Author Topic: Newbie Real Estate Investor Seeking Advice  (Read 1498 times)

joer1212

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Newbie Real Estate Investor Seeking Advice
« on: November 17, 2020, 12:58:37 PM »
I recently purchased a 2-family rental property in Massachusetts in cash with my younger brother. This is my first ever real estate purchase (paid for by a gift from our parents) and my brother's third (owns 2 other properties in Massachusetts, one of them rented 2 years).

The house is a fixer-upper, and will need several more months of work before it can be inspected and rented out. We're doing most of the work ourselves, with the help of an occasional contractor. I'm guesstimating that it should be ready sometime in the first quarter of next year.

We are splitting the profits and expenses 50/50. I will be handling all the paperwork and phone/online correspondence, while he will be responsible for maintenance (he can do construction and plumbing) and driving to Massachusetts (we live in Brooklyn) should the need arise. He's also more knowledgeable about real estate than I am, and will pick up any slack from me.

Questions:

- Our house is not yet insured. What kind of insurance should we get to cover fire, floods, natural disasters, tenant issues, lawsuits, etc. 'Homeowner's insurance' won't be appropriate here, so what is the name of the insurance we need? Any recommendations?
Also, my brother is suggesting that we get an LLC, in addition to insurance. Is he right, and what is the benefit of an LLC that insurance doesn't already provide?

- This is a basic question, but I'd like your feedback: How do we automate rental payments from tenants into a bank account, so that my brother won't have to drive to Massachusetts every month to collect in person?
Do we just open a new bank account solely for our real estate business (we're planning on purchasing more properties in the future) and send a letter to each of our tenants, with our bank account number, informing them to deposit their rent there every month?
« Last Edit: November 17, 2020, 01:01:30 PM by joer1212 »

Papa bear

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Newbie Real Estate Investor Seeking Advice
« Reply #1 on: November 17, 2020, 01:07:54 PM »
Rent payment. I use cozy.co. Itís ok.  You can also have a separate account set up and tour tenants can deposit funds directly into the account.  Or they can mail you a check. 

You need insurance ASAP.  Call your insurance guy.  It will cover you for liability as well as loss of property.  They have insurance for rentals that you can pay extra that will cover lost rent in case of property damage. Go call your insurance guy. Right now. Literally.  Do this before responding to this post. 

I would absolutely get umbrella insurance.  Itís cheap money to have your insurance company pay for your lawyers if something happens. 

I have multiple rentals, some of them with my brother.  We do not have an LLC.  I feel it needlessly complicated things for not much advantage. Youíre managing the property and doing the work yourself.  If the property gets sued for something that happens, so are you.  Having it in an LLC doesnít protect your assets because you are tied so closely to everything.  Get a bigger umbrella policy if you are super concerned.  I carry 300/500 on my rentals with a 1mm umbrella. 

*note - I do have an LLC for another business.  It has its uses, I donít think as much for rental property unless you outsource literally everything. 


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« Last Edit: November 17, 2020, 01:10:04 PM by Papa bear »

lhamo

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #2 on: November 17, 2020, 02:13:03 PM »
In addition to your own insurance on the property (which I agree you should set up IMMEDIATELY -- you can do more research and change companies later if you want to price shop), you can and should require your tenants to have rental insurance.  Your insurance on the property does not cover their belongings, etc. 

joer1212

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #3 on: November 17, 2020, 07:56:29 PM »
Rent payment. I use cozy.co. Itís ok.  You can also have a separate account set up and tour tenants can deposit funds directly into the account.  Or they can mail you a check.

You need insurance ASAP.  Call your insurance guy.  It will cover you for liability as well as loss of property.  They have insurance for rentals that you can pay extra that will cover lost rent in case of property damage. Go call your insurance guy. Right now. Literally.  Do this before responding to this post.

I would absolutely get umbrella insurance.  Itís cheap money to have your insurance company pay for your lawyers if something happens.

I've waited to insure our property because of the confusion about what to get, and from whom.
Landlord's insurance? LLC? Both? How much?

I think I'll just call all the major insurers tomorrow (Geico, Allstate, Metlife, etc.) and ask about umbrella insurance and their rates.
Once I get an umbrella policy, I guess I can add an LLC on top of it for extra protection later on, provided it isn't prohibitively expensive.

Thanks for the cozy.co info. I'll definitely check it out. Do they also handle overseas accounts, by any chance?
« Last Edit: November 17, 2020, 08:18:06 PM by joer1212 »

joer1212

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #4 on: November 17, 2020, 08:00:33 PM »
In addition to your own insurance on the property (which I agree you should set up IMMEDIATELY -- you can do more research and change companies later if you want to price shop), you can and should require your tenants to have rental insurance.  Your insurance on the property does not cover their belongings, etc.
I've heard this recommendation before.

Is this to protect my brother and I from getting sued for the value of tenants' belongings in the event of a fire/flood/natural disaster?
How common is it to require tenants to get renters insurance?
Would this be a disincentive to a prospective tenant to rent from us?

ejmyrow

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #5 on: November 17, 2020, 08:51:03 PM »
Renters insurance is super common, at least when you rent in larger complexes. Itís only like $10 a month. Plenty of smart people in MA would not blink about having to get it.

SndcxxJ

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #6 on: November 17, 2020, 09:30:55 PM »
As for rent payments, other options are PayPal and zelle.  Both are free and are common options.
I second the notion of skipping the LLC.  I own a lot of property and I just carry landlord insurance and umbrella insurance.  People often go with either an LLC or umbrella insurance.  My thinking is that an LLC is not full proof but insurance is.  Plus, holding a property in an LLC makes it so that if you ever choose to take a mortgage on the property only commercial loans will be available to the LLC with higher costs and less favorable rates and terms.
Landlord insurance is basically just fire insurance on the structure and liability insurance.  I would recommend insurance limits of the replacement cost of the property, but this is flexible.  An insurance agent can determine the replacement amount for you very simply through their methods.  I carry liability insurance of $500k on each property.  I set a high deductible of $5k to keep premiums to a minimum, which you can explore that option but it does transfer some risk to you rather than the insurance company so to each their own.
Umbrella insurance is a liability coverage if there is a problem above and beyond the $500k limit.  My umbrella policy is $2 million. 
Both of these insurances are cheap (in my opinion).
I require all residents to carry renters insurance while living at my properties, with a liability limit of at least $100k. It is cheap for them and will cover most damage that could ever be caused by a resident, like a kitchen fire.

joer1212

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #7 on: November 17, 2020, 11:22:24 PM »
As for rent payments, other options are PayPal and zelle.  Both are free and are common options.
I second the notion of skipping the LLC.  I own a lot of property and I just carry landlord insurance and umbrella insurance.  People often go with either an LLC or umbrella insurance.  My thinking is that an LLC is not full proof but insurance is.  Plus, holding a property in an LLC makes it so that if you ever choose to take a mortgage on the property only commercial loans will be available to the LLC with higher costs and less favorable rates and terms.
Landlord insurance is basically just fire insurance on the structure and liability insurance.  I would recommend insurance limits of the replacement cost of the property, but this is flexible.  An insurance agent can determine the replacement amount for you very simply through their methods.  I carry liability insurance of $500k on each property.  I set a high deductible of $5k to keep premiums to a minimum, which you can explore that option but it does transfer some risk to you rather than the insurance company so to each their own.
Umbrella insurance is a liability coverage if there is a problem above and beyond the $500k limit.  My umbrella policy is $2 million. 
Both of these insurances are cheap (in my opinion).
I require all residents to carry renters insurance while living at my properties, with a liability limit of at least $100k. It is cheap for them and will cover most damage that could ever be caused by a resident, like a kitchen fire.
I can see forgoing the LLC, provided the landlord/umbrella insurance is strong enough to prevent a potential plaintiff from dipping into our personal assets in most likely cases. Some claim that an LLC is worth it for the tax benefits, but as you noted, the downside is a higher interest rate when taking an equity loan on the property, which my brother and I plan on doing.

So, from what I understand, we would first have to get basic insurance on the house (landlord insurance), which covers liability fire, flood, etc. up to a certain amount. And, if we wish to extend the coverage, we would amend the landlord insurance with an umbrella policy?
Does an umbrella policy only increase the amount of coverage it provides over landlord insurance, or does it also cover additional items?
Which insurance company do you recommend?

Also, I wasn't aware that renter's insurance compensates a landlord in the event that a tenant does damage to his property. I was under the impression that renter's insurance compensates only a renter in the event of personal property loss, such as furniture, jewelry, cash, etc.. I now understand why you require your tenants to carry it. It would also serve to dissuade unscrupulous characters from intentionally damaging your property before vacating, as many do.

Will check out PayPal and Zelle, in addition to Cozy.co, and compare them. Thanks.

« Last Edit: November 17, 2020, 11:30:11 PM by joer1212 »

Jon Bon

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #8 on: November 18, 2020, 06:25:43 AM »
Right now you are walking down the street with 500k (or more) in cash on your person. This is incredibly naÔve.

You also seam to have many basic questions about being a landlord. Ones you likely should have gotten answers too before you purchased a property.

Where is your brother in all of this? You say he owns 2 other properties and should have answers to these questions. You either need to get smart about this very fast, or you need to hire a property management company.




Papa bear

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Newbie Real Estate Investor Seeking Advice
« Reply #9 on: November 18, 2020, 07:24:31 AM »
While I accept Zelle, Venmo, etc in a pinch, I try not to make it my primary payment option.  Your tenant can send you any amount of money and you canít decline the payment.  Think of a tenant who only pays partial every month, hard to evict them in this case.

An LLC really gets you 0 tax benefits.  Itís a pass through entity so youíre taxed the same regardless.  And the ďprotect your personal assetsĒ piece, sure maybe thinly veiled.  But if something happens on the property, say a liability claim.  Letís say someone falls on the driveway because itís not level. Or someone falls down a set of stairs.   You manage the property.  You do the work on the property.   Oops you didnít have the handrail to code.  Oops that I level concrete sits up an inch.  Guess what? Thatís your personal responsibly since you do the work yourself!  Your personal assets arenít protected because you were at fault. 

Another downside to an LLC. Letís say you finance a property.   Canít do that very well as an LLC, so you buy it personally guaranteeing the loan. And the. You quit claim it to the LLC so itís owned by the company.  Do you have a transfer clause in your mortgage? Probably! Mortgage is now due in full because there is a new owner!

Anyway. Pain in the ass. 

I have considered an LLC for the management of my properties, though.  Easier to control revenue and expenses, and can set it up so you pay self employment taxes, which might be useful if you donít have your 40 quarters for social security.  But these are pretty crappy benefits. 

Go get insurance NOW.  You are risking all of your assets if someone walks on the property and falls down. 

Oh, and agreed with the above post, your brother should have known all of this.  He needs to get moving to make this safe too. Or he needs to start reading more yesterday to catch up and make sure his stuff is ok.

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joer1212

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #10 on: November 18, 2020, 12:43:21 PM »
Right now you are walking down the street with 500k (or more) in cash on your person.

Go get insurance NOW.  You are risking all of your assets if someone walks on the property and falls down.
I called several insurance companies today for a quote. The rep for first one (Geico) asked me extensive questions about the property. In the end, she said we need a 'vacant home insurance' policy, which would be handled by a company named Foremost. This would be short-term insurance, just until my brother and I get the house fixed and rented. We would then cancel the policy and transfer over to landlord's insurance.

I tried contacting other companies, but none of them offered vacant home insurance. The ones that do all seem to work through Foremost. Looks like they have this market cornered.

Any suggestions for other companies that handle vacant home insurance, because I haven't been able to find any?
« Last Edit: November 18, 2020, 02:50:13 PM by joer1212 »

PhishFire

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #11 on: November 19, 2020, 04:04:55 PM »
Hey Joer,

Congrats on the new property.

Yes definitely set up separate bank accounts. Look into Helmane.com great low cost management software that will connect the rent for $2.50 per unit. They offer ACH and credit / debit cards for your tenants. If the tenants want to pay by card they pay the 3% fee.

If you are looking for a good insurance agent in MA. I just switched brokers and I'm looking Goll Insurance they are saving me 15% a year and I have better coverage. John's information is below.

John Goll
Goll Insurance Agency
581 Tremont St
Boston, MA 02118
p: 617-266-6700
f: 617-266-8713
john@gollinsurance.com

Best of luck!

SndcxxJ

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #12 on: December 05, 2020, 09:10:39 PM »
As for rent payments, other options are PayPal and zelle.  Both are free and are common options.
I second the notion of skipping the LLC.  I own a lot of property and I just carry landlord insurance and umbrella insurance.  People often go with either an LLC or umbrella insurance.  My thinking is that an LLC is not full proof but insurance is.  Plus, holding a property in an LLC makes it so that if you ever choose to take a mortgage on the property only commercial loans will be available to the LLC with higher costs and less favorable rates and terms.
Landlord insurance is basically just fire insurance on the structure and liability insurance.  I would recommend insurance limits of the replacement cost of the property, but this is flexible.  An insurance agent can determine the replacement amount for you very simply through their methods.  I carry liability insurance of $500k on each property.  I set a high deductible of $5k to keep premiums to a minimum, which you can explore that option but it does transfer some risk to you rather than the insurance company so to each their own.
Umbrella insurance is a liability coverage if there is a problem above and beyond the $500k limit.  My umbrella policy is $2 million. 
Both of these insurances are cheap (in my opinion).
I require all residents to carry renters insurance while living at my properties, with a liability limit of at least $100k. It is cheap for them and will cover most damage that could ever be caused by a resident, like a kitchen fire.
I can see forgoing the LLC, provided the landlord/umbrella insurance is strong enough to prevent a potential plaintiff from dipping into our personal assets in most likely cases. Some claim that an LLC is worth it for the tax benefits, but as you noted, the downside is a higher interest rate when taking an equity loan on the property, which my brother and I plan on doing.

So, from what I understand, we would first have to get basic insurance on the house (landlord insurance), which covers liability fire, flood, etc. up to a certain amount. And, if we wish to extend the coverage, we would amend the landlord insurance with an umbrella policy?
Does an umbrella policy only increase the amount of coverage it provides over landlord insurance, or does it also cover additional items?
Which insurance company do you recommend?

Also, I wasn't aware that renter's insurance compensates a landlord in the event that a tenant does damage to his property. I was under the impression that renter's insurance compensates only a renter in the event of personal property loss, such as furniture, jewelry, cash, etc.. I now understand why you require your tenants to carry it. It would also serve to dissuade unscrupulous characters from intentionally damaging your property before vacating, as many do.

Will check out PayPal and Zelle, in addition to Cozy.co, and compare them. Thanks.

Sorry for the lateness in my reply.

Umbrella insurance picks up where your landlord insurance leaves off.  So if you have $500k limit on liability, and get sued for $600k the landlord insurance covers the first $500k and then umbrella insurance covers the other $100k.
There are no additional coverages that umbrella insurance covers beyond increasing the limits on all of your other insurances to my knowledge.


joer1212

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Re: Newbie Real Estate Investor Seeking Advice
« Reply #13 on: December 12, 2020, 08:45:17 AM »
Sorry for the lateness in my reply.

Umbrella insurance picks up where your landlord insurance leaves off.  So if you have $500k limit on liability, and get sued for $600k the landlord insurance covers the first $500k and then umbrella insurance covers the other $100k.
There are no additional coverages that umbrella insurance covers beyond increasing the limits on all of your other insurances to my knowledge.
Thanks.

I currently have 1 million landlord insurance on another property. Could I have just increased this to 2 million, without getting "umbrella insurance" (which sounds like a separate policy on top of my existing one) to simplify things (I didn't inquire about what the limit is on standard landlord insurance)?

My real question at this point is, should I get "umbrella insurance/high-coverage landlord insurance, of an LLC?
« Last Edit: December 12, 2020, 08:48:06 AM by joer1212 »