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Property Management and Insurance Go Hand in Hand

Who manages your investment properties is important to your insurance company. One of the first questions any real estate investor should be able to answer is, “How am I going to manage my property(ies)?” The answer is important for many reasons. It’s also important to someone you may not have thought of: your insurance company. Some investors handle their own property management and others hire a third-party company. The important thing is to make sure whatever property management strategy you use allows you to maximize your yield and minimize your risk. Entity Separation If you do decide to handle your own property management, it is often recommended that you set up the property management services as a separate entity from the entity(ies) in which you hold your assets. The former is considered the “operational entity,” and the latter is the “asset-holding entity.” Separating the two will help maximize your protection and may add additional layers of insurance coverage for potential claims. It is always important to protect your asset-holding entity, meaning all the agreements you enter and risk management decisions you make should be done with that in mind. Even though you may own and control both entities, think of them separately, each with its own assets, liabilities risk exposures and insurance policies. When you self-manage, you will wear two hats—that of an investor and that of a property manager. When you are wearing your property-owner hat, maintain the same expectations of your own property management company as you would a third-party company. You would expect a third-party manager, for example, to: Quickly respond to emergency calls.  Use insured subcontractors (meaning your contractors have general liability, workers’ compensation and commercial automobile coverage in place). Handle evictions that follow local, state and federal housing guidelines. If you are unable to handle these basic requirements, then hiring a third-party manager may make the most financial sense for you. Outsourcing property management automatically gives you entity separation and clearly defines expectations and expenses. A good third-party property manager can also help you minimize your insurance claims, especially smaller, nuisance-type claims. Fewer claims can result in lower premiums. What Insurers Look For Next, let’s take a look at good risk practices as it relates to how your properties are managed. This is not only important in helping you protect your assets, but also in helping you reduce and transfer risk. Most insurers will look at whether you are following good risk practices in managing your properties. Here are some of the items they look for when underwriting and pricing insurance for your asset-holding entity. Signed property management agreement. A signed agreement outlines what is expected of both you and the management company as it relates to a variety of services. Even if you self-manage, it is important that you maintain a signed agreement between all your asset-holding entities and your property management entity. In the event of an insurance claim, this agreement may be the difference in which policy responds to a loss. Since insurance policies “follow the contract,” it is very important this contract is in place and enforceable. Signed lease agreement. The term should be for at least 12 months. Make sure the lease is compliant with any local and state laws and ordinances. Tenant screening of all residents over age 18. Proper screening includes a criminal background check, employment/income verification and sex-offender registry verification. Renter’s insurance. Renter’s insurance provides your tenant not only coverage for their belongings but also liability coverage if the tenant unintentionally causes damage to your property. Forty percent of all fires are tenant-caused. If your tenant does cause a claim, a renter’s insurance policy can be the primary policy to respond. This allows you to avoid filing a claim on your policy, paying your deductible and having a claim on your insurance record. A high percentage—43%—of renter’s insurance policies cancel within the first week, meaning tenants often start a policy to satisfy a lease but then quickly cancel coverage. It is important to use good tracking systems to ensure your tenants maintain coverage. Rekeying/Lock Replacement. Make sure your property manager rekeys or changes locks when a tenant moves out or is evicted. Vacant Property Procedures. Many insurance claims that occur do so in a vacant property. There can be multiple reasons for a vacancy, including tenant turnover, renovation or eviction. In fact, 38% of claims filed happen when a home is unoccupied. By putting good controls in place and scheduling regular inspections of a vacant property, you can avoid or reduce your claims exposure. Also consider having your management company install cameras or video surveillance of the vacant property. Make sure any system you install can work off cellular technology in case there is not active Wi-Fi. “Smart” Home Technology. There’s been an explosion of “smart” options for making housing more secure and efficient. There are systems that can provide keyless locks, cameras, smart thermostats, water management, lighting control, sprinkler control and garage control. Although these systems help save residents money and protect the asset while its occupied, they can also help when your property is under renovation or between tenants. For example, they can reveal when a vendor accesses a property to do work, an HVAC system is not performing, a water leak is detected or a real-time photo of a prospective resident doing an unattended showing. These are just a few examples of actions a property manager can take to help contain your risk and minimize your exposure in the litigious world we live in. It is highly recommended that you utilize a reputable, insured property manager as you begin your investment journey. As you continue to scale your operations, you may want to consider vertically integrating your operation; however, be aware that capturing these costs through your own operations entity/property management company may not always be profitable.  

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4 Ways to Grow Your Rental Property’s Value

How to work with your property manager on an “asset management” approach that drives overall value Entrusting the management of your investment portfolio to a property management company should take only a little work on your part, especially if you are looking for traditional basic services. Traditionally, a property manager focuses on maintaining the property, managing the terms of the lease, handling tenant issues and collecting the rent. Most investors and property managers, however, do not take an “asset management” approach to improving the overall value of your property.  Here are four simple things all investors should challenge their third-party managers to do in order to drive net operating income (NOI), which increases the value of your property. Set Budget Goals You do not need to talk to your property manager all the time, especially when you set expectations by establishing a budget for each property. Talk with them about your NOI goals by establishing market rents and estimated expenses.  Once both parties agree to the budget, you can take the Ronco. tagline of “Set it and forget it.”  That said, adding a budget-to-actual report to your monthly batch of owner statements is a good idea. That report helps to ensure you are on track to hit your NOI goal.  Also consider doing a quarterly proactive review of the financials and budget with your property manager. Market Valuation  Ask your property manager to provide you with a comprehensive market analysis when you lease your property and again when it is time to renew leases. Reassessing the rental market value of the property every 9 to 12 months will help ensure you are capturing rent growth opportunities and staying competitive in the rental market. This information is helpful to appraise the current and future value of the property and to make financial decisions with your entire portfolio in mind. If your property is experiencing frequent delinquencies or below-market rents, it may be time to replace the tenant and get some serious rent growth on the books. That leads right to #3—your Renewal Strategy. Renewal Strategy  Keep in mind that retaining existing tenants is the ideal plan to maintain consistent cash flow and reduce additional expenses that are incurred with turning over the property and vacancy loss.  Re-leasing can be costly, and your property manager should advocate to retain good quality tenants for you by contacting the tenants 90 days before their lease expires.  Possibly incentivize your property manager to keep the property leased and negotiate renewals with rent increases instead of having to locate a new tenant. Ensure that your property managers are proactive, and set a calendar reminder to renew that lease before the tenants even think about moving. Leverage In-House Maintenance  The No. 1 variable cost and cap rate killer is high turnover and maintenance expenses. It is better to have a property manager that has in-house maintenance where their staffing is less expensive than professional handymen or third-party vendors. In-house maintenance can be scheduled ahead of time and can expedite the work so you have less vacancy loss. Some third-party vendors are scheduled out up to 30 days before they can get to a turnover.   A good property manager should feel more like a partner and less like a service provider.  They literally hold the keys to your retirement, your children’s education, the food on the table or a rainy day. Challenge them not only to take care of the day-to-day maintenance and tenant needs but also to take care of your value growth by using the tips above. If you do that, you should have more money in your pocket and more free time to spend it.  

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Q&A With Cardone Enterprises’ Grant Cardone

35-year veteran of the real estate investment industry shares insights ranging from his personal journey to the post COVID-19 real estate world Grant Cardone is a 35-year veteran of the real estate game. He’s the CEO of Cardone Enterprises and has $1.7 billion under management. Cardone has always been seen as a forward-thinking business operator. He is often called on by Fortune 500 companies and real estate leaders for his practical business ideas and strategies. Cardone is a preferred borrower with Fannie Mae, Freddie Mac and life insurance companies. An entrepreneur, private equity manager and New York Times bestselling author, Cardone is known as the #1 Sales Expert in the world today. Forbes magazine called him one of the top CEO’s to follow on social media. Under Cardone Enterprises, Cardone currently owns and operates seven companies with $150,000,000 in annual sales. He also launched the Grant Cardone Foundation, whose mission is to impact the lives of children who grow up without fathers. According to Cardone, “the holy grail of every entrepreneur is taking risks in order to make more time and money.” Cardone was gracious enough to answer a few questions for REI-INK while he was on the road getting ready for a big event. His answers range from revelations about his own personal journey to his “macro” view of the real estate world post COVID-19. Q: How did your real estate investment journey begin—and what was it like? I’ll never forget my first real estate deal. I put down $3,500 on a $78,000 property in Bellaire, Texas, and I thought I was getting away with stealing. I knew nothing about finding tenants, listing the property, drawing up a lease—zero. All I knew was that I owned a piece of real estate and I had hit the big time. I finally got some tenants and a whole bunch of problems—roaches, plumbing, you name it. Then they moved out, and I was stuck with the payment. I ended up selling the place and turned my original $3,500 into $7,000. I made 100% with no idea of what I was doing. After that, I started doing my homework as I looked for other apartments. Q: Who were some of your mentors? I can’t talk about mentors without first mentioning my dad. He was the first person in my life to set an example for me when it came to showing up, putting in the time and doing the work. I also have to give my mom a lot of credit because she showed me what strength and determination were every day after my father died. Later in life when I was on the ropes in every way, someone looked me in the eye and asked me, “What are you doing?” That was a wake-up call for me. That guy put me on the track that led me to where I am today. Of course, I studied all the great sales trainers and professional speakers back in the day too. So, I owe my success to a lot of people. Q: Your company currently has close to $2 billion of assets under management. Are they single family, multifamily, land, retail? Cardone Capital is one of the largest private real estate funds in the country, and we got there through crowdfunding. In record time, I might add. We made it happen because we offer opportunities to both accredited and nonaccredited investors.  As far as our assets go, right now we’re concentrating almost exclusively on larger multifamily apartment complexes, especially in the southeast U.S. But that doesn’t mean we’ll limit ourselves to that sector. I’ve done retail, commercial, single family, you name it. I’ll invest in anything, anywhere if I think it will result in cash flow. That’s what it all comes down to, but right now multifamily is our sweet spot. Q: Do you favor one asset type over another? My third real estate deal was for a 48-unit property that I chose because I didn’t want to have to rely on just one renter for my income. Even if a few units are empty, I’m still collecting. Anyway, I put $350,000 on that deal and made $5 million. That was the game changer for me, where I was like, “OK, I’m investing in apartments from now on.” So right now, Cardone Capital is focused on multifamily properties across the South and Southwest because that’s where the money is. Plus, now more than ever, America is becoming a nation of renters. COVID-19 is going to accelerate that. So right now, I’m focused on apartment complexes of 300-500 units in good locations in the South and Southwest with everything tenants want nearby—good schools, convenient shopping, Starbucks, things like that. If you can offer all that, people will pay as much as $2,000 a month or even more, depending on the location and amenities. With that kind of cash flow, even if you don’t have full occupancy, there’s no way you’re losing money.  Q: What is your “macro” view of the real estate industry post-COVID? What everyone else is calling a crisis, I’m calling the biggest real estate opportunity of my lifetime. As soon as this COVID situation happened, I was like, get ready, people. I told everyone I knew to look at markets everywhere and not just for people with millions to invest. Every market in America has duplexes, four-plexes, 10 units, 20 units. Almost anyone can access those properties and once you do, you are set. Right now, large multi-family generates the most cash flow for me and my investors, but I’m always looking for new opportunities. Q: Tell us about the 10X Movement? 10X is a timeless principle for success to get what you truly want out of life. I boiled down the only difference between the times I was successful and the times I felt my ventures failed. It came down to just not thinking big enough. The 10X rule is almost like an insurance policy. You have to aim 10

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A Passion for the Portfolio

Auction.com gets excited about transparency, mobility and transactions. When Auction.com’s Steve Price, senior vice president of foreclosure auction services, and Ravi Singh, chief product and technology officer, get together in the same room—digital or otherwise—the energy feels surprisingly similar to that of a live auction. They spend their days dedicated to what they describe as “The Journey” Auction.com has been on since it launched in 2007. Price and Singh said that during the last few years, the Auction.com team has been working with the data from their exclusive listings in order to create a virtual experience that has the same interaction and energy that occurs at real estate auctions. “A lot of what we have been able to do on the tech side over the last couple of years is inspired in large part by what Steve and his field teams have already been building with investors around the country,” Singh said. “It’s been our mission to create a comprehensive auction experience that provides real estate investors visibility, reliable data and high volumes of opportunities and, really, the empowerment that comes from transacting on a truly dynamic, evolving platform.” By the time Singh is finished, Price agrees with such enthusiasm that the interview starts to sound and feel like a live auction. Clearly, these guys love what they do. “Here’s the thing people tend to overlook about Auction.com: Buying real estate at auction is complex,” Price said. “Sure, it’s exciting, but it requires a lot of thought. Auction.com initially got a lot of comparisons to more traditional online auction sites like eBay, and because of this people expect the real estate auction process to be similar.” Price and his team have made it their priority to work directly with real estate investors to make what he describes as “a complicated and exhilarating transactional process” streamlined, transparent and repeatable as often as an investor may wish. Auction.com has hundreds of employees nationwide who are active in their local markets and are experienced in evaluating what will and will not work when it comes toreal estate strategy. Price said this is extremely important because buying a property at auction has been streamlined with Auction.com, but that does not make the process a “no-brainer.” Investors still must do the research, leverage the best data available to them and evaluate the profit potential behind the deal. Working with the Field Team Price recalled one investor in Michigan who had never bought a property at auction—online or in person—before visiting the Auction.com platform. The concept was doubly intimidating because the investor wanted to use Auction.com’s new remote-bidding feature to purchase a property in California. This particular buyer wasn’t sure how to get started. The Auction Services team helped educate and guide the buyer so he could make a property purchase that fit his investment goals. “There were thousands and thousands of properties to sort through, and he had never done this before,” said Price. “He ultimately completed a transaction in the Inland Empire, and about four months later he started looking for a secondproperty to purchase. That first step, closing that first deal, is the first piece of the puzzle we examine when we are looking to evolve the way our platform works for our buyers.” The next piece of the puzzle involves Singh taking insights from that investor’s experience to evolve the digital platform for all users. “Real estate investors start out as average individuals who may not necessarily run a hedge fund or have experience in real estate as a top agent or full-time investor. It’s our goal to leverage what we’ve learned about our users over the years to bring more and more of the auction online. We want to leverage the simplicity of the process, as you experience it on Auction.com, to raise the volume of investments any investor can make in the real estate space,” Price said. Singh agreed. “At the end of the day, we are an e-commerce platform selling a high-value asset class,” he said. “You can buy high-value stocks on investing platforms for just a few hundred dollars. You can buy baubles and trinkets on eBay or Etsy for just a few dollars. But to buy real estate, you need not only to have access to a platform that makes that complicated process simple, but also to be willing and able to do the serious due diligence that goes along with that investment.” Combining Key Data Elements with Cutting-Edge Technology Singh and Price agreed one of the most important things they do is “capture the mindset of the intentional real estate buyer.” This means identifying the key elements of a transaction that create an “easy glide path,” as Price described it, from the beginning to the end of a transaction. “Our users are on a journey. When the journey goes smoothly, investors have all the key data elements they need to conduct their due diligence. They have the ability to easily conduct the transaction and they are able to repeatedly make successful financial decisions and acquire the right properties for their portfolios,” said Singh. Price agreed. “At the end of the day, our product involves not only the ability to acquire a physical property via an online auction but the ability to do so repeatedly and at high velocity. This is not an insignificant investment, and that is why we invest so much into creating footprints in local markets so we can understand our buyers’ perspectives, and then ultimately translate their experiences into the user experience on our digital platform.” Auction.com takes a stair-step approach to investor education. Using this approach results in a gradient of content that investors can tap into based upon their experience and comfort levels. For example, real estate investors can learn all about buying foreclosures and bank-owned properties via educational articles and videos in the Auction.com Help Center. Investors can also utilize the property details pages and personal online dashboard to help them conduct their due diligence. The Auction.com app is

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Partner with Your PM Before Acquiring Property

Property managers may have local knowledge that can help you with your acquisition decisions. Many investors, especially new ones, are woefully unprepared for the road ahead of them once they purchase a property. And that’s almost always due to bad information. Where is this bad information coming from? Why are these investors taking bad advice over and over again? This bad information, more often than not, comes from out-of-area single-family residential (SFR) “experts.” The 1% “Rule” Have you ever heard of the 1% rule? If you haven’t, here’s a quick explanation. The 1% rule is a “rule of thumb” for SFR real estate investors to determine whether or not a property is a good buy. It is often used in place of cap rates as a quick and dirty determination for expected income on a property. For instance, if you purchase a property for $90,000 and its market rent is $900 a month, then it fits the 1% rule. You’ve found an excellent deal! Not so fast. Any real estate investor who’s been in the SFR space for any serious period of time can attest that these deals often are not as good as they sound. Many green investors have high expectations, thinking they just purchased some golden goose, holy grail of a property that will be the first of many to come. Or, they’ve heard about a great “supplier” that is selling homes at 1% all over the market. They are ecstatic they can finally turn their “part-time dream” into a real business. Unfortunately, many of their dreams (and their wallets!) are shattered when they learn the true costs of what they have just purchased. Local Knowledge Matters When an investor buys a home based on the expectations of the seller, it doesn’t take a rocket scientist to find the problem. And, even when investors use their own representation, lack of local expert knowledge can end in disappointment. This is, in a nutshell, why a consultant with local expertise matters. Without getting too much into the weeds of local market data, let’s take a look at three different (hypothetical, but typical) properties. One is listed at $60,000 and needs new systems, possibly a roof, perhaps some paint, so the total investment should be around $80,000. Market data shows the market rent should be around $800 once it has been fully turned “rent ready.” Property 2 is listed for sale as a “rent-ready” property and is listed for only $75,000. Pictures show some dated walls and stained carpet, but it looks livable. The market looks like it is bearing $950 in this area, so it looks very promising. Property 3 also looks “rent ready” and has tons of pictures showing a great interior rehab. It is listed for only $65,000, and market rents are around $750. We’ll assume these are all cash purchases, so we don’t have to worry about mortgage rates and so forth. So, all three properties look great and meet the 1% rule, right? Property 2 tops the list with 1.26%, followed by property 3 at 1.15% and, finally, property 1 with a solid but outclassed 1%. These three properties are based on typical properties in three separate areas of the Birmingham, Alabama market. There are amazing local realtors who know these markets well and can help even green investors make money. It would be likely that all three of these hypothetical properties would make money, but which one is a better buy and why? Here are some things to consider. If property 2 does rent for $950, that doesn’t mean $11,400 per year, or even $10,260 (derived by subtracting 10% management fees). Why? Property 2 was in “rent-ready” condition only in that it was livable. The $950 rent rate is based on averages. This property is below the average in terms of desirability. The stark reality is a C-class home has a higher maintenance cost, higher vacancy rate and a generally lower appreciation over the long haul. Many municipalities even have fees associated with being a landlord that your realtor might not be aware of. In the case of property 2, the grim reality is that this property will likely only return around $3,500 in the first year. Even when you calculate out a 3-year proforma, the profit is only $15,633. The variables taken into consideration by a property manager will include valuable data that many others do not track. Based on the same variables modified to fit property 1, the first year returns $4,377, and after three years the total builds to $16,519. The difference is only an increase in $886 in rent, but the additional factor that may be hiding is resale appreciation. These three hypothetical properties are based on three very real markets. Property 1 has seen not only a 4% increase in rental value each year for the last six years but also a 13% increase in home value. Property 2 has seen a steady 2% increase in rental rate, and only 6% increase in sales value. Property 3 is the most deceptive as neither the rental value nor sales value have any significant increases in years. This market also has one of the highest delinquency rates and maintenance costs of any market in the area. The key factors that set any realtor apart is data and the ability to analyze it. The data a local expert can provide makes the difference between consulting and just another sales pitch. Property managers and realtors can make excellent teams of consultants. Always use your network to find experts in fields that you lack. One of the best networks for anyone looking to find excellent in-depth local knowledge is the National Association of Residential Property Managers (NARPM). You can check them out for a local property manager in any area of the U.S. Knowledge can be as valuable as any deal you may stumble upon—and sometimes much, much more.  

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Don’t Reinvent the Property Management Wheel

Make sure you’re aware of all the resources available for property management. In an industry with an estimated 70% of investment property owners managing their own properties, and 36% of Americans living in rental properties, property management is here to stay. This industry, however, is not for the faint of heart. Although many resources are available for the DIY property manager, any investor considering the self-managed strategy needs to assess the benefits of hiring a property manager versus self-managing. Here are a few things to consider. Financial Savings A common misconception is that you’ll save money if you do it yourself. The most time consuming and costly part of property management is maintenance. Third-party property managers have relationships with maintenance vendors who will provide lower pricing and reliable services. They will have software and programs to build efficiencies in processes, which will save you hours per week. What is your time worth? Relationships Matter A survey of investment property owners revealed the following service attributes ranked among the Top 4 in a list of eight: Effective communication Accurate accounting Honesty and integrity Availability of the property manager Interestingly, price ranked last. Owners want to do business with companies they can communicate well with, who can competently manage the accounting aspects, who they can trust and who have local boots on the ground. Selecting the right property management company is less about being the lowest price, and more about building a long-term relationship. Diversified Portfolios What makes a stable property management company? Age? Experience? A diversified portfolio typically points to a strong property management company. When it comes to your financial investments, you invest in many different stocks and opportunities, not just one. This applies to property management as well. Strong property management businesses will provide services not only for long-term residential management but also for commercial and short-term rental management, and community/association management. A diversified portfolio allows property management companies to weather just about any storm. During the COVID-19 pandemic, long-term residential management saw very little change in rent collected. Through the months of April, May and June, 95% of rent was collected compared to 98% during non-pandemic months. Community and association management held steady during the pandemic because many investors weren’t making any changes to their management companies. In some markets, there was a dramatic decline in short-term rental management due to state mandates to close. But as we emerge and start to reopen, travelers are changing their travel behavior. Instead of flying and traveling internationally, they are traveling locally, to more rural destinations, for longer periods of time. They are driving instead of flying. And, with schools and offices offering remote working options, bookings for a short-term rental for 30+ days in not uncommon. Through the pandemic, most businesses with diversified portfolios were able to weather the storm fairly unscathed. Trends in Property Management  More and more often, we are seeing property management companies convert their business to a brand name to help them grow and take their business to the next level. We hear regularly that they’ve gone as far as they can on their own and would like to tap into the brand’s additional resources. Here are the top 10 reasons property management companies convert to a brand: 1)  Tried-and-true tested systems and processes for everything from accounting to marketing. Most property managers say they don’t have time to develop and document their processes, so having them available allows property managers to scale their business. 2)  Access to systems and processes to build a diversified portfolio through all four pillars of property management. These include short term, long term, commercial, and community and association management. 3)  Access to additional revenue streams. 4)  Technology. A brand’s buying power can provide technology and systems not available to a single business owner. 5)  Support. When working with a brand, property managers find that they are in business for themselves, but not by themselves. They enjoy having a network and support team to collaborate with and learn from. 6)  Marketing. There is no better way to increase the value of your business than by partnering with a brand name. National brands will provide a “soup-to-nuts” approach to marketing and building your brand name in your local market as well as nationally. 7)  Exit strategy. Many property manager veterans have worked for years, but they haven’t figured out how to exit their business and benefit from their hard work. When you align yourself with an established brand, you will build long-term equity you can convert to cash when you retire or are ready to start the next adventure in your life. 8)  Competitive advantage. Aligning yourself with a brand name gets you to the front of the classroom when you present to new potential clients. 9)  Ability to stay current with trends. Brands will have their pulse on the industry and will develop new programs and processes to adjust and adapt to these new trends. Whether you’re creating new housekeeping certifications to comply with new post-COVID 19 regulations or adapting to the new travel trends, a national brand will help you pivot as needed. 10)  More manageability. Most property managers quickly become overwhelmed with the little details it takes to make their business work. As a result, they neglect adding new doors and growing their business. They are so busy working in their business that they aren’t able to work on their business. Don’t make that mistake. As you can see, whether you’re a seasoned property manager or new to the industry, you don’t have to reinvent the wheel. There are great resources available through associations like NARPM, CAI, VRMA and social media groups. Know what your customer is looking for and build your marketing message around it. Finally, you will need to determine whether joining an existing property management brand will help you take your business to the next level.   

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