\n
Ashley:
This is Real Estate Rookie, episode 274. You can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you\u2019re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. My name is Ashley Kehr and I\u2019m here with my co-host, Tony Robinson.<\/p>\n
Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today\u2019s episode by shouting out someone by the username of NaftaliB and Naftali said, \u201cGreat show. Thank you, Ashley and Tony. I really enjoy listening to the Rookie Podcast. You guys provide so many great tips and insights and provide a true path for rookies to start investing in real estate. Keep those episodes coming.\u201d For those of you that are listening that are part of the Rookie audience, if you haven\u2019t yet left us an honest rating and review, it would mean the world to us if you took a few moments to do that. The more reviews we get, more folks we can help and helping folks is what we love doing here. Isn\u2019t that right, Ashley?<\/p>\n
Ashley:
Yes. Yes. Today we have a great rookie reply episode. Don\u2019t forget, you can leave us a question in the Real Estate Rookie Facebook group and we may answer it on the show for you today. We talk about an estoppel agreement, which is \u2026 And also about lease agreements as to when you inherit tenants, when can you actually raise the rent? We go into getting a pre-approved for a loan, when is a good time to get a pre-approved when before you\u2019re thinking of buying? Then also, another very common question that we get, LLC or putting a property in your personal name, which we break it all down for you.<\/p>\n
Tony:
All right, so the first question today comes from Simon Woznika and Simon\u2019s question is, \u201cHi all. I\u2019m going to rent out my first rental property soon and I was wondering if I should go with property management or do I just rent it out to someone myself? What would you recommend? How much of the income would such a company usually take? What would they do that I couldn\u2019t do myself?\u201d Simon, this is a fantastic question and I think that a lot of new investors probably go back and forth on this same idea, the same kind of challenge as well. When it comes down to property management, there\u2019s really three things that I consider. It\u2019s time, it\u2019s desire, and it\u2019s ability. Okay? First you got to ask yourself, do you have the time to manage a property on your own? If you have a super busy W2 job and maybe a bunch of family commitments or community commitments and you just can\u2019t fathom trying to eek out another however much time you need to manage your property, then maybe hiring a property manager makes sense.
Second is ability. Do you have the skills to manage? Essentially it\u2019s like an ongoing project that you\u2019re managing, right? Like taking in maintenance requests from your tenants and making sure those get completed in a timely fashion. If there\u2019s payment issues, that you\u2019re managing that, that you\u2019re staying on top of the leases, and there\u2019s a lot that goes into being an effective property manager and you have to ask yourself, do your abilities line up with what it would take to be a successful property manager? Then the last piece is desire. Do you actually want to do all of those things? Or even if you have the time, even if you have the ability, do you actually have the desire to do those things on a daily basis? Because if you don\u2019t, it can really take the fun out of being a real estate investor if you\u2019re forcing yourself into this box of activities that you don\u2019t thoroughly enjoy. The first thing I will look at, Simon, is time, ability, and then desire. Ashley, I know you\u2019ve got a lot of thoughts on long-term property rental management. What do you have for Simon?<\/p>\n
Ashley:
I think the biggest thing is make sure that you can what the fair housing laws are, the rules and regulations, the laws in your area, in your market, because that\u2019s where you can get into the most trouble. First of all, do you want to pay for the convenience of having somebody take over your whole property? The thing to remember though is even if you hire a property management company, that does not mean you are automatically a passive investor. You\u2019ll have to do some asset management too, such as going through your owner\u2019s reports every month and seeing what you\u2019ve been charged for, what\u2019s going on with your property, if tenants aren\u2019t paying or late fees being collected, things like that, and just overseeing your property management company. Take that into consideration if you\u2019re looking to be completely passive or just you might as well do the work yourselves. Think about that too.
I recommend exactly what Tony said, think about how much time you have that you can actually put into it. I did start out self-managing and it worked great until I got overwhelmed and I just didn\u2019t want to do it anymore. I think look into if you can build out the systems and processes that can help you move it slowly and definitely focus on those in the beginning. For that first property, document everything, make every checklist you can. As you keep adding properties, it\u2019s just a smooth process and doesn\u2019t cause any more headaches or any kind of bottlenecks to your property management company that you\u2019re using for yourself for self-managing. The income that a property management company usually takes, if you have a big portfolio, you can usually get a discount on that, but for somebody that only has one or two, the most common I am seeing right now is around 10%.
Then there are always additional fees. Ask what those fees are upfront and make sure that you\u2019re adding those fees in so it\u2019s not just 10% is what they\u2019re taking out every month. You can look and see if they require you to do a yearly inspection where they charge you maybe $150 to go through the unit and just being proactive about it, but it\u2019s maybe a requirement that they have that you do this inspection on your properties, things like that. Look into any other type of fee that they may have and then run your numbers based off of that. Even if you decide that you are going to self-manage right now, when you are running your numbers, when you are analyzing a deal, put in the property management numbers, put those in so that if any time you decide that you no longer want to self-manage, you can make sure that the deal still makes sense to you.<\/p>\n
Tony:
Ashley, so a couple things you mentioned like learning laws, I think that\u2019s a super important thing, especially for newer investors because, and even more so if you\u2019re investing not in your own backyard. If you\u2019re going out of state, you definitely want to make sure you have a good understanding of that. Talking with either other local property management companies or real estate attorneys and that specific market who can tell you, \u201cHey, what are the things I need to do as a landlord to be compliant in the city?\u201d There is I think another benefit to potentially hiring, Simon, a property management company for your first property, even if you don\u2019t plan to use them long term. What you do is if you hire them, you now have an inside look at how a professional would manage those properties and say you use them for six months to a year, whatever it is, during that time period, your goal isn\u2019t just to pay them so that you\u2019re hands off, your goal is to understand what their systems and processes are so you can essentially copy and paste those into your own business once you get things up and running yourself.
How do they handle rent collection? What do they do if there\u2019s a lease violation? How do they handle late payments? What if there\u2019s disputes between people who are \u2026 If you have a multi-family, between the person in unit A and the person in unit B, how do they handle renewing the leases? There\u2019s so many nuances that go into managing and property and if you can see how a professional handles those things, when you go off to get that second property. Now maybe instead of hiring that property manager, you can take all the system and processes you learn from that first property and apply them to the second one. I do think, Simon, that for a new investor sometimes there is value in paying that 10% or whatever it is so that you can get indoctrinated into the right way to manage a property.<\/p>\n
Ashley:
Then kind of the last question, what would they do that I couldn\u2019t do myself? For that question I think really the resources that they have available that you may not, and just the convenience. Do you want to receive phone calls or messages or do you want to have to call a vendor or find a vendor? Do you have a list of resources that you can go to if their toilet is plugged? Do you have a plumber that you can call that would get there in a timely manner? Things like that. That can be a huge resource and convenience that they can offer, than you can. Also the fact that they have the systeming tools built in place to list your property for rent on a ton of different websites and maybe just not Facebook Marketplace, like you would be able to do.
Software in place to make it easy for your tenants. I 100% definitely think that you can get the software in place and set up all these things a property management company has. And it\u2019s more, I think the real resource and benefit property management company is the convenience and just hopefully less headaches by having them deal with it and just that they\u2019re professional and they know how to handle certain situations, and then just the resources and the people they have in their network to help you with your property to perform even better.<\/p>\n
Tony:
But I think, and you touched on this a little bit already, Ashley, but just because you are hiring that property manager doesn\u2019t mean you become completely hands off and there still is a level of involvement you need to have. I think the only true time that you can be a passive, passive investor is if you are either a private money lender for someone else\u2019s rehab or project or if you\u2019re passively investing into a syndication. Those are the two times where literally all you\u2019re doing is putting up your money and then a few months or maybe a few years, if it\u2019s a syndication, you get all your money back with a nice big fat return. But every other form of real estate investing, whether it\u2019s long term, short term, whatever else it is, you need to have some level of active involvement to make sure that that property is profitable.
All right, so question number two comes from Joaquin Hara and Joaquin\u2019s question is, \u201cWhen you purchase a property with a tenant already in the middle of their lease, can you increase their rent or do you have to wait until their lease is up?\u201d Ashley, you love to talk about the estoppel agreement and how that impacts landlords who are buying properties that already have tenants in place. Just for those of you that were confused like me, if you want to know how to spell that, it\u2019s E-S-T-O-P-P-L. Look up the word estoppel. Ash, you want to break down kind of what that is and as a landlord, how you have to kind of abide by the leases that are already in place?<\/p>\n
Ashley:
Yeah, so an estoppel agreement is given to a tenant. Usually I prefer to give it before the tenant or before you purchase the property, so before you close on it, but you can give it to the tenant after you close on the property too, if the previous owner doesn\u2019t want to, they don\u2019t want anybody to know they\u2019re selling or something like that. But really it\u2019s to verify everything in their lease agreement. You definitely want to do this before you close when there are no leases in place and it\u2019s just the owner telling you, \u201cOh, they pay me $400 a month in cash\u201d or, \u201cThey don\u2019t have a lease agreement month to month.\u201d You want to make sure the tenant is on the same page of that verbal agreement and the tenant isn\u2019t all of a sudden going to come out with a lease agreement saying, \u201cNo, I actually only paid $300 per month. I don\u2019t know why he told you 400. Here\u2019s the signed copy of the lease agreement that he gave me.\u201d
That\u2019s definitely one way to protect yourself is having them fill out, you get all their contact information. It\u2019s really just to verify that everything in the lease agreement is the same, that the owner and the tenant is saying. You can ask who owns the appliances, who\u2019s paying the utilities? Because even though there\u2019s something in a lease agreement, it doesn\u2019t always mean that both parties are agreeing to the lease agreement. Maybe it says in a lease agreement no pets, but the tenant has a dog in there and the owner just doesn\u2019t know or anything like that. It\u2019s just a way to find out some information that\u2019s about what\u2019s going on in the actual unit and about your tenant and really helps you run your numbers too, because I also always ask, \u201cAre there any repairs that are needed inside of your unit?\u201d<\/p>\n
Tony:
Yeah, but I think we can probably say this is a blanket statement. Obviously Ash, I haven\u2019t invested in every state in the United States, but I want to say most states probably have some type of protection that says if you purchase a property where there\u2019s already a lease in place, you cannot just tell that tenant, \u201cHey, because I\u2019m the new owner, your rent is going up by $500 per month.\u201d There are usually some sort of protections in place for tenants to say if there\u2019s a legally binding document that\u2019s already in place as the new owner, you have to honor that existing agreement and can\u2019t just jack up the prices on the tenants that are already there.<\/p>\n
Ashley:
Yeah, and so make sure you\u2019re finding out when that lease agreement is up before you close on the property so that you know how long you\u2019re stuck into the lease agreement of them paying that maybe below market rent, but make sure you know, too, your local laws as to how much notice you have to give them before their lease is up to actually increase the rent. In New York State, it\u2019s kind of like a step up period. If they\u2019ve lived there for less than a year, then it\u2019s 30 days notice. If they\u2019ve lived there for more than a year up to I think two years maybe or something like that, it\u2019s 60 days and then over two years it\u2019s 90 days. Make sure you know how much notice, because you also don\u2019t want it to get into the situation where you don\u2019t give them enough notice and now you\u2019re having to wait even longer after the lease term is up.
I think one more thing to notice too is that you can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you\u2019re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. Just don\u2019t think that there\u2019s no negotiation that you can, if you both mutually agree to break the terms of the contract, then go ahead and you can go ahead and do that. It\u2019s not like you have to stay into that lease agreement if you both want to mutually get out of that lease agreement too, or to change the rent.<\/p>\n
Tony:
Cool. Well, let\u2019s hop to our next question. This one comes from Sarah Lima and Sarah\u2019s question is, \u201cDo you use a realtor when you buy an investment home or is there any instance where you don\u2019t? I\u2019m new, no realtor type education and I\u2019m looking at buying from a wholesaler but not sure how to do this. Do I contact a realtor and then all three of us work together?\u201d Sarah, yeah, I think Ashley and I both have purchased real estate investments where there are no realtors involved, and you definitely don\u2019t have to use a realtor to execute a real estate transaction. If you\u2019re looking at buying from a wholesaler, oftentimes they don\u2019t have realtors involved. I can tell you how I\u2019ve done it in my home state of California and Ash can kind of give her insights on the New York side. There\u2019s some similarities but some differences.
If you are working with the wholesaler, and this is how we do it in California, typically we use escrow and title as the intermediaries to facilitate that transaction. If the wholesaler is telling you to wire funds directly to them, I would 1000% not do that. You want to make sure that all of the money that you are sending in for this deal is handled by some sort of third party. Again, typically for us in California, that\u2019s title and escrow that we work with to coordinate that. The way that our transactions usually work is if I\u2019m buying from a wholesaler, we execute our own purchase agreement. Either the wholesaler has one or our escrow company can provide one for us. And that just like you would if you were buying with a realtor, constitutes or I guess outlines all of the fee details of that transaction.
The earnest money deposit, your due diligence period, when you guys plan to close, and any other agreements or provisions that you and that wholesaler have agreed on as part of that real estate purchase agreement. You sign those documents and then when you need to submit your earnest money deposit, you\u2019re not sending that to the whole seller, you\u2019re sending that into title and escrow and they hold those funds during the escrow period. When you\u2019re actually closing the property, if you\u2019re paying with cash or maybe you have a hard money lender, those funds again get wired into escrow and then title goes through and make sure that the title\u2019s clean, that there is no encumbrances or any kind of issues with the title of the property.
And as long as the property turns out clean, escrow and title then release the funds to the wholesaler. They get paid out and then you now get your proof that it says, \u201cHey, I actually own this property. All of the paperwork is filed with the county\u201d and it\u2019s a true legal transaction. That\u2019s how we do things in California. We oftentimes purchase properties with no realtors involved. What does it look like on your end, Ashley?<\/p>\n
Ashley:
Yeah, so in New York you have to use an attorney to close a real estate transaction. I just hire an attorney like you would even if you are going through a real estate agent. The attorney, most likely if you\u2019re using an attorney that\u2019s knowledgeable in real estate closings, which you should, they will be able to guide you, walk you through the whole process. It\u2019s fairly easy. They\u2019ll drop the contract for you and then you can send it to the seller. Once it\u2019s signed, you send it back to your attorney and then they pretty much handle the closing from there, they\u2019ll work with the seller\u2019s attorney to facilitate the whole closing. They work directly with the title company. I\u2019ve never had to speak or talk to a title company before, which maybe it slows down the process, maybe it speeds up the process. I don\u2019t know.
But I do know closings take a lot longer in New York than they do in other parts of the country. Yeah, I recommend hiring an attorney. Even if your state doesn\u2019t require one, you can hire someone from the title company or an attorney, but somebody to help you facilitate. But you can also hire a real estate agent and just say, \u201cHey, can you just help me? I\u2019ve already got my offer accepted. I need a contract drew up. Can I pay you a flat fee to just draw up this contract for me?\u201d That\u2019s one option that you could do, too.<\/p>\n
Tony:
Awesome. Let\u2019s jump down to the next question here. This one comes from Carl Anthony and Carl\u2019s question is, \u201cHow do you decide what hard money lender to use? Is there some kind of \u2018Yelp\u2019 or review system somewhere?\u201d Carl, I am so glad you asked. If you go to the Bigger Pockets website and Under Network, one of the drop-downs is Hard Money lenders and there\u2019s a collection of featured hard money lenders. You can also search for a hard money lender by state, and if you click on one of those hard money lender\u2019s profiles, you can see public reviews that were left for that hard money lender. Then you can also just search for that hard money lender\u2019s name inside of the Bigger Pockets forums. And oftentimes there\u2019s different posts that people have talked about where you can hear other people\u2019s experiences with hard money lenders.
Going to the Bigger Pockets website, again, under Network, look for Hard Money Lenders. I don\u2019t even know, there\u2019s a massive database of hard money lenders there. Another great way to find hard money lenders is to ask other investors in your local market, so Carl, I\u2019m not sure what city you\u2019re in, but if there\u2019s a local meetup or there\u2019s a local Facebook group or just any kind of place where investors congregate, I would go there and just ask like, \u201cHey, are there any hard money lenders or can you guys recommend any hard money lenders?\u201d I feel like at almost every meetup I\u2019ve been to at least one hard money lender at that event because they\u2019re also looking for new clients and new ways to get their deals funded. They\u2019re always out there networking and meeting folks as well. BiggerPockets.com is a great first place to go.
Then I would say going to somewhere like an in-person meetup is a great second step, but once you find these companies, some of the things you want to look for because not all private or not all hard money lenders are created equally, you want to ask questions about, \u201cHey, what are your rates look like? What does the interest rate you\u2019re looking to pay?\u201d What kind of points are they going to charge you, right? That\u2019s where hard money lenders typically make a lot of their revenue is by charging points up front. Even if one hard money lender maybe has a lower interest rate, if their points are exceptionally high, the overall cost of the debt could be more. You want to make sure that you\u2019re evaluating the total cost of the money and not just looking at one metric by itself.
Other things to look for are what kind of LTV are they going to provide? Some hard money lenders, if you\u2019re a first time rehabber or a first time flipper, they might only go up to like 60% LTV, whereas others might go up to 75 or 80% LTV depending on your experience. You want to ask as many questions as you can about their loan product and what the total cost of that money is, and then use that to start comparing one hard money lender to the next.<\/p>\n
Ashley:
Also, the thing I would recommend asking about too is their customer service. Are you going to be assigned a loan officer? The hard money I did the past year, it was like 20 different people involved for each question. There was somebody else that had the answer, and it was just an awful experience for me. I recommend if you can work with a company that has, and I think Lodha Capital was a sponsor at the Bigger Pockets conference this past year, but I ended up working with them on a loan and we lost the deal, but they were amazing. I had one loan specialist I was working with where another company, it was just every day was somebody else emailing me. And even my attorney was like, \u201cI don\u2019t even know who to contact anymore at this point. It keeps changing.\u201d Then after the loan was closed, they hire a third party service to actually service the loan.
They\u2019re the ones who would send my statements and then collect my payment. When I talked to the person that was servicing the loan, from the specialist there that was assigned to my loan product, stated that there was no online access, that this hard money lender did not provide for that. Anytime I wanted to look at what my loan balance was, I would have to wait for my statement or I\u2019d have to email. And I just feel like that is something that is so outdated that you can\u2019t log into some kind of online system, see what your balance is, check your payments, things like that, check the due date of your loan, things like that.
That was another thing that I really would\u2019ve liked incorporated into the loan product. Then the last thing was too, with they\u2019re always having tons of people, different contacts that were going on, somehow my insurance policy was sent to them multiple times, and I ended up getting twice notices in the mail that I did not have insurance on the properties that they were lending on and that they were going to put their own insurance in place where they had already been sent twice already.
It just was very unorganized and a very poor system. I think besides what you\u2019re paying, I think I would\u2019ve paid more to go with somebody where I didn\u2019t have these constant headaches of trying to get in contact with someone or trying to figure out these things or them to mess things up. When we closed on one of the properties, it was a Friday, we sat at the closing table for three hours because the young 22 year old kid that they assigned to work on my thing did not know anything about title work. And we actually had a title attorney come to my closing because my attorney had predicted this was going to be an issue, and it was three hours and we ended up not closing until the following Monday when we finally proved that we were correct and they were wrong.
That whole weekend, we had contractors lined up, we had ready to move on our properties, and we had to wait until the following Monday. I think not only just what you\u2019re paying for the hard money, but talking to other investors that have used them as to how much of a hassle is this actual company and is it worth my time? Because I would\u2019ve rather paid extra for somebody better.<\/p>\n
Tony:
I think it\u2019s also interesting, Ash, that you said that that hard money lender didn\u2019t actually service the loan long term. I feel like usually the hard money companies that I see, they\u2019ll kind of keep that on the books because it is such a short period of time. That is interesting.<\/p>\n
Ashley:
Yeah, as far as the servicing of the loan as to they kept the loan on the books, it was just the payment was collected. It was almost like just a third party company verifying I had the insurance in place, that I was making the payments, but the loan was still on their books. They just actually didn\u2019t deal with the collecting of payments and just the backend stuff of it, like the admin stuff, I guess.<\/p>\n
Tony:
Got it. They were like a payment collector for that hard money lender?<\/p>\n
Ashley:
Almost like a property management company, I would say.<\/p>\n
Tony:
All right, well, let\u2019s jump into our next question here. This one comes from Caleb Murber and Caleb\u2019s question is, \u201cWhen is the best time to get approved? I\u2019m thinking that I\u2019ll be trying to purchase and house hack a duplex in April or around that time. I\u2019m wondering when the right time would be to get pre-approved. Should I wait until I have my down payment? Should I not wait at all? Should my credit be above a certain score? Yeah, what should I do?\u201d Caleb, I think that the pre-approval is something that you should probably do sooner rather than later. And here\u2019s the reason why I say that. I think an important part of being able to shop for the right properties and identify the right markets is understanding what your purchasing power is. And when I talk about purchasing power, there\u2019s kind of two pieces to that.
There\u2019s the capital that you have access to or that you have available. How much money can you put towards down payments or and rehab and startup costs and all those other things? But the other piece of your purchasing power is what amount of loan can you actually get approved for? And if this is your first time ever buying a property, you may not have a good sense of what loan amount you can actually get qualified for. Let\u2019s say for example that you\u2019re super excited, you choose your market, you start analyzing deals, and maybe the average price for the properties that you\u2019ve been looking at is $400,000.
But say you go to get pre-approved once you finally get this property under contract and then you realize you can only get approved for $200,000, now you\u2019ve wasted all this time and energy identifying this market and analyzing these deals at a price point that you can\u2019t actually afford. I think that getting that pre-approval earlier in the process will help you narrow down and focus on the properties you can actually afford purchasing. That would be my advice, Caleb, is have that conversation sooner rather than later. What are your thoughts, Ashley?<\/p>\n
Ashley:
Yeah, and I think the best, and they\u2019ll be able to guide you as to how much you would need to actually close on the property, like what would be your down payment amount? If you don\u2019t have that yet, just be open and honest. \u201cHow much do I need to save? This is the type of house I want to purchase\u201d or, \u201cThis is how much I\u2019m thinking of spending\u201d too. They can let you know because you can estimate what the closing costs will be. Or you can think like, \u201cOkay, I want to buy $160,000 house. My down payment is going to be three and a half percent. I know my mortgage amount is going to be this, amortized over 30 years. This is what my monthly payment is. Yes, I can afford that.\u201d But when you\u2019re closing on the property, you\u2019re going to have to show reserves, you\u2019re going to have to show what your closing costs are. You\u2019ll have to pay those closing costs up front.
I think just sitting down with the lender and knowing what those things are can be a huge advantage ahead of time instead of waiting until you find the perfect property and you put an offer in and then find out that you can\u2019t even get a loan for it because you don\u2019t have the amount of money that you actually needed, even though you could afford the monthly payment.<\/p>\n
Tony:
All right. Let\u2019s move on to our last question here. This one comes from Elsie Talwar, and sorry, Elsie, I hope I got your name correct there. But this question is, \u201cLLC versus high limit liability plus umbrella insurance. This would be my first rental property. Which one of these makes the most sense?\u201d We\u2019ve kind of chatted about this in the past before about the differences between going with an LLC versus maybe keeping some of the stuff in your personal name and what the kind of liability protections are. When you talk about putting a property into your personal name versus an LLC, from a tax perspective, it doesn\u2019t really matter. If you have a property in your personal name, you can still recognize the income and expenses that are tied to that property as income for your LLC, right? The deed and the mortgage have no impact on your ability to recognize that as business income.
There are no major tax benefits of doing one versus the other. Where you really get the benefits is from a liability perspective. From an LLC, if you have the property deed to an LLC, if something happens, there\u2019s some kind of claim against that property, instead of someone being able to come after you personally and saying, \u201cHey, I\u2019m going to take Tony and Ashley\u2019s assets,\u201d if you set things up correctly, they can really only go after the assets the that the LLC owns. Now, if you for whatever reason decide to get the debt in your personal name or the property in your personal name, either because the type of debt that you got or whatever the reason was, there are still options to protect yourself from a liability perspective. And that\u2019s what we did in our business because a lot of our debt is in our personal names or in our partner\u2019s personal names.
And what we did was we got an umbrella policy, and I want to say that umbrella policy has up to $2 million of liability protection in addition to what our homeowner\u2019s insurance covers as well. For us, we have a few layers of protection. We have the homeowner\u2019s insurance as layer number one, and then we have the umbrella policy as layer number two above the homeowner\u2019s insurance. And for us, that kind of gives us the peace of mind that $2 million should cover the vast majority of liability issues you would see on a property, and that helps us sleep better at night.
There are costs associated with setting these LLCs too, LLCs, too. You have your LLC creation costs. You have to maintain those every year. In California, I think it\u2019s like 800 bucks, you have to file a tax return. There\u2019s QuickBook files, there\u2019s more things you have to do as you create more LLCs. I think you have to weigh the cost versus benefit of how much risk am I exposing myself to and what is the potential reward of having that LLC? That\u2019s how we set it up, Ash. I don\u2019t know what you guys doing in your business.<\/p>\n
Ashley:
Yeah, so the first thing you should just look at is if you were sued, what would people be able to take from you? What is your net worth? If you had to liquidate everything to pay this lawsuit, how much would there be? If you rent an apartment, you don\u2019t even own your own house right now, you don\u2019t have a car or you have a car, but it has very little equity in it, and you just bought a brand new car and if you sold it, you\u2019d probably make less than what you actually owe on it. Look at what your assets actually are, because if you are sued and there\u2019s nothing to take, or maybe you have $20,000 in net worth or something like that, and most of the time an attorney is not going to waste their time going after and suing you because there\u2019s very little that somebody could actually take from you in a lawsuit.
Think about that because one of the biggest reasons for getting an LLC is for that liability protection from your personal assets or from other assets that are in other LLCs. I have a business, the liquor store. The liquor store is in a different entity than the building the liquor store is, and I learned this from another investor who any business he has is in its own LLC. Then any building that it\u2019s in is in its own LLC, and that just gives you that liability protection separate from each other. When you\u2019re putting properties into an LLC, if you all of a sudden have a million dollars in equity, it may be time to start opening another LLC and building properties into that LLC, so you\u2019re spreading out the net worth.
If that one LLC is sued, you\u2019re not getting the $5 million is up for grabs from somebody that that you have in equity, instead maybe spreading it out so there\u2019s a million in each of those LLCs, so they\u2019re only going to be able to come after that million, and you still have your other four million in equity for the LLCs. But just starting out, think about what your personal assets are and how much is actually available for someone to sue you for? The next biggest thing to look at is how do you want to finance this deal? The 30 year fixed rate, low interest rate, lowest interest rate you can get today, but doing that, then get the umbrella insurance policy on if you put into your personal name. You can always go and refinance it later on and put it in a commercial mortgage where you\u2019re deeding it into an LLC.
There are several investors, including myself, who have bought a property in our personal name, got that personal mortgage, and then deeded it later on into an LLC. And since I have remained 100% owner of the property, my personal name, and also 100% owner of the LLC, my due on sale clause has not been called, I\u2019m still making payments on the property. Banks are not in the business of foreclosing on homes. The property is still being paid, tends to not be an issue, but look through your mortgage contract and see if you are, what the due on sale clause actually entails. But I\u2019ve seen a lot of mortgages changing the language where if you remain 100% owner that they will not call the due on sale clause.<\/p>\n
Tony:
Yeah. Elsie, just hopefully that gives you some insight. There are a lot of factors to consider there, but luckily even if you decide not to go with the LLC, there are still ways to protect yourself as the owner of that property. Yeah, I hope that was helpful.<\/p>\n
Ashley:
If you guys would like to ask us a question, you can leave us a voicemail at 1-888-5-ROOKIE, and we may play it on a Saturday Rookie Reply or on Wednesday as a voicemail recording for our guests to answer. Thank you guys so much for listening, and don\u2019t forget to join the Real Estate Rookie Facebook group where you can also leave us a message onto there, but I can almost guarantee that before we air the podcast episode, you are going to have a ton of answers and responses to your question within the Real Estate Rookie Facebook group.
It\u2019s just great to have like-minded individuals to kind of consult with and interact with. We have rookie investors who just learned about real estate investing from a friend or from YouTube or whoever that are joining. Then we also have experienced investors right in the Facebook group too. Make sure you join. I\u2019m Ashley, @WealthFromRentals, and he\u2019s Tony, @TonyJRobinson, and we\u2019ll be back on Wednesday with a guest.<\/p>\n
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