All Forum Posts by: Account Closed

Thanks all for the feedback.

Thanks @Deanna McCormick In your experience do you end up using more than half of the damage deposits you collect to fix problems?

I recently purchased my second property in a condominium complex located in a St. Louis suburb. I am looking for some feedback on whether to require a damage deposit or charge a non-refundable move in fee. 

1. Damage Deposit: Traditional one months rent ($1,000) to be returned at the end of the lease assuming no damage. 

2. Move In Fee: $500 non-refundable move in fee

I am leaning toward option two. Assuming no damage this money becomes profit. It also eliminates the hassle of keeping the damage deposit in a separate account earning almost nothing and returning at the end.  A $500 deductible is very reasonable for a condominium unit with no wind/hail exposure so even if something goes wrong I will have the funds on hand to pay the deductible. Obviously if multiple things go wrong I would have $500 less but I think with careful tenant selection this could end up being much more profitable I am hoping to get feedback from those in the BP community that have experience with both or either of these. I look forward to feedback!

I am off work today due to a "snow day" so had a little time to actually listen to the podcast was referring to and found about what i expected. Cardone over simplifies economic concepts to the point that his explanations are partially if not completely incorrect. However, the conclusions he reaches are by and large correct showing that he understands the concepts but does not have faith that his listeners have the capacity or desire to understand more detailed explanation. 

Examples:

1. His grandmas bank account earned in the high teens in 1976 and earns almost nothing now which means traditional savings accounts are less valuable. - In reality the inflation rate in 1976 was 16.5 and is currently near 0. The real income from these accounts is almost exactly the same and savings accounts have been and will likely always be based on inflation + around 50 basis points. 

2. The minimum wage adjusted for inflation is $2 less today than it was in 1960 so that means the dollar is losing value. - The minimum wage adjusted for inflation has nothing to do with the real value of a dollar. It is absolutely true that real income earned by the lower class  has remained stagnant or slightly decreased for decades while the real income of the wealthy has increased significantly. However, this has no relationship to the value of money. 

Cardone's ultimate take away that you should not just sit on your money but should instead invest it in something (namely real estate) is totally correct but not for the oversimplified reasons he stated. Investments unlike cash increase with inflation. Real estate investments allow investors to take advantage of leverage which increases the amount you can invest and therefore increases the potential profit. 

Don't invest until you have $100,000 is another example of an oversimplification. People should have enough cash reserves to take care of themselves and their family if they loose their job and should have reserves built into an investment to withstand negative cash flow for a period of time. People should also not invest all of their savings in one investment that could serve to be life ruining if it fails.  

It is hard to imagine someone having sufficient savings, cash reserves and the money for the down-payment on an investment property without having $100,000. The conclusion that you should not invest until you have savings, cash reserves and the money for a down payment is correct for most people. This conclusion does not take into account the complexities of the individual. A 25 year old with no family to support and a steady income can probably invest his first $10,000 in a SFH. He has less responsibility, more time to make up for a failure and cash flow to get through a tough part of the investment. A union member with fixed pension payments does not have to worry as much about savings and can probably invest with a much lower amount in the bank.

Finance and economics is complex and takes time and brainpower to understand. If finance and economics could be explained and understood in simple terms there would not be an industry of professionals paid handsomely for dedicating their lives to understanding it. Anyone claiming to be able to explain these complex ideas using a few easy to understand principles is selling snake oil and its important people take in this type of information with skepticism.

@Kaleb Musie Is the policy you are referring to general liability, property or both? Generally speaking I see this structure potentially working and having benefit on the general liability side (would have to review the actual policy to be sure). However, this is definately a problem for the property portion. 

General Liability

The named insured is the only insured that has control over making policy changes and cancelling the policy. However, the property manager should have a legal obligation to act in your best interest and not make any changes that would adversely effect you. Naming you as an additional insured requires the policy to defend and pay covered claims resulting from your property in the same way it would if you were an additional insured. 

Property Insurance 

In order to be the named insured on a property policy you must have an insurable interest (meaning an interest in the value of the property). The property policy is meant to make someone with an insurable interest in the property whole after a potential loss. The owner of a property worth $50,000 would lose that amount if the property burned down and can be made whole through payment of a claim. Since the property manager does not own the property it would not make sense to pay money for property damage to that PM. This would be like the tenant in a property getting the payment when the building burns down. If you are named as an additional named insured then that could work. 

We have set up a program for a property manager client that allows them to benefit from the larger number of properties but lists the owner as the named insured. If your policy is set up this way then I would not see a problem.

@J Scott I think you are on the right track. Out performing the 50% ratio significantly for a 5-10 years over multiple properties is very common. However, it would be a mistake to assume that this performance will continue indefinitely and using a lower expense ratio for analysis will lead to overpaying for deals in the long run.   

As you mentioned the tax and rental rates tend to correlate. Insurance rates have historically moved in cycles by region but tend to even out in the long term. The causes of wear and tear vary by region but also generally equal out over time. For analysis sake I will assume:

Taxes: 10% of rent

Maintenance: 8% of rent

Capex: 8% of rent

Insurance: 8% of rent

Total: 34% of rent

Investors who choose to self manage their properties can eliminate the direct property management expense. However, the time and resources spent on self management take away from other money generating opportunities you could be pursuing generation an opportunity cost. Adding the 10% property management expense puts the ratio at 44%. This leaves vacancy as the final remaining piece of the puzzle.  

@Adam Christopher Zaleski's properties may well have a 0% vacancy rate due to the nature of the university market. However, if one of lease falls through due to a fluke right before the school year, a student drops out and leaves town or tenants are evicted due to partying and bad behavior.  Damage to the property can also make it uninhabitable until repairs are made. Long story short there are an unlimited amount of fluky reasons a property could be vacant and deal analysis is meant to ensure that in the long run you will have positive cash flow to withstand those situations. 

An experienced investor with a large portfolio may develop a process to cut a few percentage points off their expense ratio but for most smaller investors it pays to be conservative. 

Ashley Wilson If you are rehabbing or building new homes with the intent of selling them to a third party you will be considered a contractor when it comes to legal liability. If an improperly installed handrail causes someone to fall down stairs and sustain major injuries the sub who installed the railing the gc and you could all be named in the suit. Only a full commercial general liability policy covers completed operations suits. Ideally the sub would name you and the gc as an additional insured and the gc would name you as an additional insured. The gc gives you an extra layer of protection but does not eliminate liability. We recently put together a policy for someone in your situation and the liability rate for insured subcontractors was close to half the normal gc rate reflecting that added layer of protection. This policy also provided premises liability for up to five homes annually for a much cheaper rate than if it were done on a per house basis. All in our structure was probably around $1,000 more annually and required strict contractual risk transfer. It's up to you whether the extra time and money is worth the additional coverage.

Aqil Dharamsey Insurance companies will generally pay out the ACV of the repairs almost immediately and then pay the rest at the end of construction. If you have replacement cost You will get the lesser of the actual cost to replace and your limit of insurance. For that reason there is really no need for a third party adjuster. Even if you got a 3rd party adjuster and he disagreed with the insurance adjuster you would then have to hire an attorney to sue the insurance company for more money. This will delay repairs, require lots of legal fees and likely end in non renewal at the policy expiration. Your agent should serve as a resource in representing you in the negotiations.

Nicole W. In most states including my home state the sale of a property does not effect the lease. The new owner can not terminate the lease upon purchase. In most cases the guaranteed cash flow of having current leases is looked at as a positive. I have never seen a lease that obligates the owner to notify the lessee of a change in ownership or property management. I would check this with an attorney to confirm.

Robert Fiorillo Financing is the most valuable asset you can bring to the table. If you are willing to bring financing to the deal I am sure there are 100s of property manager types that would be willing to lend their experience.