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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.

sss

(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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Rental Property HOA Violations & Subjective Rules

22 Oct

Recently we had our first run in with a rental property’s homeowners association; it started with a couple warning letters letting us know that our duplex had a lawn care violation.

HOA Violation Notice

I wasn’t too concerned because (1) I assumed the lawn was in violation and (2) per our lease the tenant ultimately pays any HOA fines. It wasn’t until the fine was imposed that our letter also included low-resolution photos of the lawns in question, and I started to realize just how subjective lawn rules could be.

Lawn 1

Lawn 2

I’m not saying that’s a perfectly manicured lawn, but for a row of duplexes in rural Texas I was expecting something a LOT worse. It was also quite the coincidence that both tenants simultaneously stopped complying for the first time – more likely the HOA was now enforcing a higher standard of lawn care, but had not communicated those new expectations.

The violation letters themselves didn’t elaborate beyond “Cutting Grass and/or Weed Eating”. Our property manager reached out for clarification, but was told by the HOA manager that she didn’t have to tell them what the violation was – only refer them to the HOA’s covenants, conditions, and restrictions:

“Each owner will keep shrubs, trees, grass, and plantings
of every kind on the owner’s Lot cultivated, pruned, and mowed,
and will keep yards free of trash and other unsightly material.”

Why is nothing easy?  🙂

There were more questions than answers… was there a maximum length of grass allowed? Was edging required? Did they just want the shrubs pruned back? To help sort things out, I scheduled a meeting with the HOA Manager.

The goal wasn’t to get out of the fine – just obtain clear guidelines that I could communicate back to our tenants so they could reliably avoid the HOA’s wrath in the future. If the lawn standards weren’t clear to me then they certainly weren’t clear to the tenants.

Coming soon: the HOA meeting and aftermath

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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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How We Saved $1,454 on Our Property Taxes, Part 2

22 Sep

Earlier this year, Corey successfully protested the tax valuation of our investment properties – this series shares his experiences and lessons learned along the way. The information below is definitely Texas-specific, and possibly county-specific, so please take caution when applying it to your local area.

Step 1 – File a Notice to Protest
After reviewing our tax appraisal notice, we needed to schedule a hearing with the Appraisal Review Board. Form 50-132 requested owner information, property details, asked us to declare the reason(s) for our protest.

Notice-of-Protest-Reasons Checked v2

Our reasons would determine what evidence could be presented at the hearing. We wanted to get our hands on the appraisal district’s documentation first, but we couldn’t do that until after the protest form was filed. The solution: check both over market value and value is unequal to give us the most flexibility later.

Make a notation if you’d prefer an evening/weekend slot (if available). Be sure to make a copy of the completed form before you turn it in – you’ll need it in Step 2.

Tip: protesting multiple properties in the same appraisal district?
File Form 50-131 to schedule the hearings on the same day.

Step 2 – Request the Appraisal District’s Evidence
Next, we sent a separate letter (template below) requesting the documentation the chief appraiser will use at the hearing to justify our valuation. This provides 2 HUGE advantages for the property owner:

  1. At least 2 weeks to review the appraisal district’s rationale for the valuation, and prepare any counter-arguments.
  1. The evidence the appraisal district can introduce at the hearing is now restricted to only those materials.

We would be provided different documents depending on whether we protested market value (comparable sales report) or unequal appraisal (equity comparable report) – another reason to check both boxes when you file!

Next Appraisal Protest Post: Compiling Your Evidence

[Month DD, YYYY]

Via Hand Delivery
[Name], Chief Appraiser
[Name] County Appraisal District
[Address]
[City], [ST] [Zip Code]

Re: Request for property appraisal information at [Property Address], [City], [State] [Zip Code] (account #) Property [#]

Dear Sir/Madam:

Enclosed please find the Property Tax – Notice of Protest Form 50-132 regarding the above described improved real property.

Additionally, pursuant to section 41.461 of the Texas Property Tax Code, please provide a copy of the data, schedules, formulas and all other information the chief appraiser plans to introduce at the hearing to establish any matter at issue.

It is my understanding that information, “not made available to the protesting party at least 14 days before the scheduled or postponed hearing may not be used as evidence in the hearing,” according to 41.67(d) of the Texas Property Tax Code.

Please notify me when a copy of the above referenced information is available and I will make arrangements to pick it up and remit payment for it.

Sincerely,

[Signature]

[Name]

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Sending a Security Deposit Accounting Letter to Tenants

10 Jun

Security deposits are a necessity, but they also require proper documentation to keep everything on the up-and-up. According to the Texas Property Code, landlords must provide a refund of the security deposit (if any) and an itemized list of all deductions within 30 days of the property being surrendered.

Security Deposit Deduction

An important caveat: the tenant must provide a forwarding address (in writing). In absence of one, we send the letter to their old address using certified mail, return receipt requested. It isn’t common, but there have been tenants who intentionally “disappear” so that it is harder for us to collect for excessive damages. The post office will either forward it on to them, or we’ll have documentation showing delivery was attempted.

Below is the template for our security deposit accounting letter. There are two variations for the “Resulting Balance” section, depending on whether the deposit was sufficient to cover any deductions.


Today’s Date: [MM/DD/YYYY]

Tenant’s Name: [Name]
Rental Property Address: [Address]
Lease expiration date: [MM/DD/YYYY]
Move-out Date: [MM/DD/YYYY]

Dear [Name],

The purpose of this letter is to account for your security deposit as detailed below.

Credits Received
• Security Deposit – $x
• Itemize any additional credits – $x

Total Credits – $x

Deductions
This is notice that the owner of the leased premises is deducting the following charges and expenses from your security deposit:
• Itemize individual deductions here – $x
• Itemize individual deductions here – $x
• Itemize individual deductions here – $x
• Itemize individual deductions here – $x
• Itemize individual deductions here – $x
• Itemize individual deductions here – $x

Total Deductions – $x

Resulting Balance
The balance due to resident of $x will be returned via [enter payment method].

Sincerely,
[Name]


If deductions exceed the deposit, use this text instead:

Resulting Balance
The balance due to Landlord of $x must be paid upon receipt of this statement.

Please make checks payable to [Name].

Mailing Address:
[Name]
[Address]
[City], [ST] [Zip Code]

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New Texas Law Could Create Headache for Landlords

13 Mar

A Rental Realities first – today’s guest blogger is my husband, Corey! He is a frequent participant of our rental hijinks, antics, and tomfoolery.

Whatdaya mean my lease is unenforceable?
Beginning January 1, 2014, Texas landlords have a new hurdle in enforcing their rights under a written lease: proving they provided a copy to their tenants. The new law requires that within 3 business days of signing a lease, a tenant must be provided a copy by their landlord.

residential lease

What happens if you don’t do this? 
For starters, you won’t be able to evict a tenant for any reason other than non-payment of rent. The statute also allows a tenant to stop a lawsuit until the tenant has been provided a signed copy of the lease. In such an event, a judge would almost assuredly reset your court date – creating loss of time and rent that could have easily been avoided.

What should you do about this? 
Create documentation to prove that you provided a copy of the lease to your tenant. The statute permits this to occur three ways:

  1. Via a paper copy
  2. In an electronic format if the tenant requests it that way
  3. By email if you and your tenant have communicated by email about the lease.

I would suggest that you handle this situation by having your tenants sign a form at the time they sign their lease indicating that they received a copy (example letter below).



NOTICE OF RECIEPT OF LEASE PURSUANT TO TX PROP. CODE §92.024

I __________________(insert Tenant’s name) acknowledge that I have received a true and correct copy of _________________ (insert title used for your lease) as of the ___ day of ________________, 20XX.

_____________________________
(Insert Tenant’s name and have them sign above)

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3 Day Notice to Pay or Vacate

17 Jun

My personal red line for late rent is the 10th of the month, which is when I post a 3-day notice to pay or vacate on the inside of the front door. Typically my hope is that this serves as a sufficient scare tactic for them to pay rent, but if needed it will also allow me to begin the eviction process. Below is an a example of this letter that you are welcome to modify for your own purposes.



NOTICE TO PAY OR VACATE

 

[Date]

 

Via Hand Delivery

[Tenant Name(s)]
[Rental Address]
[City], [ST] [Zip Code]

Dear [Tenant Name(s)]:

This is notice that you have failed to pay rent of $x for the month of [Month Year].  Currently you owe rent of $x and late fees of $x.  You must tender this entire sum of money by [Date].  If you have failed to pay rent by this date, this is your NOTICE TO VACATE the property by 11:59 p.m. on [Date].

Regards,

[Landlord Name(s)]

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What are Rental Criteria and Why Do I Need Them?

4 Feb

In anticipation of having vacancies of fill, the hubby tells me we need to make rental criteria. Rental criteria is simply a document listing the guidelines you will use when deciding whether rental applicants are approved.

This wasn’t something I intuitively wanted or needed – of course I’d run a background check, criminal check, employment verification, and then determine whether this applicant would be an appropriate tenant. Common sense really. What I wasn’t considering was the CYA component – the rental criteria isn’t really for ME, the landlord. Instead, there is a very real possibility that a landlord or property manager could be inaccurately accused of rejecting a tenant for a protected reason – race, religion, etc. – and if that ever happens the rental criteria is our first line of defense to defend against those claims.

Another handy application of rental criteria is to allow tenant to remove themselves from consideration before applying if they do not think they will meet the rental criteria. This saves both the landlord and the prospective the tenant time and money by avoiding unnecessary screening or application fees.

I started by searching for other rental criteria examples online, and then incorporated the wording from each that best described my desired tenant. It was important to me that the criteria was written to be read by an average person, and not written like a contract with excessive legalese. Those types of documents usually put a bad taste in my mouth, while a polite version will provide the same protections. There is no “right” tenant criteria – it could vary greatly by property and landlord. And honestly, we’re not sure whether our criteria is too restrictive, but this seems as good a place to start as any.

When a prospective tenant leaves requests an application, we’ll also give them this rental criteria document to review and sign at the same time. I’ve also added the rental criteria as a page on each property’s website.

You can Download Our Rental Criteria Here, or view the text below:

Rental Criteria

We are delighted that you are interested in leasing our property! In order to determine eligibility, all applications will be reviewed in the following areas:

General:
• One completed application is required for each person 18 years of age and older.
• There is a non-refundable application fee of $39 for each application. This fee is payable by check and must accompany the application in order to process. For example, 2 applicants = $78 total.
• Please make sure all information on the application is completed in full, signed, and dated.
• Incomplete, inaccurate or falsified information will be grounds for denial.

Rental History:
• Twelve (12) months of verifiable rental history or home ownership. Rental history must be with a non-relative landlord.
• No evictions or eviction actions.
• No outstanding money owed to a landlord, property management company, or utility services.
• Proper notice given to current or previous landlords.
• No reports of excessive late payments, damage to the property beyond normal wear, unfulfilled lease obligations, excessive noise complaints/disturbance of neighbors, and NSF checks.
• We reserve the right to deny your application if, after making a good faith effort, we are unable to verify your rental history.

Employment History & Income Requirements:
• Twelve (12) months of current employment or twelve (12) months in a similar job, validated by pay stub, employer contact, or tax returns. Please include a copy of your most recent paycheck stub with the completed application.
• Self-employed persons will need to show proof of income through tax returns.
• Gross income (including co-applicant) shall be a minimum of three (3) times the rent amount.
• Rent plus your other monthly debt payments may not exceed 45% of your monthly gross income.
• Income may include sources other than employment.
• Ability to pay all deposits and rent in full, prior to move-in.

Credit Requirements:
• Established credit history.
• Credit Score (FICO) must be no less than 650.
• All credit accounts must be in good standing.
• No bankruptcies.
• No recent repossessions or charge offs.

Criminal Records:
• Criminal record searches will be conducted, and may result in the denial of your application.
• Must not be convicted of a felony, have a drug conviction, or be a registered sex offender.
• No convictions for the manufacturer or distribution of a controlled substance.
• No convictions for crimes that would constitute a direct threat to the health and safety of an individual, the property, or the property of others.

Occupancy Limit:
• Two persons allowed per bedroom, plus 1 additional person per unit.

I.D. Required:
• Each applicant over 18 years of age will be required to produce a photo I.D. (e.g., a driver’s license or other government issued photo identification card).

Pets:
• Pit bulls, Rottweilers, American bulldogs, German Shepherds, and Dobermans have homeowner’s insurance limitations. We require proof of renters insurance with $100,000 in liability protection to rent to tenants with these dog breeds.
• All pets must be approved by management, and will require a $200 pet fee per pet plus signed animal addendum.

Note: applicants who do not meet all of the criteria may be considered with a co-signer, larger deposit, or last month’s rent. These exceptions will be considered on a case-by-case basis.

We do not discriminate on the basis of race, color, religion, sex, national origin, disability or familial status.

____________________________ __________
Applicant                                                          Date

____________________________ __________
Applicant                                                          Date

____________________________ __________
Applicant                                                          Date

____________________________ __________
Applicant                                                          Date

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