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Protecting Rental Properties with Umbrella Insurance

7 Oct

The following is based on my own experience and understanding, but I’m certainly no expert on the subject. Please be sure to consult with an insurance professional when contemplating your options. Best of luck!

After purchasing our 3rd duplex in May of last year, we felt the time was right to get an umbrella policy – and we’re finally getting around to pulling the trigger.

How Does Umbrella Insurance Work?
An umbrella policy picks up where your other policies’ liability ends. For example: if your auto insurance has $300,000 in liability coverage, a $1,000,000 umbrella policy provides a combined total of $1,300,000 in liability coverage in the event of an auto insurance claim.

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(photo by Andreas Schalk)

I also believe our particular umbrella only extends coverage that is already granted by the underlying policies. For instance, if pit bulls were a restricted breed on our homeowners insurance, I wouldn’t expect the umbrella policy to cover that liability instead.

Do I Need Umbrella Insurance?
Not necessarily. This was a personalized decision that took into consideration our assets, lifestyle, and risk-tolerance. My general philosophy is that insurance shouldn’t cover inconveniences like cell phones and windshields – but the really big, bad, life-changing stuff that could take you down financially.

Some people are relatively judgement proof (i.e. there’s not much to take, or what you have is protected in retirement accounts) so the consequences of a no-good-really-bad-day aren’t as extreme. On the other hand owning multiple rental properties probably makes us a greater target for litigation – in the event of an auto accident, it wouldn’t take a personal injury attorney long to find our real estate via public records.

Why Not Use an LLC Instead of Umbrella Insurance?
My (somewhat uneducated) impression is that an LLC is a little overkill for us at this point. I see an umbrella policy as the next step of an asset protection continuum, with LLCs offering greater protection and privacy in exchange for greater cost and hassle.

I also wonder if LLCs are better suited for paid off properties… I’ve read about investors who move mortgaged properties into an LLC with no issues, but I also know a Realtor who had a client get their mortgage called for the same reason.

Shopping Around for Umbrella Insurance
For most carriers we asked, each duplex counts as 2 properties – which means our liability exposure effectively boils down to 2 vehicles + 7 residential properties (which includes the apartment we live in). This exceeded the underwriting limits of many household name carriers, and we ultimately had better luck finding compatible umbrella policies via independent agents.

Often the insured is required to have an auto or homeowners policy with the same carrier, but there are “stand-alone” umbrella policies too. I found the combined offering a little more affordable, but I also wasn’t eager to consolidate our insurance under a single carrier. Agents were much less enthusiastic to work with me once I expressed an interest in stand-alone policies, so I imagine the commissions aren’t as enticing for them.

Comparing Umbrella Insurance Quotes
The odds of paying out are pretty slim, so insurers can offer substantial coverage for a few hundred dollars. We received 4 quotes for $1,000,000 umbrella policies:

  • $200/year (required another policy)
  • $257/year (stand-alone policy)
  • $327/year (stand-alone policy)
  • $460/year (stand-alone policy)

There was also a fair bit of variance in the underwriting requirements that wasn’t apparent until we received the applications. Each policy had around 3-15 questions that acted as pass/fail criteria – some of which could be deal breakers depending on your situation. For example, one policy disqualified locations covered by subsidized housing. Another policy required no construction or renovation in the previous 12 months and the next 12 months.

Our Umbrella Insurance Policy
We selected the $257/year stand-alone policy after taking into consideration cost, flexibility, and the application criteria. I’ll report this expense on our Schedule E and set aside $21/month from our excess cash flow to cover the annual premiums moving forward. If we choose to in the future, we can also increase the coverage in $1 million increments up to $5 million.

This policy counts 1-4 family units as 1 property each, so on paper we represent 4 properties (including our apartment). We can acquire 2 additional properties with similar terms at a higher cost, but 7-10 properties will cap our umbrella coverage at $1,000,000.

I suppose that would be a good problem to have. 🙂

Minimum Liability Requirements
Before we could finalize the umbrella, we had to update the underlying policies to meet the liability minimums:

  • Auto – $250k/$500k bodily injury & $50k property damage
  • Renters – $300k personal liability
  • Homeowners – $300k personal liability

These requirements will vary by policy and carrier. There were also some relatively trivial costs associated with adjusting the individual policies.

Considering this process was a bit more difficult than I was initially expecting it to be, I’m very content with the price and terms of the policy we found – and pleased that it should serve our needs for the foreseeable future.

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Investment Property Balance Sheet – 2015 Edition

23 Jun
Duplex Balance Sheet

(photo by frankieleon)

Our annual look at rental income and expenses, averaged across 12 months. We own duplexes so these numbers represent 6 units across 3 properties, purchased between 2011 and 2014.

We also perform this analysis when seriously vetting a new rental property to help spot unexpected surprises (property in a flood plain? outrageous HOA dues?) and verify cash flow.

Duplex #1

  • Total cost: $181,350, latest comp $245,000 (Feb 2015)
  • Down Payment: $45,350 (25%)
  • Mortgage: originally $136,000, currently $127,830
  • Estimated Equity: $117,170

Duplex #2

  • Total cost: $144,000, latest comp $189,000 (Apr 2015)
  • Down Payment: $36,000 (25%)
  • Mortgage: originally $108,000, currently $93,223
  • Estimated Equity: $95,777

Duplex #3

  • Total cost: $201,000, latest comp $216,000 (Apr 2015)
  • Down Payment: $61,500 (30%)
  • Mortgage: originally $139,500, currently $137,395
  • Estimated Equity: $78,605
Revenue Duplex #1 Duplex #2 Duplex #3 Monthly Total
Unit A $1,025 $975 $1,050  
Unit B $1,095 $950 $1,050  
Vacancies
-$41 -$37 -$40  
Total Income $2,079 $1,888 $2,060 $6,027
         
Expenses        
Principle & Interest $699 $531 $738 $1,968
Taxes $352 $365 $365 $1,082
Insurance $69 $76 $63 $208
Repairs
$150 $150 $150 $450
Carpet Fund ($800/5yrs.)
$13 $26 $26 $65
HOA $50 $0 $0 $50
Property Mgmt (10%) $212 $193 $210 $615
Leasing & Releasing (30%-60%) $80 $72 $79 $231
Umbrella Insurance $12 $13 $13 $38
Tax Prep
$12 $12 $12 $36
Total Expenses $1,649 $1,438 $1,656 $4,743
         
Cash Flow $430 $450 $404 $1,284

Some Highlights & Observations:

  • Stagnant Cash FlowLast year I predicted our cash flow to slowly increase past our typical $400/property/mo. average because I thought most expenses had been accounted for – but we found a few more. 🙂 Technically it has risen because we got property #3 to market rate, but we also added additional protections and conveniences like umbrella insurance and tax preparation fees. Maybe next year!
  • Rent Appreciation – While cash flow remained stagnant, property #1’s rent has increased 27.5% since our first balance sheet in 2011 – bringing in $457 more income (the cash flow equivalent of having a whole other duplex). Unit A is currently under market rate, so if you assume $1,095 for both sides that would be a $527 increase!
  • Average Cash Flow vs. Actual – Since spending tends to have peaks and valleys, I’ve been charting my actual monthly cash flow throughout 2015 so I can share that perspective in the future. The $150/property/month is really a best guess… some months are SURPRISE! and others months nothing remarkable happens at all – cha ching!
  • Umbrella Insurance – I was hoping to have an umbrella policy setup by now, but no dice – so this is merely a conservative estimate using the most promising quote I have at the moment. I’m guessing insurance agents must not make a lot of commission on umbrella policies, because they sure don’t seem eager to provide quotes for them.
  • Tax Prep Fund – This was the first year I realized we could deduct a portion of our tax preparation fees on our rentals’ Schedule E. Previously we’d been applying it as a miscellaneous itemized deduction… fat lot of good that did us. Oh well, live and learn. I cringe paying a professional for something I used to do myself with online tools, but I still don’t feel reasonably qualified to handle rental tax details like cost basis calculations, depreciation schedules, and improvements vs. expenses.
  • Vacancies & Leasing/Releasing Fees – A guestimate that assumes 1 unit from each property will be vacant for 2 week a year. Using these same vacancy assumptions, I budgeted one renewal fee (30%) and one releasing fee (60%) per year, per property.

Previous Statements:


“Plan specifically so you can implement flexibly.”  – Dallin Oaks

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Laminate Floor Water Damage & Mid-Lease Replacement

23 Apr

Since I tout the benefits of rental property, it’s only fair that I also share when things don’t go according to plan. This is totally one of those times.

Last spring a leased washing machine overflowed, destroying the laminate floors in one of our rentals. Our tenants had already contacted the appliance company, who agreed to cover the damage (via their insurance). Now we needed to replace the flooring… while the tenants were still living there.

Water Damaged Laminate Floors

I suspect I could give this scenario to 5 different landlords and I’d get 5 different opinions on next steps. Here’s how it went down for us:

  • It took months for (1) the appliance company to file a claim with their insurance and (2) the insurance company to send an appraiser to inspect the damage. When insurance denied the claim the appliance company decided to pay us directly while they appealed the decision – a darn classy move on their part.
  • We requested two 2 flooring quotes – one for laminate and one for ceramic tile. The less expensive laminate estimate was provided for insurance purposes with the expectation that we’d add some money of our own to replace the floor with tile instead.
  • Movers helped us reallocate the tenants’ belongings to the kitchen, garage, and a rented storage pod. The next day, the flooring company began the process of removing the laminate and installing tile.
  • Meanwhile our tenants camped at a nearby hotel. It annoyingly took a day and a half longer than originally estimated, but at least the flooring company discounted the bill to compensate for the extended hotel stay.
Tile Floor Installed

We paid a little extra (~$300) to have the tiles installed diagonally – looks great!

What an ordeal. Our floor replacement costs:

  • Moving Help – $235
  • Storage Pod – $329
  • Hotel (3 Nights) – $519
  • Tile and Installation – $5,136

$6,219 Total – $4,864 Reimbursement = $1,355 Out-Of-Pocket

Some silver linings:

  • I never particularly cared for that laminate flooring in the first place, but it was already installed when we purchased the property and we couldn’t justify replacing it for aesthetics alone.
  • All things considered, $1,355 is a great deal for new ceramic tile flooring. I dare say we came out ahead, especially since we were probably going to upgrade the flooring to ceramic tile someday.
  • Could we have gone after the tenants to recoup some of these costs? Probably. All-in-all this was a good example of all parties (landlords/tenants/appliance company) being a little flexible to make the best of a bad situation. Any of us could have taken a hard line with demands, but didn’t. Well… except the insurance company.  😈

For the most part I figure surprises like this come with the territory. It was a lot of hassle and uncertainty – but nothing we couldn’t overcome with patience, perseverance, and our rental emergency fund.

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New Water Heater Regulations – Investigation & Decision

14 Apr

In my previous post I wondered whether we should buy a replacement water heater now in anticipation of new energy standards beginning April 16th. The higher efficiency rating would likely increase the size of the new units, which may or may not fit existing locations.

Since Consumer Reports suggested it was “likely” we wouldn’t be too negatively affected, I wanted to investigate whether our specific properties could accommodate these changes. We have 6 water heaters between 3 duplexes; I used inspection reports to piece together our current configuration:

Property Unit Tank Size
Gas/Electric
Location
Duplex #1 A 40 Gas Attic
Duplex #1 B 40 Gas Attic
Duplex #2 A 55 Electric Closet
Duplex #2 B 55 Electric Closet
Duplex #3 A 55 Electric Attic
Duplex #3 B 55 Electric Attic

I’m not too concerned about Property #2 because I think there is plenty of room in the closets, but I am skeptical about attic access for #1 and #3.

555

(photo by Bill Smith)

From what I’ve read online, a standard access opening is 22″ x 30″ – some sources adding a quarter inch to each side for trim (21.5″ x 29.5″).

Home Depot didn’t have any compliant models in-stock yet, so I noted the diameters of current models instead – substituting 50-gallon measurements because 55-gallon wasn’t available:

  • Gas, 40 gallons – 17 3/4″
  • Gas, 50 gallons – 20 1/4″
  • Electric, 40 gallons – 17 3/4″
  • Electric, 50 gallons – 19″

Now if I assume the new standards will add 2 inches…

  • Gas, 40 gallons – 19 3/4″
  • Gas, 50 gallons – 22 1/4″
  • Electric, 40 gallons – 19 3/4″
  • Electric, 50 gallons – 21″

I’m most interested in the 40-gallon gas and 50-gallon electric models since that’s what property #1 and #3 are using, respectively. Compared to a 21.5″-22″ attic opening it would be a REALLY tight fit, but doable.

I also don’t see any reason why we couldn’t downgrade to 40-gallon tanks if we run into trouble. We’ve never gotten any complaints about property #1’s hot water, and it services the same number of bedrooms/bathrooms/people as the other properties. The Rheems brand water heater packaging seems to agree:

Gallons # of People
40 2-4
50 3-5

Something else to consider – if we did want spares we’d need to buy at least 2 since the properties use different power sources. Given these gut checks and knowing we have a cost-effective plan B, we personally decided not to pre-purchase any water heaters in anticipation of the new energy standards.

One decision down, plenty more to go.  😉

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New Water Heater Regulations – Should We Pre-Purchase?

7 Apr
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(photo by Brian Cantoni)

The Department of Energy is enforcing new efficiency standards for water heaters starting April 16th – prompting speculation on how these changes will affect consumers.

A lot of the negative press is coming from local plumbing companies, making it difficult to determine whether they are merely scare tactics intended to generate sales.

The higher standards will almost certainly increase the size and cost of the newer units to some extent, but the greater concern is whether those larger water heaters will still fit in small closets and attic access hatches.

Because the regulations affect manufacturing specifically, existing water heaters can still be purchased and installed after the deadline. This means homeowners could choose to (1) replace an older water heater now or (2) buy a current model and store it until needed.

Is this something landlords should consider too?

Consumer Reports covered the new standards last month with relatively tame conclusions about their impact on consumers:

“Simply put, if you’re replacing a water heater that holds less than 55 gallons, the new one may be an inch or two larger and can likely be placed where the old one was unless it was in a very tight spot such as a closet. But if you’re replacing a larger water heater, you’ll have to do your homework as the new units may need more space.”

Tanks larger than 55 gallons might be good candidates for pre-purchase since they will experience the greatest alternations, incorporating more drastic technology changes (PDF download) and stricter energy requirements.

My take: I suspect most rentals are using the smaller tanks and the vast majority of homeowners can already accommodate these 1″-2″ changes. Manufacturers want to sell products to the greatest number of consumers, and that means adding energy efficiency in the least disruptive way possible.

Then again, if we’re wrong or unlucky our options include:

  • moving the water heater
  • installing a water heater with a smaller tank
  • replacing with a tankless system
  • increasing the size of the existing space or access point

By comparison, buying a spare unit sounds like relatively cheap insurance and postpones any growing pains for another 8-10 years.

What do you think? Does it make sense to buy a “classic” water heater or two for future replacements?

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Monday Mixed Bag – Debts, Deals & Dishwashers

30 Mar

Real life has been extra distracting lately, but we’re grateful to have a property management company in place to keep things humming along when we need to step back for a couple weeks. Since I’ve been a little MIA recently, I wanted to share an update of recent rental happenings:

Multiple Tenant Renewals
I tend to err on the side of keeping good tenants at current rates but this latest batch didn’t shake out that way:

  • Renewal 1 – $995 -> $1,025
  • Renewal 2 – $1,095 -> $1,095
  • Renewal 3 – $950 -> $975

Renewal #1 was $150/month under market rate and we were having a hard time justifying the $1,800 opportunity cost over the course of a year – so we ultimately decided to raise the rent $30/month (an amount I wouldn’t feel too bummed about if it was my rent increase).

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(photo by blu-news.org)

Renewal #3 originally wanted a 6-month lease so they could buy a house, which would have incurred an extra renewal fee (~$270) – so the original thinking was to offer a short-term lease option at $25 more to split that additional cost with the tenant. Somewhere along the way they decided to renew for 1 year at the new rate instead.

Considering one other lease doesn’t expire until 2016 – that leaves only two potential vacancies in 2015, which is awesome.

Mortgage Pre-Payment Progress
Now that our rental property emergency fund is replenished, we have been DESTROYING our $10,000 mortgage pre-payment goal:

  • Jan – $1,408.19
  • Feb – $1,755.03
  • Mar – $1,022.66

The $4,186 in extra principal payments have saved us $7,744 in unpaid interest, and shaved 22 months off the mortgage. We also set aside another $500 from February and March’s cash flow to raise the rental emergency fund to $16,000. April’s payment should be relatively sparse since those 3 lease renewal fees will probably hit around the same time.

A Difficult Decision
Recently I’ve been observing and advising a friend who is vetting his very first rental property. I’m not sure there’s ever a perfect property and this one is no exception – repairs will need to be made, priorities considered, and risk tolerance gut-checked.

sss

(photo by Sasquatch I)

I’m a huge cheerleader of rentals and I think he has his eye on a solid property, but I don’t envy his decision – it’s never without some doubt or anxiety when your investment decisions have that many zeros at the end of them.  🙂

New Equity Estimates
Because of some pending duplex sales on the market, we should be getting updated sales comps for all 3 of our properties soon. We use Google alerts to notify us of similar properties for sale, and then “favorite” those properties on Redfin.com so we’ll receive email notifications after closing with the final price.

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(photo by Dan Moyle)

If the equity becomes tempting enough, I’d like to consider a cash-out refinance of property #1 in the next couple of years and apply it to a new rental. If I play my cards right, I’m effectively getting a free rental property – which is absurd to even think about.

Before then, I’d like to see the rent increase a little more (that under-market-rent tenant isn’t helping!) so I can more or less pull off the same cash flow numbers I was getting when I first purchased the duplex.

Umbrella Insurance Obstacles
It seems like I’ve been trying to buy an umbrella policy for the better part of a month now. I’ll explain in more detail later, but we stumbled on some convoluted chain of events that went something like umbrella policy -> auto policies -> renters policy -> defensive driving. We JUST finished our online defensive driving class and received the certificates in the mail – so now we should be back on track. Good grief.

Recycled Dishwasher
Last Thanksgiving we inherited a dishwasher from my mother’s kitchen remodel, and a couple weeks ago it found a new home after the previous appliance started leaking. A good condition GE unit – and nicer than what we probably would have bought for a rental otherwise.

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(photo by Joanna Bourne)

Unfortunately we now have a black dishwasher in a kitchen of white appliances, but beggars can’t be choosers and I’d estimate we saved ~$300 vs. buying new (thanks Mom!). I did look into white appliance paint, but I didn’t see finished results online that I was satisfied with – particularly in the detail work around the buttons and button panel.

That’s all for now – until next time, keep on keepin’ on!

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Comparing Replacement Cost Estimates for Home Insurance

21 Jan insurance replacement cost estimate

Insurance agents and I have a complicated relationship. I hate up-selling, and once that line is crossed it’s hard for me to distinguish between greedy self-interest and sound financial advice.

Call me cynical, but when my agent told me a property worth $157,000 would cost 79% more to replace it seemed prudent to get a 2nd opinion.

Home Insurance Replacement Cost Calculation

(photo by Anna)

Too much coverage and you’re wasting money, too little and you’re not fully protected after a catastrophic event. Where’s the goldilocks zone? Consumer Reports recommended Building-Cost.net and AccuCoverage.com, so I decided to compare these 3rd-party sources against the carrier’s estimate.

Data Point 1 – Insurance Carrier / Agent
This replacement cost estimate comes directly from the carrier’s online tool, which is used by agents when pricing a new policy.

homeowners insurance replacement cost estimate

(photo by arbre_evolution)

There are legitimate reasons why the cost to rebuild would be higher than market value, but I question whether the agent and carrier have a conflict of interest (financial and liability) that incentivizes them to over-estimate.

Also, pay attention to the accuracy of the inputs – your agent might assume more expensive finishes than what is actually there (brick vs. wood siding, wool vs. acrylic carpet). I had to send mine back with corrections – twice.

Original Replacement Estimate: $280,600
Revised Replacement Estimate: $273,100

Data Point 2 – Building-Cost.net
A free tool provided by the publishers of the National Building Cost Manual. This no-frills estimate consists of roughly 8 sections with the usual criteria – location, square feet, # of kitchens and bathrooms, HVAC, finishes, etc.

One unique input was the quantity of exterior corners. I’m merely guessing that more exterior corners = more complexity = higher construction costs.

Building-Cost.net Replacement Cost EstimatorSince it is more contractor-oriented than insurance, it does not include the costs to remove the original structure/debri. P.S. – if you have problems viewing the emailed report, try opening in WordPad instead.

Replacement Estimate (w/o debris removal): $245,874

Data Point 3 – AccuCoverage.com
AccuCoverage costs $7.95 and is the consumer arm of Marshall & Swift, a provider of building cost data for the insurance and real estate industries. This estimate was probably the most comprehensive, and Fool.com’s insurance board calls Marshall & Swift “among the best.”

AccuCoverage.com Replacement Cost Estimator

Marhsall & Swift also offers a separate replacement cost estimate tool to insurance agencies, so you might have access to a similar report for free through your agent. Again, keep an eye on those inputs.

Replacement Estimate: $310,478

Final Thoughts
Credit where credit is due, the average of both 3rd-party estimates comes out to $278,176, which is pretty spot on with the carrier’s $273,100 estimate. Satisfied, we finalized the policy and moved on to umbrella insurance.

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2015 Real Estate Resolutions

29 Dec

I hope everybody is having a wonderful holiday season. Santa was generous this year and left a Black & Decker Trimmer/Edger with Mower Deck under the tree – I’ll be sure to let you know how it works on the duplex lawns!

A table-sized tree, not a Godzilla-sized cat 🙂

Due to other financial priorities, we do not have plans to purchase a property this year. Fear not, we are 100% committed to the real estate empire, but that just means our 2015 goals will focus on the existing portfolio instead:

  • $10,000 Extra to Mortgage #2 – we anticipate a good bit of discretionary cash flow that can be applied to our pre-payment efforts. Averaged across the year, that $833/mo. will save an additional $16,668 in interest and shave just over 4 years off the mortgage!

  • Setup Umbrella Policy – with the addition of property #3, we know an umbrella insurance policy is in order. I’ve been putting this off because I really hate dealing with insurance agents, but it needs to be done.
  • Streamline Insurance Quotes – Did I mention I hate insurance agents? Like cable companies, customer loyalty is often penalized so regular price-shopping is a must. Resigned to my annual fate, I have a project in mind that should help expedite this process. I also want to consolidate my separate landlord policies under a single agent.
  • Tackle Some Deferred Maintenance – Some repairs need to be addressed immediately, and some need to be addressed… eventually. This year we’ll suck it up and prioritize (1) a new exterior paint job on duplex #1 and (2) some minor roof repairs recommended by the inspector when we purchased duplex #3.

Roof Tab Repair

  • Plant a Cedar Elm – Our apartment balcony has slowly turned into a rental-friendly tree farm. We’re currently growing a Texas Ash and a Cedar Elm from saplings, and the latter is now ready to be planted if the right opportunity (vacancy) presents itself.
  • Take a Vacation! – We’d like to prioritize some time, money, and reward points towards a vacation (or two?) next year. All things considered, it’s hardest for us to prioritize the time.

All of these goals are important-but-not-urgent – i.e. things that should get done but could easily get put off without a plan to stay on-track. I’m dreading some of them, but all the more reason to apply blog accountability. 😉

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2014 Goal Results & Highlights

22 Dec

Earlier this year I created goals for 2014 to keep me on-track. The results:

✔  Pay Down Mortgage Debt$3,522 applied to mortgage #2
✔  Expand Property Management – done!
✔  Mean Tenants – replaced with pleasant people at market rate
✔  Try Discounted Gift Cards – success!
✔  Another Property – technically, but we weren’t expecting a rental
✔  25 Blog Posts – squeaked in at 27 posts this year, yay!

Having goals was quite motivating – a way to ensure “someday projects” get prioritized. When reflecting on the past year, a few key initiatives stand out:

Buying Duplex #3
Our third purchase last May made three properties in as many years – not too shabby! It was also the second time we saved a down payment for a primary residence and ended up buying a rental property instead.

What can I say, we have a problem. 🙂

rental property living room 3

We stumbled on some legitimately good deals, but also wanted to maximize our advantage as DINKs (dual income no kids) while we could. It’s not hard to see a future where adult responsibilities stall our current momentum.

This acquisition was unique because the cash flow and appraised value were low for the purchase price, but our research suggested it still had potential. After a $200/unit rent increase (both tenants stayed!) and a new sales comp – we were back on track a mere 2 months later.

Series: How We Saved $1,454 on Our Property Taxes
Corey’s victorious quest to protest the tax valuations on two properties, broken into a 4-part series:

  1. Receiving a Notice of Appraised Value
  2. Filing a Notice to Appeal & Requesting Supporting Documentation
  3. Compiling the Evidence
  4. Appraisal District Meeting & Outcome

A good example of a financial skill that should be taught in public education, but usually isn’t. I group it in with preparing your taxes, the effects of compounding interest, and calculating student loan payments before a student chooses a college or major.

Aspirations / Running the Numbers
It’s fun to daydream about the future of our real estate empire. I noodled through hypotheticals like how many properties we’d need to retire and whether it would be faster to finance or buy outright.

day dreaming clouds

(photo by Kevin Dooley)

Turns out we could probably buy 13 leveraged properties faster than 5 paid off ones – all things being equal – while generating the same net income. Realistically, we’ll probably do a combination of both, and now that we’ve topped off our rental savings we’re cooking with pre-payment fire again!

Make Ready Kit + New Additions
I continue to adore our make ready kit, and got the opportunity to try it out in the field during a vacancy in November.

Make Ready Vacancy Kit Additions

Through trial and error, I’ve added to the inventory a bit:

Now the real question is whether to expand to a second bin….

Discounted Gift Cards
For those tempted to give discounted gift cards a try, I’d recommend waiting until just after Christmas. An influx of holiday gifts will likely upset the supply/demand model in your favor. More inventory = better discounts.

Also, a big thank you to those using our Raise and Cardpool links – any referral credits are going straight to our mortgage pre-payment efforts!

Cardpool Referral Credit

Previous Recaps:

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and Third, by experience, which is the bitterest.”  -Confucius

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How We Saved $1,454 on Our Property Taxes, Part 3

8 Oct

Note: these appraisal protest experiences are Texas-specific (and possibly county-specific) so please be careful applying them to your own district.

Once Corey received our appraised value and filed our notice to protest, it was time to compile any value-supporting data. Below are some places to start, and a notation about whether they corroborate an excessive or unequal protest.

Paperwork

(photo by striatic)

Appraisal District’s Supporting Documentation
We previously sent a letter requesting all documentation the appraisal district intends to introduce at the hearing. Our district provides different reports depending on the reason(s) for protest – so again, check both when you file!

Comparable Sales Report (Excessive)

Subject
Comp1
Comp2
Comp3
Address
126 Street 118 Street 200 Street 100 Street
Year Built 2006 2006 2006 2011
TotValue $169,105 $169,105 $169,105 $162,618
Value/Sq Ft $48.87 $48.87 $48.87 $48.87
Sale Date 1/22/13 1/8/13 7/31/13
Sale Price $150,000 $143,000 $182,000
Adjusted Price $153,060 $145,917 $191,252
Indicated Value $153,060

The comparable sales report included 3 other properties sold recently, then made square footage, year built, and sale date adjustments to estimate the market value of our property. Notice that property #2’s indicated value is significantly less than the $161,105 appraisal, and that comp #3 is a considerable outlier in sales price relative to the other properties.

Equity Comparable Report (Unequal)

Subject
Comp1
Comp2
Comp3
Address
126 Street 112 Street 112 Street 112 Street
Sq Ft 2006 2007 2007 2006
Year Built 3,460 3,460 3,460 3,184
Appr Value $169,105 $170,607 $170,607 $169,105

Each equity comparable report gave us the appraised value of 10 similar properties relative to our own property’s appraised value.

3rd Party Sales Comps (Excessive)
Request comparables from a real estate agent or property management company, or search online listings (Redfin.com filters by past sales). Our realtor provided a “Market Analysis Summary” with ~10 similar sales for each property:

Address Unit Mix
SqFt
Sold Price
Sold Date
212 Street Dr 3/2 3,460 $129,000 3/5/12
112 Street Dr 3/2 3,460 $138,000 6/8/12
220 Street Dr 3/2 3,460 $136,000 7/13/12
200 Street Dr 3/2 3,460 $143,000 1/11/13
118 Street Dr 3/2 3,460 $150,000 1/31/13

The ultimate goal of the appraisal process is to determine the value of the property on Jan 1st of the current year. Properties sold within 24 months of that date can be considered (36 months is allowed if there are limited comparables). This means we’re interested in sales from 2012 and 2013, but the most recent comps have more weight when determining the Jan 1st value.

Appraisal District Website (Unequal)
There is a wealth of information on the appraisal district’s website, included the appraised value of every property in your neighborhood. If you find similar properties with significantly lower appraisals (perhaps they are homesteads – which means the rate of increase is capped at 10% per year), they could support an argument that your property has not been equally appraised.

Appraisal District Property Results

While you’re there, verify the information the appraisal district has about your property. Pay extra attention to the square footage and number of bedrooms and bathrooms – it’s possible the appraisal district used inaccurate information to calculate the appraised value.

Recent Settlement Statements (Excessive)
We didn’t know this at the time, but we could have also used our HUD-1 Settlement Statement to support a lower market value since property #2 was purchased in the previous year.

If you have used any other data sources when protesting an appraised value, please share them for others in the comments below.

Next post – Corey’s meeting with the appraisal district

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