Actual Results

We have to pass the bill so that you can find out what’s in it.

This well-known line came out of the mouth of Speaker of the House Nancy Pelosi in 2010 while discussing the health care bill.

It is a kind of circular logic that just doesn’t make sense. You pass bills because you know what they say, how are you going to know how to vote if you don’t know what’s in it?

Dumb statements like this will happen if you put anyone in front of a camera long enough. Remove a few words from the original context and they take on a new meaning.

What she meant was the results of the bill won’t be known until passed (even if that’s not what she literally said). Meaning people will come to see that the worst-case scenarios of the opposition are not true.

My search for an umbrella insurance policy reminded me of this. I want a policy, but can’t read the actual contract until I sign up.

Wait, What?

A few weeks ago I wrote Defend Your Money – My Decision to Get an Umbrella Insurance Policy. It gets into why I started on this search. Basically extra protection against potential lawsuits from either rental properties or my family’s normal day-to-day life.

The logical place to start is with the insurance company I already have. I have Geico auto insurance, so asked them if they offer umbrella policies as well.

They do. Ok great, but the important question is whether my rental properties will be covered. Yetisaurus summed it up well in her comment on the previous article (she is a rental property investor and lawyer, so is very qualified to speak on this):

Check whether it’s a personal insurance policy or commercial policy. Be careful about taking your agent’s word for it. They’re often unsure of the distinction and may give you inaccurate info. (Mine did at my last policy renewal. Thankfully I knew better.) Read the policy yourself, very carefully, and/or talk to an attorney who does insurance defense work or a claims adjuster who you know and trust to make sure your policy is protecting you in the way you’re expecting.

When I asked the Geico agent if my rental properties were covered, he said yes and gave some additional details. Sounds good, but I shouldn’t just blindly trust that answer. I need to look at the fine print.

Turns out I can’t read the policy details without signing up for the policy first. Then a couple business days later they will both email and physically mail it to me.

I Said: Sign Me Up!

Why did I agree to sign up? I’m not sure if it covers what I want it to cover, but I went forward with it anyway.

The worst case scenario isn’t bad.

If I find out the policy sucks, I can cancel. They will issue a refund for everything except the days I was covered.

So I’m not really risking anything other than a couple dollars to sign up, then read the policy details.

It is very backwards, but oh well.

The Details I Do Know

The agent said for someone living in California, I can have a maximum of 4 rentals (they can be out-of-state) before they have to refer me to another insurance carrier. It is vital that my insurance is up to date and correct wherever I am, just like the auto industries trade policy car insurance arrangements, I need to be assured I am doing all that I can for my car.

The properties have to be in my own name, not an LLC or other business entity.

I also have to increase my auto insurance coverage. My coverage limits have to be $100k / $300k.

Geico offers a 10% discount on auto insurance when you have an umbrella policy. Let’s drill down into the numbers.

Before my wife and I were paying $1550 a year for $50k / $100k auto coverage. Increasing it to $100k / $300k is an extra $60 a year. With the 10% discount for an umbrella policy, it comes to $1450 a year. So more coverage for $100 less!

The umbrella policy quotes were $207 ($1 million), $342 ($2 million), $497 ($3 million). I signed up for $1 million in coverage.

The net is only an extra $107 a year for better auto coverage and a million dollar insurance policy! Sounds pretty good if it covers what I hope it does…

Side note: I was a little surprised by the price for larger umbrella policies. I expected a much steeper drop off in price. Consider I doubled my auto coverage limits for a 4% increase in price. Doubling the umbrella policy coverage increases the price 65%!

My discovery should inspire everyone to strive for cheaper auto insurance! There most definitely are options out there, and by looking through car insurance quotes, you’ll be able to find cheaper options, with or without an umbrella policy.

Easy Peasy

It was cheap and easy to get umbrella insurance coverage through my auto insurance company. Had I known this earlier, I would have signed up a long time ago! I only came to the conclusion that this was the best route for me to take after thoroughly researching all the different options that were available to me. I spent quite a long time looking at the different types of insurance reviews from Truly Insurance before making my final decision. They had some really good advice on there but I personally felt that the umbrella insurance coverage was the best option for me.

However, the work isn’t done if the policy documents don’t match what the agent told me. More on this to come.

What do you think, are those prices surprising to you? Do you think I’m in for a surprise when the policy document arrives?

Roller coasters are fun.

They go up and down. They are unpredictable.

Yet these very same qualities I enjoy about roller coasters are the qualities that make rental properties less enjoyable.

The cash flow on my Memphis rental property investment has been a roller coaster of a ride. Saying this though, if it means getting some advice from property management groups on how to move forward, this may be something worth looking into, especially as we know how there is nothing wrong in asking for a helping hand. No matter what industry you work in, we all have good days and bad days.

Up Then Down

This property was featured in the article The Perfect Year on a Rental Property Investment – Looking at 1 Year of My Memphis Rental.

2015 was a great year. One tenant with only $150 in repairs. The positive cash flow of $4,199. Wow.

Then the tenant moved out. Tenant turnover is expensive – no rent while it is vacant, a list of repairs to get it ready, and a placement fee from the property management company. It didn’t go that well and cost roughly $2,400, as covered in Tenant Turnover From Thousands of Miles Away.

But in March 2016 the future looked bright. I made plenty of minor improvements while the property was empty, hopefully to avoid future maintenance calls. I had to do one major improvement, but thankfully I had condo insurance to help get started on that. The new tenant signed a two year lease at 2.5% higher rent the first year and 5% higher the second year.

I thought the roller coaster was going to swing back up.

Stuck in Maintenance Hell

The last 10 months have not gone as planned – it has been one minor expense after another.

Major expenses are one thing. A new roof, HVAC, or water heater is going to really hurt. I can look on https://waterheaterreviewssite.com/best-water-heater/ to get a good one, but still. You need the good years to bank some cash and pay for these major expenses that will one day arrive.

The new tenant calls every month with something else she wants fixed and the property management company takes care of it. Everyone’s happy right?

It is common to have a property management agreement where the owner isn’t contacted for small expenses. Anything under $300 the management company will not contact the owner and use their discretion. Hopefully that discretion takes into account what the owner would want.

The frequency of this tenants calls and the rubber-stamped repairs by the property management company is a horrible combination. My bucket has sprung a leak.

Over the 10 months this tenant has been in the property, there is an average of $225 a month in expenses! I won’t go through the list of repairs, some are valid, others aren’t. Only one of the repairs did they contact me first as it was over the discretionary threshold.

What Went Wrong?

Three things: the property management, the tenant, and me.

The property management company has to balance the interests of the tenant and the owner to keep everyone happy. I do not believe they have been working in my best interest.

The tenant is not self-reliant. They are not approaching the rental with an owner-like mentality, closer to a hotel-like mentality.

I haven’t been proactive in managing my manager. It took 10 months of this for me to finally say “enough is enough”. After 3 or 4 months I should have done something, but I was busy getting married. Even after that I was in denial or lazy.

The Changes

My first goal is to try to make the property management company act in my own best interest. It’s important to note that different property management companies will operate in different ways and not all of them follow the same procedures. If the property management doesn’t want to cooperate, it might be time to start using another Colorado Springs property management service. A service that suits your needs better.

You would think this could be accomplished with a couple of phone calls, but unfortunately, this property is managed by a big company. There isn’t one person like I have for my Atlanta property. There is a system and a process.

I don’t have a ton of leverage to make sure my voice is heard in this system. But there are people who can help. The rehab / turnkey company I purchased the property through refers a lot of business to this property management company. They want to keep that relationship in good standing.

One level higher, the national turnkey marketer I purchased from does even more business in Memphis. They want to keep that relationship in good standing.

It is great I have these people in my corner, but it takes some action on my part to call on them. Their voices are louder than mine.

Ultimately I’m likely to move on from this property management arrangement, but I think jumping ship now places the blame entirely outside of myself.

I need to pay attention and use my resources to get my voice heard. I need to play the politics game. I need to learn how to manage my manager otherwise this is likely to repeat itself.

The Big Picture

I don’t live off the cash flow from my investments, so this doesn’t hurt as bad as it might for other investors.

I view cash flow as necessary to keep you in the game long enough to reap the benefits of the other components of rental property return (like appreciation). The 10% cash-on-cash return goal is simply a margin of safety for when things go wrong.

Luckily those other components offset this bad run of luck in cash flow. In the past six months, Zillow shows appreciation of $4k, more than making up for these issues.

If you have the right mindset and the ability to see past short-term issues with rental properties, in the long run it will all work out.

How do you handle the roller coaster ups and downs of rental properties? Or if you don’t have properties yet, what scares you the most about this?

On a typical day, I don’t give my rental properties any thought. There is a property manager to collect the rent and handle any repair phone calls.

When the property has a tenant in place, it is pretty typical to just have one email or phone call with the property manager per month. Or zero. Hardly any work at all.

But when I look back at the last 6 months, some trends start to emerge – this analysis is a great chance for me to realize what I need to do.

My goal is to show potential investors the two sides of the coin. It’s not that hard and it’s a pain. Somehow both are true.

Managing Your Manager

The goal of the investor is to make sure their property manager is doing their job. This is the case when you look into their hoa compliance, and when you consider what their work means. The rent is collected and deposited into your account. They handle all tenant calls and minor repairs without discussing with the investor. Instead, there is a short month summary sent.

Most of these details were pulled directly from the monthly summary email. Then I sometimes follow up by email or phone for additional information – what was the repair in more detail? Are there before and after pictures?

I also double check the money was deposited and matches up with the report – just generally keeping an eye on things.

The Bad – Late Payments

The Atlanta tenant has been in the property 5 years now. This really helps cash flow because as we saw with the Memphis property, tenant turnover is very costly.

But slowly over the course of 2015 the tenant fell behind on payments. Rent is due on the 1st of the month and she paid a week late. Then the next month it slipped another week, compounding the problem. Some months were on time, but the issue peaked at nearly 2 months late on payments.

We were perhaps a little more lenient than we normally would have been since this tenant had a four year history of paying on time. But we weren’t push overs.

Twice when she said she would have a payment by a certain time, we filed the eviction paperwork. Both times she caught up enough and paid the paperwork fee on top to keep the game going.

The Good – All Caught Up!

After an entire year various levels of behind on rent, then tenant is now caught up. So rather than exactly 6 payments of $950 for 2016, the tenant has paid much more – $7,665 towards rent, plus a little more for late fees and the eviction paperwork expense!

This is really going to help the cash flow numbers for 2016. It balances out the disappointing cash flow numbers from last year.

Rent payments the last several months have been on time and we won’t let that happen again. But I’m glad it worked out!

The Bad – Repairs

I already covered the process of placing a new tenant in the Memphis property through January and February. There were several repairs that were done to get the property ready for a new tenant, but let’s cover what has happened since then.

Even though a lot was done in January, there were still quite a few repairs that weren’t all that cheap:

• Replaced fill valve in master bath and hall bathroom. Repaired broken commode collar. $373
• Repaired closet shelves and re-secured fan. $111
• Water heater T-and-P valve. $99

In Atlanta there were some storms that damaged shingles and vinyl siding, but this could easily be repaired by looking for siding replacement alpharetta has to offer (if I were closer to this area). But as this is Atlanta, I’m going to have to find a service closer by!

The property manager pushed off making these cosmetic repairs until they were completely caught up on rent, which was a great move. She finally sent someone out to do the repairs and the total came to $245.

The total repairs for the last 6 months, excluding the expensive tenant turnover, were $828. Ouch!

My rough budget for repairs is $70 per month per property, which comes to $840 for the half-year. I went well over including the repairs not billed to the previous tenant during the tenant turnover. However, it is lucky that the valves for the water heater were found, otherwise, I’d have had to look into websites similar to bouldenbrothers.com/water-heater-replacement/ for a full water heater replacement, and that would have increased the total bill significantly! Then again, if a problem with a water heater cannot be resolved then a replacement may be necessary – it’s either that or no hot water! However, most problems can be rectified with some assistance from plumbing experts – navigate here to learn about some of the problems they can help with.

The Lazy

I believe I am paying too much for property management and repair mark-ups in Memphis. But I haven’t shopped around for a new property manager or decided to try self-managing yet.

I discussed raising the rents with the Atlanta property manager a couple months ago. It still hasn’t happened. I guess I haven’t followed up frequently enough to make it happen.

The insurance costs have gone up from roughly $600 to $850 a year on the Atlanta property over the course of 5 years. I know I should shop around for new rates, but haven’t done anything yet.

Part of this laziness is not wanting to rock the boat during a busy time in my personal life – the last thing I want to do on my honeymoon is deal with any issues that could come out of raising the rent (like a vacancy) or changing property managers.

As a result, I’m leaving a little bit of money on the table each month.

Overall: Pretty Solid

Extra rent money, more repairs than expected. I still come out ahead over the last six months.

What do you think? Was this a good first half of the year or would you be disappointed by this?