Buying a “Cheap” Rental Property: What 99% of Rookies Miss (Rookie Reply)

0:00Tony:Welcome back to the Real Estate Rookie Podcast, where we help you get started in real estate investing the right way, without the costly rookie mistakes.

0:08Ashley:That's right. Every week, we break down real questions from real investors in the BiggerPockets community. And these are the same things that you're probably wondering as you look for your first or your next year.

0:17Tony:And today's lineup is stacked. We're talking about three topics every investor should think about early on, even if you don't think they apply to you yet.

0:26Ashley:First up, should you get umbrella insurance. Is it a smart safety net or just another bill that you don't need?

0:31Tony:Then we'll cover the downsides of an FHA loan. Yes, it helps you buy your first house with less money down, but there's a few catches you should know before signing.

0:41Ashley:And finally, the age-old debate, neighborhood versus numbers. When the deal looks great on paper, but the block's a little sketchy, which one actually wins?

0:49Tony:If you're brand new and trying to make smarter decisions with your first few properties, this episode is going to save you from a lot of headaches down the road.

1:01Tony:This is the Real Estate Rookie Podcast. I'm Ashley Kerr.

1:05Ashley:And I'm Tony J. Robinson. And with that, let's get into today's first question, which comes from Taylor in the BiggerPockets forums. All right, Taylor says, should I get umbrella insurance? I want to explain my situation and I'm curious what you all think if I should get umbrella insurance or not. I have regular insurance on all of my properties and I have two separate LLCs. I have one LLC that I use for properties that I own 100 % by me and another LLC that I'm using for properties owned 50 % by me and the other 50 % by someone else. So he's got two rentals owned 100 % by him behind one LLC. One rental owned 50 % by him behind a second LLC.

1:42Ashley:And then two rentals owned 50 % by him that are not behind any LLCs. These are ones that the lenders would not let me move into an LLC. However, I plan to refi in the future if rates go down and put them behind an LLC. the other property I'm looking to sell. All right. So questions on umbrella insurance and LLCs and liability protection. I guess first, let's just put out a big fat disclaimer that Ashley and I, neither of us passed the bar. We are not attorneys or insurance agents for that matter. So definitely go talk to a qualified professional, but I think we'll just kind of give our take and you can take it for what it's worth.

2:17Ashley:I think there's, and Ashley, you explained this before and I thought it was like a great explanation, but the LLCs and insurance both protect from liability, but they do it in different ways. The LLC or asset protection, whether it's an LLC, a trust, or whatever other entity you put your property into, the asset protection's goal is to hopefully prevent a lawsuit from happening in the first place. We've interviewed asset protection attorneys, and you can get super complicated with this, but if you set your entities up in a way, sometimes it just discourages people from even trying to sue you in the first place, right?

2:54Ashley:So that's the goal of your LLCs and your trust and all the different legal entities you can use to hold ownership and protect your properties, right? The goal is to prevent lawsuits from happening.

3:06Tony:Tony, I think to clarify, like it doesn't prevent lawsuits from happening prevents them from suing you personally or like prevents lawsuits against your other assets that aren't in the LLC.

3:18Ashley:So yes, but I, so outside of, we had a conversation with, um, Brian Bradley, um, who is an asset protection attorney. And I had like a, an off the record conversation with him. And he was actually saying that there were certain entity structures that you can set up where when they go to try and see you, they realized that there's actually nothing for them to sue because of how complicated the legal structure is. Now that's like probably like the Ferrari of, of asset protection that a lot of rookies aren't going to need, but just know if you're a super high worth individual and you, you've got a lot of assets before you start investing in real estate that you want to protect, you know, there, there are ways to really just discourage people because it is such a complicated structure to sue you at all, uh, because they realize that maybe it's not even worth the hassle.

3:57Tony:That's really interesting. Like, I didn't know that, that there was that the complications, like I knew, like, if you have, you know, no equity and you're completely leveraged. And like, even if they sue you, they get nothing like that would deter people. But that's really interesting. I didn't know that about like the complicating, the actual setup can.

4:16Ashley:And again, don't ask me to repeat how that was set up because I couldn't tell you because there was something with like an, you know, like a foreign trust or something like that, or, you know, way beyond my scope. But I, you know, he did educate me on the fact that that that is an option. And then the other piece, aside from the asset protection is the insurance itself. And that's more so when something happens and you're kind of in the thick of it. And insurance will usually cover damages up to a certain amount, right? You know, maybe it's 500K, maybe it's a million bucks, maybe it's 2 million bucks.

4:44Ashley:So the umbrella policy is there as an additional layer above and beyond whatever liability protection comes with your landlord insurance. So let's say that your landlord insurance covers you up to like maybe 500K. and you get sued because someone slips and falls and they want to see you for$1 million. Well, now you're on the hook for that difference of$500K. The umbrella policy is what would be that backdrop to give you additional liability protection to cover whatever that shortfall is from your landlord insurance. So it doesn't make sense, potentially, but I think it goes back to what you said, Ash, of like how much do you actually have to protect?

5:20Tony:Yeah, I recently did a call with a different asset protection attorney just to see what my options are and things like that. And there's usually this big debate of putting one property into an LLC. So there's only one property in each LLC. So if you have 10 properties, you have 10 LLCs, which I have not done that. I've done it more as partnerships. And that's kind of seems what this person has done in this example. So the idea behind that is if you're putting one property that if something happens with that property, they can't take any of your other properties because it's only in that one LLC.

6:03Tony:So there's different ways that you can do that. What I recommend is the umbrella policies for your partnerships. I have LLCs with my partnerships, but I also have umbrella policies on top of that because I know what I'm doing, but I don't always know what kind of liability exposure I have from my partners. So I'm not the one going out and completing maintenance or doing things like that. So I want to be able to make sure there's an extra layer of protection in case, you know, and still it could even be me that does something wrong. But I do still do the umbrella policy because it helps me sleep at night, first of all.

6:50Tony:And it's just giving me more money to be able to defend myself, the LLC defend itself from losing my assets. So most people, I would say, they put it in the LLC. They don't get the umbrella policy on top of that. But I highly, highly recommend that you get an umbrella policy for your personal assets. Like even if you don't have a rental property, you have your primary home, you and your significant other drive cars, like have an umbrella policy on that. especially if you are starting to build a nice net worth and build some kind of wealth for yourself too, is having that extra money to spend for your attorney fees, for a settlement, things like that, if something does happen.

7:39Tony:So I'm a big proponent of umbrella policies for sure. I think one thing to add in to real quick with an umbrella policy is you have your base insurance. So that will pay out first and then the umbrella policy will pay out after that. So you might not even need to tap into that umbrella policy, but it's just like an extra coverage. So first would be your, you know, your landlord policy, and then that would kick in and pay out until that was spent. And then it would go to the umbrella policy too.

8:09Ashley:Last thing I'll say is that like, these are not expensive policies, the umbrella policies. Um, I was trying to find a recent quote that I got, um, I found one from a few years ago and it was like$2 million of coverage. And obviously there's some nuances there. There's some carve outs, but it was like 500 bucks for the year, I think, right? That's like 60 bucks a month to get$2 million in coverage. So it is not a large expense. So if you're on the fence about it and you feel like you've got enough assets to protect, then yeah, I would just say spend the 60 bucks a month and get the umbrella policy.

8:38Tony:Plus you can have your LLC pay the policy too. If you have an LLC and the policy is for the LLC, it's a business write-off too for the premiums. Well, we have to take a short break, but when we come back, we're going to be talking about the downsides of using an FHA loan. We'll be right back. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy? Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored job posts help you stand out and hire the right people quickly.

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13:08Tony:Okay, welcome back. Our next question is from Erica, and this question comes from the BiggerPockets forums. Erica's question is, For anyone who has utilized an FHA loan, did you find it hard to find sellers that want to sell to buyers with an FHA loan due to the FHA appraisal? Does the FHA loan make you less competitive when making offers? Thank you in advance for any insight. One little thing I do want to clarify in this question is where she says buyers with an FHA loan due to the FHA appraisal. It's usually nothing to do with the appraisal because pretty much every bank financing you're going to get is going to make you get an appraisal.

13:53Tony:It's more of the FHA inspection. So if you go and you get an inspector to come out, do a home inspection, this is completely different. FHA is sending out their own inspector and they're going to go through the property and look for things that they care about. I remember my cousin bought a property using her FHA loan and the inspection happened and they made them put up railings. There was no railings in the stairwell or something like that. And the seller refused to. So my uncle went over there and he's like, can I just put them up so we can get this house to close? And my uncle installed the railings, even though they didn't own the house yet, just to get it to pass the FHA inspection and to move on.

14:40Tony:So the same with VA loans, they have some extra hurdles and hoops you have to go through too. So if I'm a seller and I'm reviewing my offers and one is FHA, one is VA, and one is conventional, yes, I'm going to be more towards wanting to take the conventional loan because there's not as many hoops to jump through for the funding to get approved to purchase the property. So yes, it could be a deterrent. Another great option is not using FHA and doing conventional. Like FHA, you can do three and a half percent down, but conventional, you can do five percent down. So if you have that extra little bit of money, you're adding more equity into your home upfront by putting a little bit bigger down payment, and then you can just get the conventional loan and not even use the FHA loan.

15:34Ashley:Yeah, great, great points, Ashley. I've never personally used an FHA loan or sold to someone who has an FHA loan. But I think your points around in apples to apples comparison of offers, one with non-FHA debt and the other with FHA, the FHA is probably going to be a little bit getting the short end of the stick. But to that point, I think there are ways that you can make your offer a little bit stronger as well. Purchase price is one. If you just simply offer more money. I think that's always one way to entice the seller. Your earnest money deposit, right? Like if you say, hey, I'm willing to give a bigger EMD to maybe get this deal done, it'll show that even though you're using FHA, maybe you're a little bit more committed to getting the deal done.

16:16Ashley:Speed is always important, but with an FHA, it's probably a little bit out of your control. If you were closing with some other form of debt, I think that'd be easier. But those are probably the two things that I would focus on. And maybe even just like in your contract saying that maybe you're willing to fund some of those repairs yourself up to a certain amount, right? So I think it's just trying to understand what the seller's motivations are and doing your best to speak to those specific motivations, even if the FHA inspection is a little bit of a headache. All right, guys, we're going to take our final break.

16:45Ashley:But while we're gone, if you haven't yet subscribed to the Real Estate Rookie YouTube channel, make sure you do that. That way you can see mine and Ashley's beautiful smiling faces every time You consume the content from the podcast, but we're at Real Estate Ricky on YouTube. You guys can find us there. We'll see you right after the break. People love to call real estate passive income, which is interesting because most of the investors I know are very busy, busy finding deals, busy managing teams, busy worrying they picked the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10 % below market value in top rental markets across the country.

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