All Forum Posts by: Sara Abernethy

I'm putting in an offer on a commercial property.  I'm a part-time investor - I have a six figure day job and this will be my fifth property (3 long-term rentals, 1 vacation rental, and this will be a 3 unit vacation rental).  

I have a bank lined up and ready to go, who will be giving me a loan for 80%.  A friend is loaning me part of the down payment.  I would like to structure this as an unsecured personal loan, with a promissory note.  However, he wants it to be a secured loan, and be listed on the title.  I'm worried the bank will be concerned.  My loan with my friend is short-term, 3 years, and the bank loan will be 30 years.  

The way I have positioned this is that as an unsecured personal loan, if the property turns out to be a dud (it won't be, it will be awesome), then I still owe my friend the money regardless.  My day job brings in more than this new property will, so he'll get the money back regardless if the property performs.  The difference is, if I default, he has to sue me for the money rather than get the property (which in my opinion - why would he want the property if it's a dud?).  

I do understand his perspective - secured is better than unsecured, but I just don't think that secured is possible.  Any ideas here?  Any thoughts on how I could structure this to make him feel comfortable?  I'm not worried about paying the money back to him, I know I will, but I'm worried about getting him on board without killing the deal with the bank.

So you can see the other side, here's what CBIZ wrote me when I had them review Proper's quote.  Again, everyone needs to do their own due diligence, but hopefully this gives you the right questions to ask when shopping for this type of insurance!  

CBIZ:

Our company created and introduced short-term vacation rental insurance to the marketplace back in 2002. We are a publicly traded firm and our strict focus is niche/specialty insurance markets (i.e. vacation rentals, bed & breakfast, wineries, outfitters and guides, etc.). Proper Insurance has not even been in business for 5 years and they are a privately held company. We also work with an American-based insurance company, Tudor, and we have an in-house claims department within CBIZ. Proper Insurance uses a foreign insurance company, Lloyd’s of London.

The coverages in the 2 policies are nearly identical because Proper created their policy based on ours. We have a lot more underwriting history and knowledge of this marketplace, however. The syndicate of Lloyds used by our competitor took over $1 Billion in losses in last year’s hurricanes and wildfires, so many of their customers are seeing their renewal premiums skyrocket. I saw one last week that increased by 80% over last year’s rate. Tudor paid out $400 Million in losses last year, but our rates are much more stable due to our underwriting/claims history.

Every person's situation is different, but if it gives you good questions to ask, this is what Proper told me when I asked them to analyze the CBIZ quote.  To be fair, I haven't asked CBIZ to analyze Proper's quote, but I learned so much that I think I'll do that next.  

Thanks for sending over the proposal from CBIZ. It looks like a good quote, but from it, I would like to point out a few things you are getting with Proper Insurance.

1. With Proper, you are getting a Lloyd’s of London insurance policy, the best in the world. I’m not too familiar with Tudor Insurance, who CBIZ appears to be using.

1. In our proposal, we offer an “Ordinance or Law” endorsement, which is extremely important, and I do not see that enhancement on the CBIZ quote. We have an additional $50,000 in increased cost of construction (coverage C), on top of the $10,000 built into the base. Plus, our enhancement covers up to policy limits on undamaged portion (coverage A) Below is some information on the importance of Ordinance or Law. For any single family home, in my professional opinion, it’s a must have coverage.
   
2. The CBIZ quote has a “liquor liability exclusion”. Proper removes this exclusion as we have found it to be imperative coverages to have when operating a short-term rental business. Please see more details below.

Ordinance or Law Coverage A, B, & C:This is the most overlooked coverage and essential to have for any single family home. This is the coverage for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Coverage A is the most important, and responds to the undamaged portion of a building. Most cities have an ordinance that says if 50% of your building is damaged, i.e. fire, then you are required to demolish and rebuild your entire building new. However, insurance only pays for the damaged portion, unless you have Ordinance or Law coverage A. The Proper policy offers this coverage in full, while many of our competitors don’t.

Example: You have a vacation home insured for $500,000 rebuild, and the kitchen catches fire, ultimately destroying 50% of the home. Your city ordinance requires you to fully rebuild. You file an insurance claim, but DO NOT have coverage A, you would receive a claims check for $250,000, and be responsible for the undamaged portion yourself. If you had coverage A, you would get the full policy limit of $500,000 plus coverage B & C for demolition cost, and increased cost of construction. Here is a well written article.

Liquor Liability Exclusion:

This is not in relation to someone drinking their own alcohol and doing something and then getting sued for their actions. This is in relation to the furnishing of alcohol, if your rental actually furnished the alcohol. Most vacation rentals do not furnish alcohol, but what if someone left a bottle of alcohol in the cupboard, and your cleaning crew did not through it away. Then the next set of guest came, drank it, which was furnished by the rental, and then got injured? This is where you need the liquor liability exclusion removed as it is in our policy.

@Tim Schroeder That's great news!  That makes me feel better too - it had made me wonder if I should have looked at the big guys, but I guess we're all using either Proper or CBIZ.  Funny on the CBIZ mixup - I can totally see that mixup once you mentioned it.  

@Tim Schroeder . Hi Tim!  I have a commercial policy for my long-term rentals (they call it a "landlord policy" informally), and I have an umbrella policy.  This policy is for my short-term vacation rental.  Most policies won't cover me if they uncover that I'm doing short-term rentals.  CBIZ and Prosper specifically write their policies to cover these types of rentals.  

@Jason Bott That's helpful - what do you mean by endorsements?  Would it be safe to say that the Proper team left CBIZ to create a superior product??  Or they just wanted to write the same policy and keep more of the $?

Does anyone endorse CBIZ vs. Proper?  The policies seem pretty similar.

@Dexter Crawford = I'm surprised that State Farm allows short term rentals!  I had a lot of trouble getting covered for that piece.  My long-term rentals have "landlord policies" on them, which cover rental income, but from what I learned, I couldn't get a "regular" insurance company to cover short-term rental loss. 

I have 5 doors and about to purchase 3 more (plus I have a FT job and freelance on the side).  Plus I'm just honestly not the most organized person.  I'd like to simplify by taking bookkeeping off my plate.  Does anyone have any recommendations?  I tried Upwork, but there's no consistency of quality there.  I talked to Bench.co, but they aren't cost efficient for real estate.  I'm still super small, so I don't want to spend a lot of money on this, but if I close this next deal, it's going to overwhelm me.  

What do you all use for bookeeping?

Congrats on saving!  Lots of good comments above, so I'll just add a new thought here.  Keep in mind that you CAN get bank loans for investments.  So you don't have to buy a $40k property...in fact, that be a terrible way to start (I'm not saying it's a bad idea overall, but it might be a bad way to start if you don't have the stomach/experience).  Perhaps you can find a $100k property that will cover your mortgage and cash flow.  You'll put 20-30% down, depending what the bank requires, you have some for closing costs, and perhaps a bit for fixup (not a fixer-upper home...but no property arrives perfect).  Your cash flow will be lower, but you have to start somewhere, right?  And you have to believe in what you're investing in...not just AFFORD it.  

 You're in CA, so that does make it more challenging and I'm not familiar where the cash flowing areas are there.  I live on the East Coast, where I can find $100k properties that are in decent neighborhoods where people want to send their kids to school.  I prefer to self-manage, so I'm less than a 3 hour drive from each property (I have 4 now).  I spend a LOT of time getting to know the area that I'm investing in intimately...that's part of the fun for me is getting to know a new area...understanding the employers, the local economy, the people...I read the town/municipality/village's website in detail.  I recently attended a village board meeting and that was a really great way to get to know the town.  Property managers can be helpful as well (or so I've heard...I haven't had great experiences so far, and I enjoy self-managing).  

I'm not sure how much this translates to CA, but from what the other posters are saying...there's probably something out there for you.  My two cents is...don't buy in an area that you don't believe in, don't feel comfortable in, don't want to drive through, just because it's all you can afford.  You worked hard to save this money, so buy something that you'll enjoy owning!  You'll be tied to the house for a long time - you have to like it!  

Thanks Sam!  Do you have a solid house manual now?  Or a way to avoid those calls?  I still get calls about half the time asking to re-confirm what's already in the online instructions:)