the suckers.

The California Earthquake Authority has less than something like $10 billion in it's war chest. They claim that would be enough to rebuild the entire state, but I have my doubts. $10 billion isn't really a lot when you consider the possibility of half of Los Angeles and all of Orange County getting flattened by an earthquake. Hurricanes are pretty bad as well, but they carve out a relatively thin line of damage and peeter out once they get 50 miles or so inland. Compare that to a quake which can destroy everything for miles around its "ground zero".

It's the sheer magnitude of the destruction that makes me question how responsive and how solvent the CAE will be after the BIG one. I don't expect Mike Holmes and his crew to show up in our driveway the day after to rebuild our house. We'll probably be in a hotel for a month or more before an adjuster even looks at our crippled home.

So do I simply stay the course, drop the E.I. on our primary and put that money in the money in the bank instead, or take out E.I. policies on all of our rentals as well? I'm a pretty conservative fellow, but I don't want to over-insure either.

Lenders do not require earthquake insurance, at least not in California.

I'm fairly confused about what to do myself. We only carry E.I. on our primary residence, not our rentals, and am considering dropping it altogether because the deductible is so high. I believe if and when the BIG one hits, the insurance companies will go bankrupt long before everything gets rebuilt, so we may be paying for coverage we may not benefit from.

Looking to see what others have to say.

I found it depends a great deal on the county. For example, in Orange County, California, you can pull up the tax bill for any property you have an address and/or parcel number for, but the bill you download online has the owner's names hidden due to local privacy laws. Some other counties allow you to pull a copy of the deed online, others make you show up at the clerk's office in person to request a copy.

This also depends. The lease for some of our properties are signed by my LLC's manager. Others are signed by the property manager as an agent for the owner, my LLC.

Oh yeah. I know a few people who "bet on the come", i.e., invested like property values would continue going up, up and up, and they got burned real bad when the bubble popped.

I, myself, didn't buy anything between 2002 and 2009. The numbers simply didn't pan out because the values were so high. It wasn't until 2009 that we jumped back into the market and started buying again. No, I'm not an advocate at market timing nor am I very good at it (especially with stocks) but with real estate, the cycles move slower and more predictably, and it's easier to tell when things are ridiculously over-inflated (2005-2006) or irrationally under-valued (now). I believe we're in the latter period and the time to buy has been good for the last few years and will remain so for several more.

We can all agree to meet back here in 10 years (when I plan to take an early retirement) and compare notes. I could very well be wrong and sitting on a bunch of property that hasn't moved anywhere after a decade, but I'm in this to win, not simply make an appearance. That's why I still have a bunch of money in the stock market. Something, somewhere, has to pay off sometime. Either that or we're all screwed. :-)

I don't. I use a spreadsheet that spits out certain numbers. If those numbers are satisfactory, given the type and location of the property, then I'll pursue the purchase.

BTW, the wealthiest investors I've met or read about in California made their money in appreciation, not cash flow. I've said before most of the investors I've heard that don't believe in appreciation either live in flat markets, such as Houston, or simply haven't been in the game very long. Those that began investing in the last 5 years or so have known nothing but a DOWN market. Ask someone who's been in real estate for 15 or more years and ask them about appreciation.

We have a separate insurance policy for each property with the exception of one, which is simply covered under an extension of our homeowner's policy. It's clear as mud to me, but my carrier explained that the one rental which we've had the longest was originally covered that way and that's how they prefer to keep it. All subsequent rentals received their own policy and each policy carries $1M in liability.

An LLC is NOT a substitute for insurance, but there are several misinformed individuals that believe that. An LLC is simply another layer of protection (think layers of an onion). In certain cases, such as negligence, your insurance policy may refuse to pay altogether, but your LLC can still afford you some measure of protection, especially if the negligence was caused by a third party and not yourself. We also enjoy the personal privacy and separation an LLC affords us from our business, e.g., all of our tenants understand the property they rent is owned by a company, not a person.

Exactly. That's why it annoys me so much when some investors or lawyers flippantly say "just form an LLC for each property". Then you see they only do business in Michigan or South Dakota. :-)

Yes, umbrella policies are highly recommended as they only cost a few hundred dollars per year on average. However, my insurance company has provided me with $1 million in liability coverage within our normal policies, so we haven't gone with an umbrella yet.

Another reason I like the privacy afforded by an LLC or Corporation (although it's far from perfect).

With title held by my LLC, I can honestly state I am not the owner but merely manage the property for the company. Also, I stick to only giving out my first name.

The general consensus ranges between form an LLC before you even purchase your first rental or wait until you have 100 units or so. Your personal preference may fall somewhere in between, and yes, I believe it is a personal preference.

In many states, forming an LLC is cheap and easy, so why not do it for even one rental? In my state, California, the $800 annual franchise tax for an LLC makes it an expensive endeavor unless you have several rentals to fund it (or just one or two that cash-flow very well).

Lastly, asking when an LLC is "necessary" depends on what you consider mandatory. Some investors operate a lifetime without ever forming an entity, so I guess for them, an LLC was never "necessary". For some who had one rental property and got sued in their second month of operations, their take on what is "necessary" may differ quite a bit.

The best approach is speak to an attorney who specializes in asset protection and estate planning. Lay all your cards on the table and evaluate exactly your risk tolerance and what you have/need to protect.