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In this episode of the Your Landlord Resource podcast, Stacie and Kevin Casella explore the intriguing world of tenant buyouts for rental properties. If you’re a self-managing landlord or property owner, this episode is packed with valuable insights that can help you navigate tenant buyouts with confidence.
Discover the essential differences between tenant buyouts and cash for keys, and why it’s crucial to understand these distinctions. Learn about the situations where tenant buyouts come into play and why they are becoming more common, especially in rent-controlled areas like California.
Gain insight into the legal aspects of tenant buyouts and the importance of involving a real estate attorney in the process. The hosts delve into the intricacies of negotiating tenant buyouts, including how to determine the right amount to offer and when to pay it.
Listen to real-world examples of when landlords might consider tenant buyouts, from selling a property to making major renovations, and why it’s essential to approach these situations with sensitivity and open communication.
Discover how tenant buyouts can be a viable alternative to eviction, potentially saving you time and resources. Whether you’re a seasoned landlord or just starting in the rental property business, this episode provides invaluable guidance for dealing with tenant buyouts effectively.
Tune in to the Your Landlord Resource podcast and empower yourself with the knowledge to confidently handle tenant buyouts in the rental property business.
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👉 Our FREE 10-Page Guide on Placing Your Ideal Tenant
Learn several of the tips we use to place tenants who pay rent on time, respect your property, and follow the policies you have set.
Our FREE 10-page guide includes:
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- Understanding Marketing for your unit
- The Application Process
- Performing Background Checks
- Handing Over the Keys/Move-In
👉 Episode 19: Your Tenant Wants To Break The Lease, Now What?
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If more than a couple of these factors ring true for you, it may be time to consider selling your property and possibly make a 1031 exchange into a passive replacement property.
Sign 1: Your State/Local Landlord Regulations Have Become Intolerable
Oregon and California recently became the first two states to impose statewide rent-control legislation. Not only do these laws cap annual rent increases, but they also impose onerous requirements for removing tenants after 12 months of occupancy.
If you feel like your state or local governments are adversarial to your interests as a rental housing annual provider, you are not alone.
RECENTLY IMPOSED STATE/LOCAL REGULATIONS INCLUDE:
✓ Screening limitations or prohibitions
✓ Security deposit restrictions
✓ Seasonal eviction moratoriums
✓ Late-fee limitations
✓ Forced relocation assistance
✓ Complicated notice and eviction procedures
Sign 2: Your Risk of Legal Liability Has Exceeded Your Comfort Zone
When you own rental real estate, you expose yourself—and your assets—to a whole new world of potential legal liability. In addition to the dozen ways a rental housing provider can trip over federal fair housing laws and local landlord regulations, state premises liability can be devastating.
Courts in California effectively presume that an injury was the result of a breach of duty and shift the burden to the property owner to prove otherwise. This stems from the California Supreme Court’s view that regardless of actual fault, “liability should often be imposed on the party, often a business, most able to implement steps that promote social welfare by enhancing safety, spreading the risk of loss and ensuring compensation.”
In other words, some courts promote the notion that you should pay for more than your fair share of injuries occurring on your property simply because you have more money than your tenants or their customers.
If you are tired of worrying about being sued in a pro-plaintiff state, you may be ready for a “change of venue.”
Sign 3: Demographic Trends May Not Be Positive for Your Area
DEMOGRAPHIC/ECONOMIC FACTORS DRIVING RENTAL PROPERTY PERFORMANCE:
✓ Positive migration
✓ Overall population growth
✓ Job growth
✓ Supply of rental housing relative to demand
Differences in economic prospects and cost of living can drive migratory behavior. Such differences, in turn, reflect differences in tax policies, business friendliness and right-to-work policies.
Click here to see an example of how disparities in living costs impact interstate mobility.
If you live in a state whose employers are leaving (and whose employees are following), you may not be able to count on past patterns of upward population growth.
Sign 4: Your Yield on Equity is TOO LOW
Over the last 12 years, many rental housing providers on the West Coast have watched their equity increase much faster than their rental income. This is particularly true for landlords whose property was once an owner-occupied property, such as an SFR, condo or townhouse. In these examples, prices are driven by the supply/demand for single-family properties, rather than multifamily cap rates.
Twelve years ago, you may have purchased a property with an 8% yield on equity (aka cash-on-cash yield) and today the same property may only generate a 2% yield. Why would you continue to accept such a low cash flow while bearing all of the risks and burdens of individual property ownership?
If you feel your current net cash yield—as a percentage of your property’s equity—is too low, you should consider relocating your equity to a market with potentially higher yields.
Sign 5: The Burdens of Operating Your Property are Affecting Your Life
Sometimes, enough is enough. Younger landlords simply have more energy to cope with the trials and tribulations of property ownership than the older versions of themselves. And sometimes, the wrong property manager simply exacerbates the problem.
Whether your hot button is problem tenants, overwhelming bills/accounting, unending property maintenance or looming capital expenditures, you may be ready to “tap out.”
You are in good company. Each year, thousands of people make the transition from active operators to passive investors. There are multiple options for investing in real estate without the weekly headaches of self-managed rental properties.
RICHARD D. GANN, JD
Managing Partner
1031 Capital Solutions
(800) 445-5908
1031CapitalSolutions.com
Richard (Rick) Gann is an attorney, licensed real-estate broker, and general securities principal
specializing in 1031 exchange solutions and he is co-author of the book How to Retire from Being
a Landlord.
Want to read about our experience with our 1031 exchange?
Recently, we decided to sell farmland in one state and exchange it for a 4-plex multifamily complex in a different state, neither state of which we resided in. Having never done this before, we thought our readers might like to know what our first experience with a 1031 exchange as rental property owners entailed. Where we gained insight and learned a lot, it certainly was not an easy task. Would we do it again? Click HERE to read about our experience to find out and determine if a 1031 exchange is right for you.
Prefer to listen to what we have to say about our 1031 exchange? Listen to our podcast!
Click HERE to listen🎙️
By: Spark Rental
You’ve probably seen condemned signs on houses. But how do properties become condemned, and what do you need to know as a buyer or seller?
There is likely a condemned house somewhere in the neighborhood you live in. Some are so far gone that demolition is the only answer, while others just need some good TLC (and a solid investment) to bring value to their owner. Here’s what happens when a house is condemned, and what it could mean in terms of buying, selling or simply owning that property.
What Is The Definition Of Condemnation In Real Estate?
A property is considered condemned when a government entity deems it unsafe or no longer fit to live in. Once a home is condemned, it may not be inhabited again until it has been rehabilitated and inspected, if that’s even possible.
In many cases, condemning a home does not necessarily mean it is a lost cause forever. Whether or not you can un-condemn a property depends on why it was condemned in the first place.
What Are Grounds for House Condemnation?
Most condemned homes are only condemned after they have already been abandoned and the owners or residents stop maintaining the property.
According to the US Department of Housing and Urban Development (HUD), there are currently more than 10 million abandoned residences in our country. Many of these will be well on their way to being condemned if no one steps up to maintain their care.
Regulations can vary based on municipality. Generally, a home may be condemned if:
- The house has been abandoned for an extended period of time; in some cases (and depending on the condition of the property), this could be as few as 180 days.
- It is dilapidated and/or deteriorated to the point where it’s no longer structurally sound.
- It is considered unsafe or unsanitary.
- The house does not have adequate utilities, such as power, water, electricity and/or sewer.
If a home is condemned, it is no longer legally habitable. If the problems are not fixed within a specified period of time usually stated on the condemned house notice, the home’s occupants will need to move out.
A home can also be considered condemned when eminent domain powers are exercised. This means a perfectly safe home may be forcibly acquired and modified — or in some cases, even destroyed — simply because of its location.
In cases of eminent domain, public authorities seize private property, such as a home and land, if it is in an area that is to be used for certain public projects. That means if your state wants to build a highway or airport through your backyard and you don’t want to sell, they can still condemn your property. (Yes, you’ll be compensated.)
How Long Does It Take to Condemn a House?
The length of time necessary to condemn a home depends heavily on its condition and why it’s being condemned. The specific regulations also vary from one municipality to the next.
Generally, the process of condemning a house or building takes time and involves notifying the owner and/or residents that the property is in violation of health and safety requirements. This often means receiving citations about the property’s violations, sometimes in a pattern lasting weeks, months or even years.
If the owner doesn’t correct the violations, the property generally goes before the courts for a formal legal hearing, at which time it may be declared condemned. The owner may then have a specified period of time, often between 30 and 60 days, to correct the violations, request new inspections, and apply for new permits before the property is declared uninhabitable.
In some cases, condemning a house can be much faster. If the property is determined to be structurally unsound, for instance, it can be condemned immediately and the residents forced to vacate with little or no notice.
How to Sell a Condemned House
If your property has been declared condemned because of code violations or lack of upkeep, you may decide that it’s not worth repairing. In this case, you can choose to sell your condemned property, though there are a few important things to keep in mind.
The first is that, generally, without making the required repairs, you will be unable to sell the condemned house as a structure. Instead, you can sell the lot the home is on, drawing in buyers who would plan to demolish or renovate the property themselves.
This is common, said Glenn Phillips, the CEO of Lake Homes Realty, a multi-state real estate brokerage based in Alabama. “We operate real estate brokerages in 33 states, and more often than not, we will see buyers purchasing a condemned home mainly for the lot. Once the sale is complete, the home is demolished and construction of their dream home begins.”
Expect a limited buyer pool for condemned properties. Buyers will have a difficult time getting a mortgage lender to approve a loan for a property that contains a condemned, even as a fixer-upper. Instead, you may have better luck selling to a buyer with cash or an investor who has the backing of a hard money lender.
There are also a number of companies that buy homes , often “in any condition.” Depending on the location and value of your land, you may get a fair offer even with a condemned house still on the property.
Buying a Condemned House
If you are simply looking to demolish the structure and build on the land, your biggest hurdle will be finding a lender. If possible, buy the property in cash. You can also borrow from a hard money lender like Kiavi or LendingOne, but you’ll still need to come up with a down payment.
If you’re looking to rehabilitate the home — either to live there yourself or even flip the house — you’ll want to do your due diligence and determine what you can afford.
Once a home is condemned, there are added steps in order to facilitate a purchase. For instance, if the property was condemned because of safety violations, you work with a code enforcement entity when making your offer. If the property was foreclosed on, you deal with a bank rather than an owner.
In this case, having a good real estate agent on your side can be very valuable.
Additionally, many lenders will only approve a mortgage based on the value of the property as it stands. This means that the land value and the condemned structure’s current value are factored in, but you may need significantly more money in order to actually demolish or renovate the property.
Having a partner investor or working with a hard money lender can be a good way to purchase the property and also have the cash necessary to complete your project.
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Where to Find Condemned Properties for Sale
Was the property eventually condemned because it was abandoned, or was the property abandoned because it was declared condemned?
No matter which came first, condemned and abandoned homes frequently find themselves on the path to bank foreclosure. And once these properties are foreclosed on, it can be easy to locate and move toward purchasing them.
You can also check with your city or county to see if they keep a list, or even a website, with local condemned homes. These condemned house lists can give you a great place to start looking if you’re interested in buying a condemned and abandoned property.
Your area may also hold auctions for abandoned and condemned properties; your county clerk may be able to direct you if such auctions exist in your town or county. These auctions can be a good opportunity to find a good deal on a property, though they may only be held periodically.
Lastly, if you come across a home that appears to be abandoned or has been declared condemned, one option is to contact the owner about purchasing the property. You can often reverse-search addresses through your county tax assessor’s office, which will give you information about the owner of the home. Then, you can contact them directly to see if they’re interested in selling and how much they’re willing to take.
Can You Fix a Condemned House?
A condemned home may initially seem doomed, that its only future involves demolition. However, you can often fix a condemned house and restore it to a beautiful property.
“The main benefit of buying a condemned home is the value,” Phillips said. “While some people will perceive very little value in many of these properties, they often have the bones necessary to create a wonderful home. Often, architectural elements from condemned structures can be saved and incorporated into an updated home.”
A home’s condemned status can be reversed, as long as the reasons it was condemned in the first place are corrected. If the home was condemned because of code and safety violations, that usually requires a significant investment into the property to bring it up to date.
The issues could be serious and structural in nature, or something as simple as electrical wiring. Be sure to get copies of the original condemned orders as well as a trusted home inspection before you buy, so you know what you are getting yourself (and your bank account) into.
Once you complete any necessary repairs, you need to request inspections from local authorities. If the renovated property passes those inspections, the condemned status can be reversed.
But does a stigma remain attached to those once-condemned homes, even years later?
“After a home has been renovated or replaced with a better version of itself, the stigma goes away and the homeowners will have a house they love,” Phillips said.
Final Thoughts on Buying and Selling a Condemned House
While many of us think of boarded-up eyesores when we hear “condemned home,” the truth is homes can be condemned for many reasons.
Whether you’re looking to sell a condemned property, build on a lot with a condemned home or plan to renovate a previously condemned house, it’s important to go into negotiations knowing what sort of value the property retains and how expensive your project will be. Buying or selling these properties may involve jumping through a few hoops, but the value that can be found in a condemned lot can be well worth the extra work.
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If you’re at all interested in multifamily real estate investment, then there are two words you need to learn right now: house hacking.
What does it mean to hack a house? The definition is simple: buy a residential multifamily (4 units or less) with strong cash flow numbers, live in one of the units, and rent out the rest.
New investors are discovering house hacking as the best way to get started in real estate investment. In this post, I’m going to share three big reasons why that’s the case.
Ease of Financing
One of the benefits of multifamily investing, in general, is economy of scale. One transaction gets you multiple income-producing units. As a result, per-unit acquisition costs on multifamily properties are typically much lower than single families. From a cash-on-cash perspective, that’s terrific news.
Economy of scale matters for financing, too. Especially with new investors, lenders like to see a property with multiple streams of income. They want to know you’ll have enough cash flow to keep paying the note even if a tenant disappears on you.
On top of that, lenders will typically count 75% of the income from those additional units in your favor. That added income will help you qualify for higher dollar amount than you could on a single-family property.
Scale isn’t the only thing that makes financing a house hack easier than a commercial multifamily. Thanks to FHA, residential investors can take advantage of loan products with significantly lower down payment requirements and better rates than the alternatives.
A Smarter Way to Pay for Housing
Consider the following scenario:
You’ve got a decision to make: buy and live in a single-family or a duplex. You’ve only got 5% to put down, so you’re going for an FHA rather than a conventional mortgage.
Let’s take the single-family first. You find a house you love for $300,000 and put 5% down on a 30-year loan at 4% interest. Assuming a tax rate of 1.5% and insurance at $2000/yr., that’d put your monthly payment at about $2,000/month. You might decide to rent out a room or two. If not, that $2,000 is entirely on you.
Now, let’s imagine you choose a duplex instead at the same price point, down payment, and loan terms. Let’s put the rent at $1,250 (about the national average for a 2-bedroom). Congratulations. You’ve effectively lowered your monthly housing obligation to $750. Not bad.
Take that scenario a step further and imagine you went with a triplex instead of the duplex. Assuming the units you choose to rent are both 2-bedrooms, that puts your monthly gross income at $2,500. Now you’ve got a $500 surplus at the end of the month to plow into expenses, capital improvements, and so on.
This isn’t pie in the sky math. This is how house hacking works.
Of course, you’re going to have to trade off some things in the process—a bedroom or two, yard space, parking, etc. But this is just the beginning of your investment journey, not the end. Just a few years in a hacked plex will prepare you to move into the single-family of your dreams soon enough.
Learn on the Job
“Passive income” is a paradox. It doesn’t just happen; it takes years of hard work to establish a portfolio and a system that’ll put real money in your bank account every month without you having to handle the day-to-day.
One of the hardest parts of that early journey is learning to manage property. Nobody’s born with a filled-out property management toolkit. It takes time to build up the business sense and emotional intelligence needed to handle people and properties well.
The question is: where are you going to get that experience?
House hacking answers that question in the least intimidating way possible. When you hack a plex, you become your property’s on-site manager. From a tactical standpoint, that puts everything within arm’s reach. It’s much easier to manage a property from next door than from the next state over.
From an experiential standpoint, you get hands-on experience as a landlord: marketing property, showing units, screening tenants, writing leases, collecting rent, and fielding maintenance calls. You’ll outsource these things soon enough, but it’s always better that you understand these basic mechanics before you hand them off to someone else.
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There’s no better way to learn this business than to immerse yourself in it. House hacking literally accomplishes just that. If you want to build a massive commercial portfolio someday, then that’s fantastic.
Source: Rod Khleif
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In this episode of “Your Landlord Resource,” we do a deep dive into the world of risk management for rental property owners. We cover a broad spectrum of topics to help you feel more confident and professional in operating your rental property business. From the very start, we emphasize the importance of knowing your numbers, with a focus on financial metrics like cash flow, cap rate, and more. We discuss the significance of cash reserves and how they can save you from unexpected expenses.
When it comes to property-related risks, we talk about the importance of insurance, including rental property insurance, umbrella insurance, and rent default insurance. These policies can help safeguard your investments and protect you from unexpected liabilities. We also discuss the value of regular property inspections and preventative maintenance to minimize potential issues.
When it comes to tenant-related risks, we explore tenant screening, lease agreements, and tenant retention strategies. Communicating effectively with your tenants, setting clear boundaries, and using incentives to encourage lease renewals can significantly reduce risks associated with tenant turnover. Lastly, we touch on the importance of setting up your rental property business with the right legal structure, such as an LLC, to protect your personal assets.
Remember, managing rental properties can be a rewarding journey, but it requires proper risk management. Join us in this episode to master the art of reducing and mitigating risks, ensuring a safer and more profitable landlording experience.
LINKS
👉 Our FREE 10-Page Guide on Placing Your Ideal Tenant
Learn several of the tips we use to place tenants who pay rent on time, respect your property, and follow the policies you have set.
Our FREE 10-page guide includes:
- Creating Qualifying Standards/Policies
- Understanding Marketing for your unit
- The Application Process
- Performing Background Checks
- Handing Over the Keys/Move-In
👉 Podcast Episodes:
Episode 4: The Importance of Rental Property Inspections
Episode 16: Is Holding Your Rental Properties in an LLC Right for You?
Episode 20: Part 1: The Nuts and Bolts of Residential Rental Property Insurance
Episode 21: Rental Property Insurance Part 2, Interview with Ryan Bravo
Episode 28: The Cash Reserves Blueprint: Protecting & Expanding Your Portfolio
Episode 32: Our Lease and Addendum Breakdown, A 3-Part Masterclass, Part 1
Episode 33: Our Lease and Addendum Breakdown, A 3-Part Masterclass, Part 2
Episode 34: Our Lease and Addendum Breakdown, A 3-Part Masterclass, Part 3
👉 Toggle Renters Insurance
Your Landlord Resource has teamed up with Toggle, a division of Farmers Insurance that offers competitive pricing of renters insurance for tenants.
Policies can start as low as $5 a month!
Copy and share our link with your tenants to get them started: http://go.gettoggle.com/SH1E
Download this PDF to present to your tenants with your renters insurance request! Toggle Renters Insurance Flier.pdf
👉 Blog: Why Landlords Should Require Renters Insurance
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In this episode of “Your Landlord Resource,” we dive into the world of pet-friendly rental properties and Emotional Support Animals (ESAs). Our guest, Logan Miller of Our Pet Policy, is a real estate investor and an expert in pet management for rental property owners and he’s here to give us his insights on ESA’s and pet rules.
We explore the process of handling ESA requests, verification, and the laws surrounding ESAs. Logan sheds light on the concerning issue of fake ESA certificates available online and the potential legal consequences for doctors who misuse the system.
We also discuss the pros and cons of allowing pets in rental properties, including the importance of limiting pet breeds and sizes. Logan offers valuable insights for landlords looking to create pet policies that are both accommodating and responsible.
Join us as we equip self-managing landlords and property owners with the knowledge and confidence they need to navigate the world of pets in rental properties. If you’re seeking to make informed decisions about ESAs, pet policies, and more, this episode is a must-listen.
P.S. Logan has graciously offered our listeners 3 months free service with Our Pet Policy when you sign up and register your tenants’ pets. Listen to the episode to see how to take advantage of this opportunity.
LINKS
👉 Email your questions for our Q&A Episode!
Stacie@YourLandlordResource.com
Kevin@YourLandlordResource.com
👉 Episode 22, The Pro’s and Con’s of Renting to Pet Owners
👉 Our Pet Policy, Contact Us to set up your pet polices.
👉 Get in touch with Logan Miller, Our Pet Policy:
Our Pet Policy on Facebook
Our Pet Policy: Instagram
Landlord Tech: LinkedIn
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In a landscape that continually evolves, the U.S. Department of Housing and Urban Development (HUD) has once again brought to light an important regulation by reinstating the Discriminatory Effects Rule. This development holds far-reaching implications for those who navigate the property management sector. It not only applies to public housing providers but ALL housing providers.
This article seeks to illuminate the intricacies of this recent move by HUD, charting its trajectory and the
subsequent effects it may cast upon property management professionals.
UNDERSTANDING THE DISCRIMINATORY EFFECTS RULE
Central to the ongoing battle against housing discrimination, the Discriminatory Effects Rule emerges as a paramount framework. Its primary objective is to clarify the concept of disparate impact in the context of the Fair Housing Act. Under the purview of this rule, a policy, even when neutral on its face, can be flagged if it disproportionately hampers or affects any protected group.
In layman’s terms, the Discriminatory Effects Rule is a key tool in the fight against housing discrimination. It helps explain the idea of “disparate impact” related to the Fair Housing Act.
Basically, this rule says that even if a housing policy seems fair at first glance, it can still be considered discriminatory if it ends up hurting a specific group more than others.
According to HUD’s press release, “[The Discriminatory Effects Rule] has long been used to challenge policies that unnecessarily exclude people from housing opportunities, including zoning requirements, lending and property insurance policies, and criminal records policies.”
For example, a blanket rule that excludes anyone with a criminal record from living onsite seems fair in light of resident safety. However, this rule can have a discriminatory effect based on race, national origin, and disability. Although it is not unlawful to have a rule about criminal history, there are other ways to achieve resident safety without discriminatory effects.
For example, reviewing how long ago the crime occurred, the nature of the crime, and efforts to rehabilitate should be considered, instead of simply using a “no felons” policy.
The Discriminatory Effects Rule was initially adopted by HUD in 2013. With the turn of a new administration, the rule was recalibrated in 2020, which left some feeling that the new stance was more amenable or helpful to landlords and not so much of a protection for residents.
The new stance added new pleading requirements, new proof requirements, and new defenses that would have made it more difficult for a protected class plaintiff to start and win a disparate impact case.
So, what catalyzed the recent return to the 2013 understanding? Following the 2020 alterations, a series of litigations emerged, championed by various advocacy groups. Additionally, a federal judicial intervention halted the execution of the 2020 modifications, prompting discussions about their alignment with the foundational court case that set the initial standards.
This evaluative process subsequently led HUD to reinstate the 2013 version of the rule, deeming it more
in line with established precedents.
Navigating the maze of housing laws can be a formidable challenge. A critical takeaway is the absolute necessity for property management professionals to insulate themselves from disparate impact claims.
This demands an acute awareness and meticulous evaluation of occupancy policies and criminal history screening practices given their susceptibility to challenges.
The revival of the Discriminatory Effects Rule serves as a poignant reminder of the commitment required to eliminate housing discrimination.
With this reinstatement, property management professionals bear the onus of ensuring their operations align seamlessly with the stipulations of the rule. By recognizing the intricate dynamics of disparate impact and proactively amending any unintentional biases, they can foster an inclusive housing environment.
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CHARTING THE PATH AHEAD
As we step into the future, the onus remains squarely on property management experts to stay abreast of fair housing legislation. Periodic training and continued education become non-negotiable, ensuring preparedness and adherence. With knowledge as the guiding compass, property managers can adeptly steer clear of complaints, ensuring a compliant and inclusive housing landscape for all.
In conclusion, as housing regulations evolve, professionals in the field must remain vigilant, informed, and proactive in their approach, ensuring fairness and equality in housing opportunities.
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It seems like there are stories published every day about how expensive multifamily insurance premiums are getting. With such large increases, it might be tempting to put off updating your existing policies or even cancelling them.
But the question remains, do you want to risk not having enough coverage should there be a devastating natural disaster or massive damage to your property? Do you not want to recover losses due to theft and injury? What if an employee sues you for wrongful termination or sexual harassment?
Although it is not required by law, insurance is your protection from such catastrophes. Nothing beats excellent coverage by a reputable company when you need it the most.
But it’s getting so expensive!
One of the primary threats to multifamily investment returns is rising insurance costs. Insurance premiums for this industry have significantly increased over the last two years, dating back to early 2021 and intensifying in 2022. And the trend will continue into 2024.
Multifamily investors have reported 40-50% increases in premiums and in certain cases, insurance premiums have doubled. In addition, apartment owners are also faced with increased deductibles and self-insurance limits.
Not only are apartment owners realizing a lower net operating income, but they may also face the inability to secure financing for new investments. Higher deductibles will require larger capital reserves, forcing some property owners to sell.
What is Multifamily Insurance and why is it so important?
When buying insurance, any residence larger than a single-family home and which can accommodate more than one family is considered multifamily. Multifamily rentals often have individualized standards for risk and coverage, which can be covered with multifamily property insurance.
Multifamily insurance, sometimes known as apartment insurance, should protect you from potential liability claims, such as lawsuits, and cover you for lost rent income that you may experience after a loss covered by your insurance.
Such losses may include:
- Vandalism
- Theft
- Natural disasters, such as fires and storms
- Loss of income from rentals
- Advertising liability claims
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There are several different types of multifamily insurance:
Property Insurance
Property insurance protects against damage to the physical structure of the property.
Coverage can be obtained per building if there are multiple structures on the property where each building has its own separate coverages and deductible(s). This can be helpful for big-ticket items like mold.
Or, coverage can be obtained under a whole property policy that covers everything, regardless of the number of buildings. In either case, the actual face value of the policy will depend on the size and value of the property.
General Liability Insurance
General Liability insurance protects against claims for bodily injury and third-party property damage. For example, if a tenant is injured due to your negligence, you will be covered for damages, including medical expenses, lawyer’s fees and lost wages.
Umbrella Liability Policy
An Umbrella Liability policy is one that provides additional coverage over the stated business owner limits in order to ensure that there are no gaps in the General Liability coverage. For instance, this policy will provide coverage for acts of terrorism that may not be covered in a General Liability policy.
Business Income Coverage
When a property suffers damage that causes an interruption in the flow of normal business income, this coverage can provide protection. It can help you recover lost revenue and pay your expenses during the time it takes to repair your property and prepare it for the return of your tenants.
Based on various considerations, such as business income, sustained loss, waiting period and payroll limit, the amount of the policy may vary significantly from one property to another.
Employment Practices Liability Insurance (EPLI)
EPLI provides coverage to employers against claims made by employees alleging discrimination based on sex, race, age or disability as well as wrongful termination.
Flood Insurance
Depending on your property’s location, flood insurance may be a necessary type of coverage to consider. Standard property insurance policies typically do not cover damage caused by flooding, which can be a significant risk for multifamily properties located in flood-prone areas.
Workers’ Compensation Insurance
If you have employees working on your multifamily property, workers’ compensation insurance may be required by law in your state. This type of coverage can provide compensation for medical bills and lost wages if an employee is injured or becomes ill while on the job.
What is a small multifamily investor to do?
The small investor needs to have multifamily insurance almost more than the larger property owners who may have greater access to funds should a disaster occur. “Mom and Pop” landlords should work with their accountants to find the means to cover the needed insurance premiums.
There are economies you can take to lower your operating costs that will not affect your bottom line, such as carefully screening your potential tenants with an AAOA tenant credit check. Bad tenants will cost you in the long run with rental property damage, late rent payment, evictions, and vacancies.
The value of excellent insurance cannot be over-emphasized. This is one area where you should not shop by price. You want to choose a company that will respond quickly and work with you to get your building back to operating condition as quickly as possible.
As emphasized in Forbes, “Insurance is a must for commercial multifamily properties. The amounts and types needed are unique to the property and the market in which it is located…You should work closely with an experienced agent to determine coverages and deductibles.”
To learn more about rental property insurance for all residential types, check out our podcast, The Nuts and Bolts of Residential Rental Property Insurance.
Thank you to Spark Rental for writing this informative article
If you’re new to real estate investing—and especially as you grow your portfolio of rental properties—sooner or later you’ll be faced with a choice about how to structure your business. As an individual you can own a rental property and operate the real estate business out of your personal checking account, but that gets messy in a hurry.
Many experienced real estate investors in the United States use a limited liability company (LLC) to hold their properties and operate their businesses. Holding your real estate assets this way helps protect you from potential lawsuits from tenants and offers favorable tax treatment on your rental income.
Forming an LLC is deceptively simple, and transferring property into one takes only a few steps. But they must be done correctly and in full view of your mortgage lender, insurance provider, and of course the tax man.
Let’s review the benefits, tax implications, and pros and cons of transferring rental property to an LLC. Then, we’ll run through the step-by-step process.
- Why Real Estate Investors Love LLCs
- Tax Implications
- Federal Income Taxes
- State Business Taxes
- Transfer Taxes & Transaction Fees
- Potential Cost Triggers
- Deducting Business Expenses
- Pros and Cons of Holding Property in an LLC
- Pros of Transferring Rental Property to an LLC
- Cons of Transferring Rental Property to an LLC
- How Many Rental Properties Should I Put in 1 LLC?
- Steps to Transfer Rental Property to an LLC
- Step 1: Do Your Homework
- Step 2: Contact Your Mortgage Lender
- Step 3: Form the LLC
- Step 4: Transfer Ownership
- Step 5: Update Insurance Policies and Lease Agreements
- Final Thoughts
Why Real Estate Investors Love LLCs
A limited liability company (LLC) is a business structure that effectively creates a private business entity. This structure protects the business’ owners from personal responsibility for its debts and other liabilities.
Many small business owners and freelancers choose to form LLCs through which to conduct their business’ operations and finances. That way, if the business falls into debt or faces a legal settlement, creditors can’t come after your personal assets such as your home, car, and financial accounts. Hence the “limited liability” in limited liability company.
For real estate investors, transferring rental property to an LLC bestows some notable advantages.
To begin with, holding your rental property within an LLC shields your other personal assets from potential lawsuits or legal claims arising from your property. A litigious tenant who decides to sue the property owner will end up coming after the LLC’s assets, but your personal assets remain completely separate if you’ve set things up correctly. Yes, your LLC owns the property—maybe several properties—that could be targeted by a lawsuit seeking damages, but it won’t include your family’s home, your car, or your retirement account.
Holding rental property in an LLC also gives you tax flexibility and pass-through taxation—one of the primary benefits of an LLC over other business structures. The IRS does not recognize LLCs as separate tax entities, so income and losses pass through to your personal income tax returns. This allows real estate investors to avoid double taxation (once on the business’ income and then again on the personal income the business pays out to you). You can also write off many ordinary business expenses as deductions, while still taking the standard deduction on your personal income tax return.
Operating rental properties through an LLC ensures a clear distinction between your personal finances and the property’s financial dealings, enhancing transparency and reducing potential confusion during tax season. If you work with partners or co-owners, an LLC can formally define your property’s ownership structure and streamline ownership transitions as well.
Tax Implications
Before you jump headfirst into transferring your rental property to an LLC, you must understand the significant tax implications of the move—some good, others not so much.
Federal Income Taxes
Good news! The IRS treats LLCs as pass-through entities, meaning the income and losses from LLCs pass through to the members’ personal tax returns. Unlike with a corporation, with an LLC you don’t pay a separate federal corporate tax rate on your business profits and then get taxed again on any income you draw from the business. In other words, you pay federal income taxes on your profits as though it was direct personal income. Clean. Simple.
State Business Taxes
At the state level, the tax picture gets muddier. Like, “consult an attorney or accountant” muddier. You’ll hear this mantra a lot in the paragraphs ahead.
For starters, every state taxes businesses at a different tax rate. Because your LLC is a business, in most states you’ll pay the state’s business tax rate on your profits. It’s still generally the same or better than the personal income tax rate you’d pay to the state, but some states are much friendlier to small businesses than others. Find your state’s current marginal corporate tax rates to see what you’ll be expected to pay.
Transfer Taxes & Transaction Fees
Because LLCs are formed at the state level, each state carries its own rules and regulations for transferring property into these business structures. Many states find ways to charge upfront or ongoing fees or levy special taxes on real estate investors trying to take advantage of the benefits LLCs offer.
For example, New York imposes a real estate transfer tax of 0.4% for properties valued up to $3 million and 0.65% for properties above $3 million. Florida imposes a documentary stamp tax of $0.70 per $100 in property value when you file certain documents during this process.
Oof. When you’re talking about a piece of rental property, these small percentages can add up to a sizable expense. Make sure you know what to expect in your state.
Once again, consult an attorney or tax professional familiar with real estate regulations in your state to get a full sense of the taxes, fees, and other charges that might affect you when you transfer your property to an LLC.
Potential Cost Triggers
Transferring real estate to an LLC may trigger potential costs associated with the property technically changing hands from you (the individual) to you (the LLC member).
Transferring property to an LLC may trigger capital gains tax if the property’s value has appreciated since acquisition. And if you have claimed depreciation deductions on the property, transferring it to an LLC may result in recapturing some of those deductions.
If you plan to do a 1031 exchange in the future, transferring the property to an LLC may impact your eligibility for this strategy. Put simply, the law excludes LLC ownership interests from eligibility for 1031 exchanges.
If you’ve used other tax-saving strategies with the property in the past or you think you might want to in the future—you guessed it—consult a real estate attorney or tax professional in your state to help you fully understand the implications of moving the property into an LLC.
Deducting Business Expenses
The news isn’t all bad, though. Owning your rental property and conducting your business through an LLC allows you to deduct property expenses and ordinary business expenses from your taxable income.
It’s hard to overstate the power of being able to write off business expenses as tax deductions, especially when your business periodically involves five-figure repairs to your property. These deductions can make a huge impact on the amount of taxable income you report, and thus the taxes you owe.
For example, if you earn $50,000 of income from your rental property but have to pay $20,000 to replace a roof, your taxable income from the business for the year becomes $30,000—and your tax bill drops by thousands of dollars.
Pros and Cons of Holding Property in an LLC
Transferring rental property to an LLC has its pluses and minuses. Many real estate investors find that the benefits outweigh the headaches for them, but your mileage may vary, especially depending on your state’s tax laws.
Pros of Transferring Rental Property to an LLC
1. Personal Liability Protection: Transferring rental property to an LLC can safeguard your personal assets from potential lawsuits and claims related to the property. You never know what can happen, so holding your rental property in an LLC limits the amount of damage a potential lawsuit could do to you and the assets you’ve worked your whole life to accrue.
2. Tax Flexibility and Pass-through Taxation: LLCs offer pass-through taxation, allowing you to avoid double taxation and report rental income and expenses directly on your personal tax return. You’ll typically enjoy a more favorable tax rate on business income and have the option to deduct many everyday business expenses, lowering your overall tax burden.
3. Simplified Ownership Structure: LLCs allow for multiple owners and facilitates transfers of ownership interests if you work with co-owners or wish to sell shares of your rental business. It’s also helpful if you decide to bring on employees, such as a property manager, because the LLC can pay them rather than you paying them personally.
Cons of Transferring Rental Property to an LLC
Despite these advantages, transferring property to an LLC carries a few trade-offs and considerations worth noting before you pull the trigger.
1. Initial Costs and Taxes: Setting up an LLC involves formation costs, including state filing fees and legal expenses. The cost to file an LLC with the state is often negligible, but plan to also engage the services of a real estate attorney or accountant to help you execute a property transfer correctly. Additionally, many states charge taxes in one form or another whenever you transfer property.
2. May Invalidate Your Current Loan and Insurance Policies: Transferring your property to an LLC can invalidate the mortgage loan and owner’s title insurance policy you signed in your name. Many mortgages include a “due on sale” clause that can force you to pay the full mortgage amount immediately if you transfer the property incorrectly, so make sure you involve your lender in the process before you initiate the transfer. You’ll also need a new insurance policy in the LLC’s name. And because your brand new LLC doesn’t have the credit history you do, you may not be offered the same rates on new loans or insurance.
3. Difficulty Refinancing: Fannie Mae and Freddie Mac, the federally backed mortgage institutions, only guarantee loans issued to individuals, not to business entities. That discourages most residential mortgage lenders from working with you. You have options for financing LLC-owned rental properties, including refinancing with a commercial or portfolio lender, but these providers tend to offer less favorable rates and shorter terms lengths compared to residential mortgage lenders. Additionally, lenders may require a personal guarantee, which puts you personally on the hook to repay the loan in case of a default.
How Many Rental Properties Should I Put in 1 LLC?
There’s no one right answer to that question. You have to find a balance between liability protection versus cost and inconvenience.
You could create a new LLC for every single rental property. But those costs add up quickly, and you have to open separate bank accounts for each LLC, complete tax returns for each LLC, and so forth.
On the opposite extreme, you could create just one LLC to hold a dozen or more properties.
To strike a balance, I’ve known some real estate investors to put two to four properties in each LLC. That segments the risk to small portfolios — if you get hit with a nasty lawsuit, theoretically you contain the risk to just that small portfolio of properties.
How many properties you put into a single LLC also depends on the size of the property. If you buy inexpensive single-family rental properties, you might put a handful into a single LLC. If you buy a 20-unit apartment building, you probably want a separate LLC for it.
Find your own balance between protection, hassle, and cost.
Steps to Transfer Rental Property to an LLC
If you’ve decided this approach is right for you, great! Next we’ll walk you through how to move your investment properties into an LLC. Transferring a rental property to an LLC must be executed correctly to avoid any costly surprises. Follow these steps to make sure you don’t miss anything.
Step 1: Do Your Homework
At the risk of sounding like a broken record, before you make any decisions about how and where to establish your LLC, you should consult with a local real estate attorney and/or tax professional to understand the tax implications and for legal advice specific to your situation.
Seek professional advice to review your existing mortgages, loans, and contracts to decide whether moving your property to an LLC is the best approach for your situation and, if so, to ensure a smooth transfer to the LLC.
When choosing a state in which to form your LLC, consider factors like corporate tax rates, filing fees, and ongoing compliance requirements.
Step 2: Contact Your Mortgage Lender
Avoid the risk of tripping a due on sale clause by contacting your mortgage lender and discussing your intention to transfer the property to an LLC. They’ll let you know whether you can transfer the property title under your existing mortgage and what fees or interest rate adjustments, if any, you’ll incur.
While I’m not saying it’s a good idea, I’ve known real estate investors to create an LLC named after themselves, such as “Jim Cirigliano LLC,” in hopes that the mortgage lender simply won’t notice the subtle change in ownership. While I’ve seen it work, there’s no guarantee, and you risk the mortgage company calling the loan.
Step 3: Form the LLC
Register your LLC with the state government, usually with the Secretary of State’s office. During this process you’ll choose a unique name for your LLC and register it with the state by filling out some forms and paying a registration fee, often around $100.
Upon completion, your new LLC will receive an employee identification number (EIN), a unique ID akin to a Social Security number you’ll use to file your LLC’s taxes and open a bank account.
Remember, once you create this new business entity, you have to keep your LLC compliant by maintaining separate bank accounts from your personal finances and keeping detailed records of your business income and expenses to protect your limited liability status.
Step 4: Transfer Ownership
To move your property into your shiny new LLC, you need to obtain a deed form, which you can find online.
In most cases, if you’re transferring property you already own to an LLC you also own, you can get by with a quitclaim deed, which simply transfers ownership without making any guarantee that the title is free and clear and that you rightly own the property. If you’re working alongside partners or co-owners who might need to verify this information, you can use a warranty deed instead.
Complete these forms using your legal name and your LLC’s information exactly as registered with the state. If you have questions, a local title company can help you through any of the specifics that apply to you in your state. In some cases you might need to have a third party, such as a registered agent, sign on behalf of the LLC, and you may need to sign the paperwork in the presence of a notary.
File the paperwork with the county clerk or county recorder’s office to transfer the title and record the new deed. Congratulations, it’s official!
Step 5: Update Insurance Policies and Lease Agreements
Once the property belongs to the LLC, you need to update several stakeholders to whom this change matters.
For example, you’ll have to notify your insurance company about the transfer to the LLC and ensure that the property is adequately insured under the new legal entity. You should also update any contracts or utility accounts you have in your name to that of the LLC.
Finally, make sure to notify your tenants about the ownership change and have them sign updated lease agreements under the LLC’s name.
Final Thoughts
Transferring rental property to an LLC offers real estate investors protection for their personal property, tax flexibility, and organizational clarity. The drawbacks include potential costs and less flexibility when it comes to financing and selling the property. Unfortunately the rules vary so much from state to state that it’s impossible to cover them all here to provide a one-size-fits-all recommendation, other than to consult with a real estate attorney or accounting professional in your state who understands the tax laws that apply to you.
That said, as long as you play by the right rules, investors who successfully transition their real estate assets to an LLC enjoy many benefits that will serve you well in the long run.
We published a podcast ALL about how to determine if holding your rental property in an LLC is right for you.
Check out episode 16 to listen!
In short, due diligence in real estate means “do your homework.”
This goes beyond looking for the “perfect” property, whether for your personal residence or an investment. Due diligence means conducting thorough research to ensure the home is a good investment before you sign on the dotted line.
Millions of homes on the market today don’t live up to their promised returns. Unless you do the work to discover property faults, clouds on the title, weak real estate cash
flow, or other reasons not to buy a property, you won’t discover them until it’s too late. If you want to avoid making a bad investment, learn how to do your due diligence.
So how do you do due diligence when buying a house? Keep all of the following in mind before shelling out hundreds of thousands on your next home or investment property.
What is Due Diligence in Real Estate?
You already know the basics of due diligence in real estate: bringing in experts to conduct the appraisal and home inspection. Both reports reveal crucial information about the home you need – its current market value and condition, respectively. If a home isn’t worth as much as you bid, it’s time to renegotiate the contract or walk away.
If the property comes with greater repair problems than you knew, you can of course also negotiate a lower home price, or pull out if you included a real estate offer contingency. In this case you also have a third option: ask the seller to pay for the repairs.
As long as you included a real estate offer contingency, your earnest money deposit is protected during the due diligence period. Wait beyond this period however, and you risk your earnest money.
But the home inspection and appraisal only represent the tip of the iceberg. There is much more to due diligence in property investing.
How Do You Do Due Diligence in Real Estate?
Due diligence is a broad term. It encompasses the vast amount of homework you have before buying a home. Here are the most common steps:
Research the Neighborhood
When you buy a home, you buy the neighborhood along with it.
Find out the local crime rates, the area’s noise level at all times of day, and the area’s demographics (young families, older couples, income levels, etc.). For rental properties, gauge the demand in the area by researching the vacancy rate.
Which will also help you calculate the property’s cash flow, if you’re buying a rental.
Calculate Cash Flow & Returns
Before making an offer, you should know the precise real estate cash flow you can expect to earn on the property.
That starts with pinpointing the market rent for the property. Research rental listings on websites like Craigslist, Trulia, and Zillow.
Then you can estimate expenses to calculate the rental property’s cash flow. These include, but aren’t limited to:
- Vacancy rate
- Property management costs (even if you plan to self-manage – they still represent labor costs!)
- Repairs & maintenance
- Property taxes
- Property insurance
- Rent default insurance
- Monthly mortgage payment
- Travel, bookkeeping, accounting, legal, and other miscellaneous expenses
Note that property taxes could jump up after you purchase, based on the new purchase price amount.
Review Property Loan Options
You may have many financing options when investing in real estate. Compare rental property loan terms here.
Determine the options at your disposal based on your credit score, down payment (LTV), and the programs available in the area. Finding proper financing is a large part of due diligence in property investing.
Financing directly impacts your rental cash flow and returns, so invest the time to develop relationships with several lenders.
Pay for a Home Inspection
This is one of the most important components of due diligence in real estate. A professional home inspector peers under the hood at every component in the property, including foundation issues, problems in the mechanical systems like HVAC and plumbing, inadequate roofing, and termite infestation/damage.
Also consider tests for lead paint, radon, asbestos, and mold if you have any reason to believe there’s a risk. You need to know before buying, not after.
As a final thought, attend the home inspection if you can. Ask probing questions and get a sense for the red flags the home inspector looks for, to improve your own eye for problems in the future.
Buy Title Insurance
A title search determines if there are any ownership defects in the chain of title. In other words, can someone come and claim ownership that you weren’t aware of when you buy the home? Undisclosed heirs, contested property lines, and easements on the property can all cost you enormous sums, headaches, and possibly heartache.
A title search also uncovers any unpaid contractor’s liens or other financial liabilities that transfer with the property. In other words, if you buy a home with a lien, the lien becomes your debt. You don’t want any surprises after buying, and to protect yourself spend the few hundred bucks to buy title insurance.
Get an Appraisal
If you need financing to buy the property, lenders require an appraisal. Even if you plan to buy with cash, pay for an appraisal. The inspector tells you in-depth what’s wrong with the home. He doesn’t discuss the home’s value – that’s the appraiser’s job.
An appraiser does a high-level property inspection. But he also looks at the property and lot size, location, and the home’s condition. The appraiser takes note of any upgrades and compares the home to the area’s most recently sold comparable homes. It helps ensure you don’t overpay for the property.
Evaluate the Homeowners Association
Whether the home purchase is for your primary use or an investment, know the HOA rules. Can you rent the property out? How many units can you own?
Also, evaluate what the HOA requires. Get into the nitty-gritty details. Can you paint the condo? How many cars may park at the condo? What property changes require HOA approval?
Finally, evaluate the HOA’s finances. Look closely at reserve funds, the association’s budget, and how often they assess special assessments. Is the association often subjected to litigation or do they have any pending litigation right now?
These fees can wreak havoc on your cash flow.
Confirm Flood Risk
Properties in a flood plain require special flood insurance, adding to your annual ownership costs.
If you take out a mortgage or rental property loan to buy the property, the lender will run a flood search, but you should know the answer before then. Ask the seller, and consider running your own flood search. Leave yourself a real estate contingency to renegotiate pricing if you discover the property needs flood insurance.
Price Out Insurance
Flood insurance isn’t your only potential insurance premium. You’ll need homeowner’s or landlord’s insurance to protect the property itself from fire, storm, and other types of damage.
If you’re buying a rental property, also consider buying rent default insurance. If the tenants stop paying, the insurance company pays the rent until you finish the eviction process and replace them with a paying tenant.
Insurance costs factor into your ROI, so evaluate it carefully.
These represent the basic (and most common due diligence steps). If there’s anything else that concerns you, of course, look into the situation before committing to buy the home.
Screen Inherited Tenants
When you buy a rental property already occupied by tenants, you need to screen them as if they were submitting a rental application for the first time.
Start by requesting copies of the rent roll to review their payment history. But keep in mind that unscrupulous sellers may not provide an accurate rent payment history, so return to the source and request copies of the original tenant screening reports.
Credit reports, eviction history reports, criminal background checks, identity verification, and personal references are all key factors in the tenant screening process. Even if potential tenants have excellent credit, that doesn’t mean they make great tenants. How do you know they’ll take care of the property, treat the neighbors with respect, or not leave you with a vacant and destroyed property?
The last place you want to find yourself is locked in a year-long legal battle trying to remove professional tenants, who may well damage the property out of sheer spite.
Tenant due diligence is an essential part of the real estate investment process, when you buy a property with inherited tenants.
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Is a Turnkey Property Worth It?
In your search for real estate properties, you may come across several turnkey properties or rent-ready properties with no work necessary on your end.
Should you buy a property sight unseen? As with any property, do your due diligence in property investing first. Look at the basics – the home inspection, title report, and appraisal. Then consider the rental possibilities (financially and physically speaking). Don’t overlook the pros and cons of turnkey properties, especially any long-distance properties you may consider.
Can a Buyer Back out After the Due Diligence Period?
Each state has different due diligence periods. Know how long you get and if you need more time, don’t be afraid to negotiate with the seller. While the law is the law, there are ways you can ask for more time if something isn’t adding up or you ran out of time.
Once the period ends, you have limited options. Can you back out? Yes. But will you keep your earnest money? Probably not.
Unless you have contingencies in your real estate contract that give you more time to back out of the contract, you’re stuck. If you back out after the due diligence period and without a valid contingency, you give up your earnest money. The seller keeps the funds to make up for the time and money lost while taking the property off the market.
Doing Due Diligence in Property Investing Makes the BRRRR Process Possible
Are you a serious property investor? If so, you likely want to include the BRRRR process in your strategies – buy, renovate, rent, refinance, and repeat.
This tried-and-true real estate concept helps you grow your real estate portfolio quickly. Essentially, you get your down payment back quickly, which opens up the possibilities to buy another property and BRRRR all over again.
Due diligence in real estate is the smartest way to invest. With the right steps, you know all aspects of the property, its finances, and whether it’s a good investment. While no process is fool-proof and there’s always a ‘lemon’ in the group, using the right steps limits the bad investments and increases your chances of a profitable real estate investment.
Final Thoughts on Due Diligence in Real Estate
When you buy an asset worth hundreds of thousands of dollars, you can’t afford to make mistakes.
Do your homework before committing your hard-earned cash. Get it right, and you’ll never make a bad investment again.
Want to know more about how to handle inherited tenants? We did a podcast ALLLL about this subject! Click Image to listen👇
