Author Topic: High insurance costs due to loss: should I give up landlording?  (Read 6329 times)

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
High insurance costs due to loss: should I give up landlording?
« on: December 11, 2014, 02:25:52 PM »
My husband and I had planned to rent out our former primary residence for a few years, then sell it and invest in a multi-plex unit. The plan was working well until, two weeks before it was due to go on the market, the tenants caused a fire resulting in a total loss ($246K claim paid by insurance company.) Although the rebuilding took a lot of our time and psychic energy, we ended up with a very nice profit from the house. However, now that we are looking for multi-plexes, we're finding our insurance costs would be astronomical due to the insurance loss. I just got a quote for one four-plex; before he took into account the insurance loss, the quote was for $1333/year; after accounting for the loss, it was $3,366. Apparently claims stay on your record for 5 years, so since the fire occurred in 2013, that would take us out of property investment until 2018 if we wait.

Here are the numbers for this property we're considering:
sale price: 400,000
downpayment: 140,000 (30%)
Insurance: 3,366K
Taxes: 1,500
Rental income: $3,400/month now; this is well below market. Current occupants are section 8 and we think income could increase to $4000 within the next 2 years with very minor improvements as existing tenants leave.
PITA: $2151
Cash flow: $1250/month
ROI: 22%
Annual taxable income: $30,800

Obviously these numbers would be a lot better if insurance costs were $200/month lower. Should we sit on the sidelines until our insurance history is better, or take the plunge despite it?

jda1984

  • Stubble
  • **
  • Posts: 179
Re: High insurance costs due to loss: should I give up landlording?
« Reply #1 on: December 11, 2014, 04:03:19 PM »
Can you get that ROI on your capital elsewhere?  It seems like a good deal on paper.  Have you factored in maintenance costs and landlord provided utilities (if any) into your cashflow/ROI calculations?  If so, looks like a good deal that will only get better when the insurance drops down to a lower rate.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5082
Re: High insurance costs due to loss: should I give up landlording?
« Reply #2 on: December 11, 2014, 04:49:56 PM »
Current rent is $3,400 or $40,800 per year.  That's a 9.8 percent GRM for a $400k purchase price.  You MIGHT be able to raise the rent to $48,000 over the next couple of years.  You are going to have to turn the units over, rehab them and have rent loss in the interim.

Your cash flow will be nowhere near $1,250 and your ROI will be considerably less than 22 percent.  You have not considered vacancy and collection loss, management (it's an expense, even if you don't contract it out), repairs and maintenance, or capital improvements.  If you have the kind of 4-plex that is filled with Section 8 tenants, you are going to have high expenses.  This type of property generally requires 2 percent in rent per month to produce the returns that justify the risk.  I would not pay $400k for this property, based on your description. 

With regard to the insurance, have you talked to multiple companies and independent brokers?

Fallenour

  • Stubble
  • **
  • Posts: 125
  • Location: Earth
  • RE/PM Investor, P2P lender, Business Owner
Re: High insurance costs due to loss: should I give up landlording?
« Reply #3 on: December 11, 2014, 06:04:28 PM »
Ok, I cant help this one, because this wound is self inflicted.

Section (8) housing is a horrible thing to do to your property, as most of the tenants end up decimating the property, baltimore, MD is a perfect example of this, and the slums that were all recently evicted due to destitute conditions they fell into.

Secondly, most section 8 housing programs pay 1.5 times standard market value and guarantee rent to ensure landlords will rent to them. You should be making roughly 5k at the moment if the standard market is 3200 (1.5x).

I dont know what area you are in, but in most areas Ive lived in and seen, the 1.5 rule is the standard.

Additionally, form a corporation, and have the company insure the property. That way the insurance goes under your company name, and not yours, and your company's history is clean.

Unless they use your history specifically, which I havent seen insurance companies do so for corporate insurances, you should get a much better rate, and a lot better tax benefits.

I specifically suggest forming a S-Corp, and using the S corp policy combined with an indemnification and liabilties policy to protect you, as well as also let you use income pass through, while also giving you all the tax benefits of being a corporation.

Additionally, you could also use it to your benefit to buy properties through a SEP-ROTH account, as part of your corporate 401k, which will allow you up to 51k, instead of 17500.

Also, corporations can do up to 25% matching.

Will greatly help with your costs, and lower your taxes dramatically.

It will also allow your business (and you) to buy houses at a tax advantage.

If you buy it with a roth, its tax free on the rental incomes. BOOOOOOOOOOOOOOOOOOOOOOOM and another grenade DOODGED lol. I love saying that.

Overseas Stache

  • Stubble
  • **
  • Posts: 130
  • Age: 34
  • Location: Democratic Republic of Congo
Re: High insurance costs due to loss: should I give up landlording?
« Reply #4 on: December 16, 2014, 05:49:51 AM »
Deja vu! I was reading this post and I was like man this seems so familiar. Someone posting a question about a rental but not accounting for maintenance and management and thus inflating their ROI. Then Another Reader chimes in with some solid advice and yet the OP never replies to the post. It made me wonder if the OP read it and took the advice or decided to ignore the advice and continue to use their inaccurate ROI projections?

So then I check Stephaniekb's post history and sure enough she has posted the same situation again without implementing any of the advice given to her back in October.

SMH!

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28030
  • Age: -999
  • Location: Seattle, WA
Re: High insurance costs due to loss: should I give up landlording?
« Reply #5 on: December 16, 2014, 08:13:15 AM »
Protip: If you get an answer you don't like, wait a few months and ask again.  Maybe different people will see the thread and you'll get a different answer you like better.  Which one is correct probably isn't important.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3306
Re: High insurance costs due to loss: should I give up landlording?
« Reply #6 on: December 16, 2014, 10:05:06 AM »
At least 80% of the sell/buy/rent threads here involve people with terrible, awful rental properties (or people who are considering them). Inevitably they argue a little bit with some of all of the 1% rule advice and then we never hear from them again.

So Stephaniekb is at least tenacious.

-W

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5082
Re: High insurance costs due to loss: should I give up landlording?
« Reply #7 on: December 16, 2014, 10:39:25 AM »
Looks like the OP and her husband dumped the flip property from the last post in favor of a Section 8 property.  To me, that's out of the frying pan into the fire.  The problem is the numbers don't work on decent properties in this part of Colorado because there is too much stupid money willing to accept anemic returns.  So the OP and her husband are considering inferior properties to make the numbers "work."  What they don't seem to understand is a bad location and/or an inferior property require much better numbers to generate an acceptable return.  There comes a time when it makes more sense to put your wallet away.  This may be one of those times.

Fallenour

  • Stubble
  • **
  • Posts: 125
  • Location: Earth
  • RE/PM Investor, P2P lender, Business Owner
Re: High insurance costs due to loss: should I give up landlording?
« Reply #8 on: December 16, 2014, 11:43:16 AM »
Looks like the OP and her husband dumped the flip property from the last post in favor of a Section 8 property.  To me, that's out of the frying pan into the fire.  The problem is the numbers don't work on decent properties in this part of Colorado because there is too much stupid money willing to accept anemic returns.  So the OP and her husband are considering inferior properties to make the numbers "work."  What they don't seem to understand is a bad location and/or an inferior property require much better numbers to generate an acceptable return.  There comes a time when it makes more sense to put your wallet away.  This may be one of those times.

The real issue from what I see are people who want to always get properties in their immediate region, try to play handiman and do the repairs themselves to save money, try to be landlord as well, and end up failing at both.

Honestly Id suggest to people if they are new to being a landlord, get yourself a property management company, and get properties in higher income regions that aren't isolated.

Houses in areas where job markets are booming (relative term) will do better, be valued higher, have a much higher buy in costs, and be better margin generators.

In addition, overall non-occupancy times (I call them void periods, because they are a black hole to income), are relatively lower in number, and duration. Thus, more income.

Cookie78

  • Handlebar Stache
  • *****
  • Posts: 1893
  • Location: Canada
Re: High insurance costs due to loss: should I give up landlording?
« Reply #9 on: December 16, 2014, 11:49:44 AM »

The real issue from what I see are people who want to always get properties in their immediate region, try to play handiman and do the repairs themselves to save money, try to be landlord as well, and end up failing at both.

Honestly Id suggest to people if they are new to being a landlord, get yourself a property management company, and get properties in higher income regions that aren't isolated.

Houses in areas where job markets are booming (relative term) will do better, be valued higher, have a much higher buy in costs, and be better margin generators.

In addition, overall non-occupancy times (I call them void periods, because they are a black hole to income), are relatively lower in number, and duration. Thus, more income.

My biggest problem is finding a reliable property management company (in Calgary). The one I am using now sucks up all my income. I searched around to find a better one, but heard the same reviews on all the others I could find. I don't have to deal with the day to day problems anymore, but I'm paying a LOT more for the luxury.


DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: High insurance costs due to loss: should I give up landlording?
« Reply #10 on: December 16, 2014, 01:00:43 PM »
I always find it weird when I see in the newspaper or on TV someone in a rental house, and the place is a disaster. Trash all over, typically bed sheets or blankets or towels used as "curtains," grease and/or writing on the walls, obvious disrepair all over, etc. Sometimes it's functioning as a meth lab or something similar. I always think, "Who are these landlords that let this occur? Why even bother owning a property with these conditions? Do they know something I don't?"

I don't know why any of this should surprise me, but it still does.

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: High insurance costs due to loss: should I give up landlording?
« Reply #11 on: December 16, 2014, 02:03:25 PM »
I didn't realize that people were so anxious to hear back from me again! Just to let you know how both situations played out, we walked away from both deals, thanks in some part to the advice I received here. However, to clear the record, in both situations we had added maintenance costs into the calculations; I just hadn't thought to include them in the numbers I described here.  Also, both properties were in Denver suburbs where the rental market is going crazy and property prices are appreciating quickly. Both were also positioned close to soon-to-open public transit lines. Due to that, there were multiple offers all at or above asking price on both properties.

Based on what we're seeing in the rental market, the first property I posted about, ("the flip") was a much better deal, and probably would have generated some decent cash for us, but we walked away because we saw that they had not quite finished all of the renovations the property needed. The second property (the "section 8") had lower rents and lower potential for income growth due to the section 8 rules, but was really a very nice property that had been kept up nicely. The tenants seemed to be good people who had bad luck in life (autistic children, young woman who'd had a brain aneurism). But I was deterred by dealing with the complexity of Section 8 and the low potential for upside due to limits on bringing the property to market rates.

And to be completely fair, it is my husband who is tenaciously investigating real estate investments. I come in after he's vetted the property to poke holes in his analysis, thanks to my friends here. He's been looking for properties in a bunch of different markets across the country, but so far hasn't found any investments where we can get close to the 1%/50% rules, so he's very frustrated. We have approx. $150K to invest in RE. We currently own one property in addition to our home -- it is a half-duplex with a party wall agreement that we purchased about 2 years ago. This property also does not meet the 1%/50% rules (purchase price was $229, rent is currently $1700/month, expenses have been negligible), but the neighborhood where it is located has become super-hip and so the property has appreciated ~30% in value in 2.5 years. We'll probably hold onto it another year or two then sell it.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3306
Re: High insurance costs due to loss: should I give up landlording?
« Reply #12 on: December 17, 2014, 08:24:32 AM »
Why are you (or your husband) so focused on RE? If you're not finding 1% rule properties, that probably means you should put the money to work elsewhere.

-W

jba302

  • Pencil Stache
  • ****
  • Posts: 623
Re: High insurance costs due to loss: should I give up landlording?
« Reply #13 on: December 17, 2014, 09:02:39 AM »

The real issue from what I see are people who want to always get properties in their immediate region, try to play handiman and do the repairs themselves to save money, try to be landlord as well, and end up failing at both.


We ended up doing kind-of this. In lieu of selling our townhome we are trying renting it out. Good neighborhood, sleeper-type community, very close to our house. I even like doing house repairs and we have good tenants and I still can't stand it. For now the income is a wash so we're waiting on a good market to get rid of it. Summary - I am impressed with people that can truly handle being a landlord.

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: High insurance costs due to loss: should I give up landlording?
« Reply #14 on: December 17, 2014, 10:22:55 AM »
We are trying to diversify our investments and generate a monthly income stream so that I can semi-retire.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3306
Re: High insurance costs due to loss: should I give up landlording?
« Reply #15 on: December 17, 2014, 10:30:58 AM »
Sure, but there are lots of ways to do that that don't involve RE. Just buy some index funds - a 4% SWR gives you a hassle-free and relatively low risk $6k/year. Houses that don't meet the 1% rule aren't going to provide much/any return in general.

-W

We are trying to diversify our investments and generate a monthly income stream so that I can semi-retire.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28030
  • Age: -999
  • Location: Seattle, WA
Re: High insurance costs due to loss: should I give up landlording?
« Reply #16 on: December 17, 2014, 11:25:33 AM »
Houses that don't meet the 1% rule aren't going to provide much/any return in general.

This.  You'll match bonds, for a lot more risk and a lot more work.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: High insurance costs due to loss: should I give up landlording?
« Reply #17 on: December 17, 2014, 01:17:23 PM »
We already have lots and lots of index funds, so my husband is eager to find another kind of investment. (And at the same time that we began investigating real estate, I plugged a large sum into more index funds, which are now down approx. 4%, so I don't have a compelling argument to him in terms of the stock market.) We were hoping to generate something more than $12-15K/year. Due to our high insurance costs, we're trying to offset that by finding local properties we can manage without an investment company and with the advantage of our local low property taxes.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5082
Re: High insurance costs due to loss: should I give up landlording?
« Reply #18 on: December 17, 2014, 01:27:32 PM »
The compelling reason to make or hold any investment is not short term loss or gain.  It's the income or gain it produces over the period you hold it.  You need to have a much longer time horizon.  If your husband does not want to put any more money into equities, how is he going to feel when the real estate investment is down 25 percent and you owe more than it is worth?  Dealing with short term losses (and recognizing when a short term loss is going to turn into a long term loss) is part of being an investor.  If you and your husband can't tolerate market cycles and volatility, you really should not be an investor.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3306
Re: High insurance costs due to loss: should I give up landlording?
« Reply #19 on: December 17, 2014, 01:43:51 PM »
I don't think you're going to come anywhere close to the 10% return you want in your RE market. The properties you've proposed are break-even or maybe slightly positive but as Arebelspy said - if you want that, just buy some bonds and lose the stress.

-W

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: High insurance costs due to loss: should I give up landlording?
« Reply #20 on: December 17, 2014, 02:27:34 PM »
I understand the long term approach with the stock market. It has worked for us and it makes up huge portion of our taxable and exempt 'stache. We're looking for more passive income to supplement our FIRE until we can begin taking withdrawals from our exempt funds.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28030
  • Age: -999
  • Location: Seattle, WA
Re: High insurance costs due to loss: should I give up landlording?
« Reply #21 on: December 17, 2014, 02:38:30 PM »
I understand the long term approach with the stock market. It has worked for us and it makes up huge portion of our taxable and exempt 'stache.

Do you?  Does your husband?  Because your last post said this:
(And at the same time that we began investigating real estate, I plugged a large sum into more index funds, which are now down approx. 4%, so I don't have a compelling argument to him in terms of the stock market.)


We're looking for more passive income to supplement our FIRE until we can begin taking withdrawals from our exempt funds.

You may want to look into how to access those funds penalty-free as another option.

We were hoping to generate something more than $12-15K/year.

That's a return of 8-10% on your 150k.  Totally doable.  But not with properties that don't meet 1%.

I love your exploring other ideas.  That's terrific.  :)   But we're trying to caution you to not jump into something that won't meet those goals, but just delay you or be a huge pain for very little return.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3306
Re: High insurance costs due to loss: should I give up landlording?
« Reply #22 on: December 17, 2014, 02:47:32 PM »
FWIW, too - if stocks are down 4%, and you are investing long-term, you should think of that as a nice 4% discount, not as a reason not to invest.

I think you need to sit down with your husband and decide on what your goals are. There are lots of ways to generate income with non-RE investments (ie, 4% SWR type stuff) and there are ways to get at your tax-advantaged funds ahead of schedule if you want to. Do more research!

-W

Stephaniekb

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: High insurance costs due to loss: should I give up landlording?
« Reply #23 on: December 18, 2014, 09:18:40 AM »
Thanks for all the input, guys. I have been working for the last few months to move some of our investments that aren't as productive into Vanguard funds so we can really get them working for us. Once we see them all in one place it will be easier to envision starting to withdraw them. I'll keep you posted on future developments and/or real estate investments.

Fallenour

  • Stubble
  • **
  • Posts: 125
  • Location: Earth
  • RE/PM Investor, P2P lender, Business Owner
Re: High insurance costs due to loss: should I give up landlording?
« Reply #24 on: December 18, 2014, 10:40:59 AM »

The real issue from what I see are people who want to always get properties in their immediate region, try to play handiman and do the repairs themselves to save money, try to be landlord as well, and end up failing at both.


We ended up doing kind-of this. In lieu of selling our townhome we are trying renting it out. Good neighborhood, sleeper-type community, very close to our house. I even like doing house repairs and we have good tenants and I still can't stand it. For now the income is a wash so we're waiting on a good market to get rid of it. Summary - I am impressed with people that can truly handle being a landlord.

Right before you go to sell, estimate out your full equity into the house, find out what the general "value" of the area is. Find what your selling price is, and then go straight to a bank for a cash out refi.

Heres the math:

House bought 1990: 100k
House up for buy: year 2000
Time in years: 10
Time in months: 120
Mortgage, taxes, PMI: 700
Time for tenancy: 120
Tenancy occupancy: 70%

700*120=84,000 paid

Current Mort. Rem.: 81,144

Assume we say at this point, that your house property went up 2% per year (reserved estimate), your house in 10 years is worth 121,899.

To ensure it sells, I always say sell it at least 5% below market value, which would be 115k.

Important numbers:

Amount owed: 81,144, Amount sell: 115,000, Amount diff: 34,660, Equity from origin: 18,566, Total potential income(sale+equity): 33,566, total income (rent((before damages): 0 (your M+I ate your income)

This meets the x and y, 0 of the 700/70 rule.

Overall profit margins are 34,460, by a 10 year time frame, total value is roughly a 3.4% gain over time. Before taxes.

This is why its crucial to maintain at least a 85% occupancy minimum, and is why I preach it so heavily.

Math proofs based off of Kahl's mortgage calculator + manual calculations, standard rate 4% mortgage, 0 down payment, 100k principal balance, 10 year (120 month) term on a 30 year fixed rate mortgage.
« Last Edit: December 18, 2014, 10:43:27 AM by Fallenour »

money_bunny

  • Stubble
  • **
  • Posts: 114
Re: High insurance costs due to loss: should I give up landlording?
« Reply #25 on: December 18, 2014, 07:27:33 PM »
Why get the cash-out mortgage before selling? The loan is going to be paid from the proceeds of the sale anyway before they get their check.

clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 1893
  • Age: 40
  • Location: Pueblo, CO
Re: High insurance costs due to loss: should I give up landlording?
« Reply #26 on: December 20, 2014, 07:43:06 PM »
I know that you didn't go through with the deal, but play around with different deductibles if you give it another shot.