All Forum Posts by: Steve Smith

Quote from @Greg M.:

Quote from @Lynnette Pombo:

I've got four units, all paid for and occupied by tenants. Even with high deductibles, the rates are high. Looking for some guidance on going this route.

Unless I missed it, there are a lot of missing facts that weigh into this decision.

1) What are the properties worth?
Doesn't matter

2) What is the cost of insurance and current deductible? With higher deductible? 
Depends on the % of premium vs the value of the house. As the % of premium increases, at what point do you say no. There are some insurance products that are 20 to 25% of the value, so you totally pay for the house in 4 or 5 years. Now factor in the deductible and hassle with the insurance company and there's a strong argument for not insuring. If the % is 1% and you only have one or two houses, that's the other extreme, and insurance is probably a good value, especially if you can't afford ANY loss.

3) Are you thinking of getting rid of property and/or liability insurance?
One could make an argument for either. It's just a matter of the numbers and ones risk tolerance,

4) How much are you will to spend to defend against a lawsuit? Insurance has a duty to defend, so if I sue you, the insurance company pays for the attorneys, specialists, etc. No insurance, you pay. At what point do you walk away - keeping in mind this is coming out of your pocket. 
No liability with a big claim, let them have the house. Of all the investors I know, only one guy lost a house (and that was a $5K trailer).

5) What is your personal financial situation like? If the four properties disappeared tomorrow, would you still be OK financially or would it set you back significantly (both current income and retirement/net worth)?
Good point and worth being comfortable with the decision, and yes, you can isolate some dollars that will be protected against a lawsuit. And you certainly can keep yourself personally at a distance with a little planning ahead. Most do.

Unless I missed it, there are a lot of missing facts that weigh into this decision.

1) What are the properties worth?
Doesn't matter

2) What is the cost of insurance and current deductible? With higher deductible?
Depends on the % of premium vs the value of the house. As the % of premium increases, at what point do you say no. There are some insurance products that are 20 to 25% of the value, so you totally pay for the house in 4 or 5 years. Now factor in the deductible and hassle with the insurance company and there's a strong argument for not insuring. If the % is 1% and you only have one or two houses, that's the other extreme, and insurance is probably a good value, especially if you can't afford ANY loss.

3) Are you thinking of getting rid of property and/or liability insurance?
One could make an argument for either. It's just a matter of the numbers and ones risk tolerance.

4) How much are you will to spend to defend against a lawsuit? Insurance has a duty to defend, so if I sue you, the insurance company pays for the attorneys, specialists, etc. No insurance, you pay. At what point do you walk away - keeping in mind this is coming out of your pocket.
No liability with a big claim, let them have the house. Of all the investors I know, only one guy lost a house (and that was a $5K trailer).

5) What is your personal financial situation like? If the four properties disappeared tomorrow, would you still be OK financially or would it set you back significantly (both current income and retirement/net worth)?
Good point and worth being comfortable with the decision, and yes, you can isolate some dollars that will be protected against a lawsuit. And you certainly can keep yourself personally at a distance with a little planning ahead. Most do.

Insurance IS overrated. Once you can get enough properties, and keep them in separate entities, they cannot be attached if you are not the sole owner, but only if you're found negligent. Also, lawyers won't pursue a case if they don't see any money in it for them (ie: insurance policies). Keep your personal self off the records and out of the aim of any possible suit. Have a property manager and his LLC to manage (you can own or control that, too.).

Yes, mortgages on properties make them less of a target.

Question: How many investor friends do you have that have even lost ANY law suit against them? And once you get going you can afford to have a pretty big loss rather than pay stupid expensive premiums.

Randy,
Thx for the info. I'm currently sharing a Citation 5 with a colleague, and the cost is every bit of what you say. He flies a lot more than I do with his business and customers and has the need, so he picks up the bulk of the costs (we share costs on hours used). And sometimes we fight over who gets the plane, and getting it for several weeks for a long trip doesn't work well. It's also more plane than I need, but relatively cheap considering he pays the bulk of the cost. Downside is operating costs is high because it's older, but a very comfortable plane. Still cheaper and better than charter. Just wondering if Net Jets, Flex Jet and others offer better options.
A small, newer plane like the Vision, just doesn't make financial sense. Just the fixed costs of the plane, hangar, pilot, etc. is mind blowing.
After having this kind of travel, I'll NEVER go back to the airlines, other than a rare international flight.

How do you travel? For trips less than 200 miles or so, seems like most people just drive. The airlines suck and the hassle has led a lot of us to just buy our own planes or charter a plane (MUCH easier travel).

But owning your own plane can get pricey and looking into  chartering with Net Jets or comparable operations. They can provide a LOT of travel just for the cost of our pilot and insurance with our own plane, regardless of the other expenses. Anyone with experience in the jet charter companies? Goods and bads.

Stay with the SFH locally, do NOT go out of state and do NOT do multi.

Think about selling your worst and replacing them with better houses, perhaps 1031 to push the taxes out a bit. If you don't have a Roth, get one and get some dollars in it to invest in SFH options, teaming with a good friend investor where you can help them, they help you. I like the 3 down to double your portfolio, but only if the bulk are GOOD houses. Be sure to ask the seller for a option to "move" the mortgage for future expansion, and the option to release a house or two you wish to sell.

If you're still working W2 jobs, you might start thinking about retiring early (especially if you don't like work) and spending more time developing your rental portfolio. About 10 free and clear homes will pretty much replace an "average" W2 income job. 

You have some great options.

Excellent strategy! Be sure the LLC is properly set up, and there's a thought to NOT be the managing member, but be able to control things.

A trust expert would most likely help.

but, sounds like the trust already passes the income thru to the bene, who pays (may pay) the taxes. Why would the trust pay tax on the purchase of a property?

I'm sure you'll get a lot of answers on this but it depends on your risk tolerance and thresholds. If you just had averages losses over time, you'd be ahead without insurance.

Can you recover from a loss, and would one loss wipe out a lot of your portfolio? If you had one building and lost it, it could be a huge loss. If you had 100 buildings and lost 1, probably no big deal and the savings in premiums would likely pay for it.

I know several investors "medium sized" with 20 to 30 units that self insure all of them. Some of their properties are waterfront, with premiums in the 5% of value range (or more), which makes sense to self insure. I know a few that don't even have liability. They are personally "disconnected" and their property manager is "broke". Their cash flow is substantially better.

Worth thinking about.

There's a lot of merit to that song and dance, but requires skill in buying SFHs below market often with seller financing to get good terms and skill in management. However, it's probably the safest real estate investment out there. You say it's not your kind of music, but with your current portfolio, you're all ready there. I'd bet you didn't get those properties paid for free and clear when you bought them, unless someone gave you a wad of money. Some debt would shelter a lot of income, give you appreciation, and the tenants would pay off your mortgages. 

It may not be worth the hassle of creating a "job" for yourself to contribute to your IRA, but the number could easily favor that hassle. Philip has some good thoughts on that.

If your IRA is not a self directed Roth, convert it to one, and you can do that over 2 years or more to minimize taxes. Get up to speed on using your Roth to control real estate with leases and options and you can easily double the worth of your Roth every few years to provide for tax free retirement income. A lot of the Roth custodians have good and free educational info on creating wealth in your Roth. Also seek out some of the good investor gurus that know how to do this.

Lots of good ideas.

Real estate is the BEST way to wealth, bar none. Learn it, buy SFHs for long term rentals. NO DUPLEXES, too much work (need to spend time with the kids). Get a self directed Roth IRA and convert your current IRA into that. The Roth will be your retirement. Use it to control real estate with leases and options. You'll need friends in the business to help with that (experienced investors only). You'll need a LOT of education on real estate investing. But only from those that have done it and still teach it. Don't take courses from Kids under 50 years old, you want the experienced ones only and expect to pay in the $600 range for a weekend course.