All Forum Posts by: Troy Zsofka

@Ashley Kirby -

Winterization usually refers to getting a property ready to go through the winter unused with no heat. It involves blowing out the water lines, filling them with RV antifreeze, etc.

It sounds like what you're trying to accomplish is a conversion from seasonal to year-round use. Thought I'd clarify so you don't call plumbers and ask for winterization since that's not what you're looking to do.

As previously mentioned, you'll need insulation, heat, etc; which may or may not be partially in place already. Much of it may require permits and inspections as well as licensed trades to do the work. The cost for something like this will vary greatly based on the size of the house, what's there already, etc.

Hi @Suzette Rovelsky

I created a spreadsheet several years back to analyze my exposure if I were to self-insure.

The argument for doing so was compelling, but I ended up switching carriers and saving a bunch on premium so I decided to keep coverage rather than inviting Murphy into my life.

Happy to share the data and analysis if you'd like.

As far as a book on this stuff, no idea. I think your best bet is to find a knowledgeable agent who gives AF and customize a plan to suit your needs and risk tolerance.

@Suzette Rovelsky - 

Why are you considering flood coverage as a standard?
Flood insurance is only necessary if the property is in a FEMA designated flood zone, and even then it is optional unless you are using leverage. However, keep in mind that your eventual buyer will likely be getting a mortgage and flood insurance is rather expensive, so being in a flood zone will affect the market value of the property. In other words, even if you are buying all cash and don't ever intend to leverage the property, you still need to factor the flood zone designation into your financial return metrics because it will reduce resale value.

Insurance coverages can be customized based on your perceived exposures as well as your risk tolerance. @Greg Powers makes a good recommendation for public water/sewer properties; especially in areas where significant infrastructure components, such as sidewalks, are in the way of repairs to the lines.
My general take on insurance is that, on average, the premium will end up being more than the claims reimbursement multiplied by the likelihood of loss (otherwise insurance companies would be in the red), so I only insure against losses that would otherwise be financially crippling. Other people have differing opinions on that, but the general idea is that those who by an extended warranty on a toaster are missing the point on how the game works.
If it's a rental property, liability coverage on the property policy, and required renters insurance naming your management and ownership entities as additional insureds on the liability portion, coupled with strong lease verbiage regarding the maintenance responsibilities of the tenant (snow removal, etc), are, in my opinion, the most important, because an uncovered liability claim could be financially devastating. There are countless other endorsements that you can elect on a case-by-case basis to suit your specific needs, potential exposures, and financial ability to take a hit without risking insolvency.

As far as price, it will depend on coverage amount (building limit, liability coverage amount, etc), but make sure to understand any coinsurance provision before you attempt to minimize premium by reducing building limits. A better way to reduce premium is to increase deductible if you can safely afford to do so, but be aware that if you do use leverage, many banks will mandate a lower deductible (such as $1K). Generally, the premium per dollar of coverage will decline as property value increases (i.e. it doesn't cost double to insure a property of twice the value). Premium will also be based on location (distance to fire department) as well as other factors. It will also be slightly more expensive for a rental dwelling than for a primary residence or second home.

Your best bet is to consult with an agent that is willing to educate you on your options and tailor a solution that will best suit your individual needs and circumstances. I recently switched carriers and achieved significant savings across my portfolio. I believe my agent is licensed in both NH and VT. If you'd like a reference, feel free to PM me.

Happy investing,
Troy

@Troy Welch:

I'm not a real estate attorney, but this is what title insurance is for.

It is possible that your grandfather took the transfer as a quit claim deed as @Wayne Brooks mentioned, which means that no warranties were given as to the title being clear, and the transfer could have proceeded with the lien in place; as a quit claim deed simply grants the seller's claims on the property to the buyer and says nothing about other claims or liens. However, your grandfather still should have gotten an owner's title insurance policy; which should step in to handle to this up to the policy limit (typically the purchase price).

If he bought it all cash and decided to forego owner's title insurance, you may be out of luck.

Again, I'm no expert on this and I always retain a third party real estate attorney to handle title, and I purchase an owner's title insurance policy on all my acquisitions. 

At this point, if you can find the docs from when your grandfather originally purchased the property, you can see if there is an owner's policy amongst the paperwork. At the very least you can identify the title company or attorney that handled the transaction and reach out to them. Otherwise, your best course of action is probably to engage a quality attorney to guide you on this.

Good luck

@Matt McLaughlin - 

I'm not an accountant, tax professional, attorney, or financial advisor, but I'm happy to share my insight into this on a few points. Solely my non-qualified opinion and not to be taken as advice.

I'm assuming you are considering forming an SMLLC (where you are the sole member).

From a tax perspective:

1) An SMLLC is a "disregarded entity" from a tax perspective and will pass through to the Sch E of your 1040. It will therefore make no difference whether you own it individually or through an SMLLC in regards to taxes.

2) You can absolutely create an LLC to act as property manager. However, there may be tax consequences of doing so. The property will expense the management fee paid to your PM LLC as a deduction to passive rental income on Sch E. HOWEVER, the PM LLC will book the property management income as Sch C active income, and it will be subject to SECA tax. Overall, doing this will result in higher tax liability on the dollars paid and collected as management fees. If your solution is not to charge a management fee, I think that may fully undermine any defensibility as to the legitimacy of the liability protection you seek in establishing the LLC in the first place; which I believe to be moot anyway as I will cover below.

In regards to liability protection:

1) An LLC only serves to limit liability to assets owned by that LLC. If all you own is this property, you aren't protecting anything. If, on the other hand, you have significant wealth outside of the LLC, it makes more sense (subject to the following considerations).

2) I have heard from attorneys that an SMLLC doesn't offer much protection, and to really get the liability protection offered by an LLC, it must be a multi-member LLC. I think the jury is out on this, but it's a topic of discussion and disagreement amongst legal professionals.

3) When someone sues, they go after everyone and everything they can. To think that you protect your assets by creating an LLC to manage the property is, in my opinion, a dream. The lawsuit will almost certainly name both the property management entity as well as the property ownership entity. If you have a 3rd party management company, you can push the liability onto them and their insurance (if you can show that the matter at hand was part of their responsibility), but you will still be named in the suit. If you own that property management company, you're just pushing the liability from yourself to, well, yourself.

In regards to quit claiming the property into a newly formed LLC and the bank not caring as long as you are making your payments:

1) I agree that it is unlikely that the bank will call the note for this. However, you are just starting out and looking to build relationships and a reputation. Do you want to start off by doing something behind the bank's back that they most certainly will not like, even if they don't call the note? I propose that the answer should be 'no'.

2) You may be subject to transfer tax if you do this. However, I do remember a NH bill exempting property transfers from RETT if the ownership of the entities remains the same. Not sure if it passed. Something to ask your accountant or attorney.

Bottom line is that, in my opinion, you stand to gain little, if anything, from transferring the property into an LLC at this point, or creating an LLC to manage it. Moving forward, as you build your portfolio, it begins to make a lot of sense to own properties under multiple LLC's (this doesn't have to mean one LLC per property, but it can if they are large MFH). For now, I would think that you are better off having a good liability insurance policy, and a strong lease in regards to who is responsible for what (if the lease says the tenants shovel the steps, they will have a hard time suing you for slipping on them), and requiring each tenant to carry a renters policy that names you as "additional insured" under the liability portion (in case someone besides your tenant sues for something that was the tenant's responsibility).

Moving forward as you expand, it becomes more prudent to set things up with proper entities. I hold my properties in multiple LLC's and I have another LLC for property management that does not own anything. You can find local banks that will lend on properties held in LLC's as a commercial loan, and if you ever purchase a property that is 5 units or more it will have to be a commercial loan anyway.

AGAIN:

The above is not legal, tax, or financial advice and you should seek the advice of duly licensed professionals. The information provided is merely the opinion of a non-qualified individual and should not be relied upon to make any decisions. Blah blah blah...

I think everyone is giving solid advice regarding partnering or not, but I'm going to offer an additional perspective.

If you are looking to house hack this, and then another in a couple years, and then grow from there, then yes, do it yourself with a minimal down payment on an FHA loan if you can.

On the other hand, if you plan to get deeper into REI more quickly than that, then you should not only consider this particular deal, but future ones as well. What I mean here is, let's say that you can take this one down yourself, and don't need your capital partner. Can you take the next one down, or will you have exhausted your personal capital? Is this potential partner going to be receptive to working with you on the next one if they feel that you cut them out of this one in the 11th hour?

I invest a lot in PERE, and if someone brought me a deal and asked me to be an equity partner, but then changed their mind in order to make more money after I had already spent time on due diligence for that particular deal, I'm not sure how receptive I'd be if they then came back to me for the next one.

I guess it all depends how much you've involved this potential partner in the deal to date, and therefore whether they feel like you reneged on a commitment to work together.

There's the adage that half of a deal is better than no deal. That can be extrapolated further to say that half of 5 deals is better than all of 1 deal.

Just something to consider.

Happy investing,

Troy

@Quinn Morrissette - 

Is that $1,750 cash flow monthly? Is it NOI or actual Cash Flow after Debt Service?

If the gross rent is $3,350, and the NOI is $1,750, that means the expenses are $1,600; which indicates an OER of 47.8%. That's reasonable, but that's BEFORE P&I.

If you are thinking that it cash flows $1,750 AFTER P&I, you may want to take closer look at your expense assumptions.

If this old mill town is Claremont, take an even closer look because RE taxes there are astronomical.

Happy investing,

Troy

@Michael Day

@Michael Ketchen

I'm also in a liquid position right now. Will PM both of you.

@Andrew B. -

I also am not an attorney and only sharing my opinion. However, I have had many conversations with insurance agents over the years, and one in particular has always been incredibly knowledgeable.

His take on liability coverage makes a lot of sense and is based on the potential liability exposure (as it obviously should be). As an example, my properties are all single family and duplexes where the tenants are responsible for snow removal. I also require each tenant to carry renter's insurance with a minimum of $300K liability coverage ($500K if they have a dog), naming my property management company and the property's ownership entity as additional insureds. This effectively mitigates the need for a large liability limit on the property insurance so long as you are doing a good job with property upkeep and your other responsibilities. Conversely, if you have a multi-family where you are responsible for snow removal, ice control on steps, etc, there is much more potential liability exposure. In my case, if someone slips on ice, the renter's insurance will step in because the ice was the tenant's responsibility. With a multifamily, if someone slips and falls on ice, there is no renter's insurance to take some of the heat.

All that said, I carry $1MM per occurrence anyway, for a couple reasons:

1) It is not a lot of money to go from $500K to $1MM. I also mitigate the additional cost by carrying a larger deductible on the property coverage. I can be overly thorough sometimes so I calculated the expectation of loss based on national statistics regarding type, frequency, and severity (average payout) of claims. I determined that, in the long run (assuming your properties are in good condition), you are better off with larger deductibles because the amount you save in premium should be more than enough to cover small occurrences that are below your deductible. I have always felt that insurance should only be used to protect against losses that otherwise can not be absorbed, and the data tends to agree (obviously, otherwise insurance companies would lose money). Several thousand dollars in uncovered repairs is a cost of doing business that isn't going to have much of an affect in the long run (especially if you're saving it in lower premium for the higher deductible); whereas several HUNDRED thousand dollars in uncovered liability judgement is going to hurt, really bad.

2) Once you grow to a certain level, you become more of a target for lawsuits. Ask any attorney who will give you an honest answer, and they'll say that a litigation lawyer is more likely to file a nuisance suit with little to no merit against a defendant with significant assets, than to file a legitimate suit with demonstrable merit against a defendant with little to no assets.

Bottom line, in our super-litigious society, I think it's worth spending a few additional bucks to have plenty of liability coverage. That way, if someone does try to get rich off your hard work, it will be your carrier and their formidable team of lawyers that will be dealing with it, not you racking up legal fees and stress.

Happy investing,

Troy

Hi @Cindy OBrien

I would definitely say that the pandemic has affected NH real estate.

There seems to be an exodus of urban refugees fleeing the more populated areas. I'm not sure about the actual extent or likely duration of this, but it's happening at least to some extent right now.

It's not hard to come by anecdotal evidence in the form of people talking about bidding wars, insufficient inventory, etc.

As an example from my own personal experience, I listed one of my rentals that had gone vacant. A comp 3 houses down sold for $229K in May. We listed it last Friday at $249K. By Sunday I had multiple offers and it's now under contract for $265K. Sure it's a bit nicer than the comp from May, but I never would have imagined it bringing in quite that much. This is not seacoast area but I'm guessing much of the same is happening with mid-level properties (say $300-400K out there). I'm listing another in Hillsborough today, and will be listing 2 others in Derry and Keene next week. My MO right now is if a house goes vacant, it's getting listed for sale.

Welcome back to New England,

Troy