This article is a fantastic synopsis of why unit owners should hold their properties in a legal entity such as a LLC. The LLC will shelter you from lawsuits arising from incidents on the property in question. Brandon with BiggerPockets sums it up nicely. Check it out HERE.
rental unit liability
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If you’re reading this, then I assume that you fall into one of two categories; either you own a rental property, or you’re interested in owning one. If so, then the information in this article is vitally important. There are many ways to calculate your return on investment that go into much greater detail, but this breakdown will give you the quick and dirty for your unit by giving you the cash on cash return. If you own a property you need to be aware of exactly what your unit is costing you and not just the sticker price. After we identify the needed information we will crunch some numbers on a Missoula residence.
First, let’s look at the four areas of information that we will need.
1) Income: This is the actual income generated by your unit. The most obvious of which is the rent. This also includes items such as coin op laundry, storage units, etc.
2) Expenses: These are the things you pay out money for. These include taxes, insurance, utilities (electric, water, sewer, garbage, gas, etc), HOA fees, lawn care/snow removal, repairs,
capital expenditures (setting aside money for large future repairs), vacancy (setting aside money preparing for vacancies), and your mortgage.
3) Monthly Cash Flow: Income – Expenses
4) Cash on Cash Return on Investment: What kind of percentage is your money earning? How much money did you spend to acquire this cash flow? To find this you must first figure out how
much money you spent on this property. Add up items such as your down payment, closing costs, remodeling budget, etc. These items add up to your total investment. Then, take your
monthly cash flow multiplied by twelve to get your annual cash flow. You then divide the annual cash flow by the total investment. This number is your cash on cash return.
Now it’s time for a real-world example.
The numbers here are for a 3 bed, 2 bath 1200 square foot townhome built in 2009 here in Missoula. It has hardwood floors, granite countertops, nice paint, and a garage. Nothing super fancy, but a nice home. Let’s break down the numbers.
Income: Similar houses in Missoula are renting for about $1300-$1400/month. We will assume you get $1350. There are no additional income sources for this property.
Expenses: Oh boy, here things get interesting. The listing price for this home is $210,000. With a 30 year mortgage at 4% and 20 %down ($41,980) that’s $802/month. We can guestimate insurance for this size and age of home at about $60/month. Missoula is a little ridiculous when it comes to taxes, and by looking at county records we can estimate the taxes at about $200/month. Now let’s account for everything else. Assuming you have the tenants pay for electricity and heat, that leavs you with a $30 garbage bill, a water/sewer bill of $45, and HOA fees of $30. Somebody must mow the lawn and remove snow, so to be conservative, let’s say $50 a month on average. Next, eventually you are going to need a new roof, hot water heater, furnace, etc so let’s set aside $75/month for that. Finally, you must always account for vacancy. If you have a great rental and you market it properly you could hope for less than one month vacancy per year, so we set aside $113 ($1350/ 12 months).
Well now, that number is quite a bit different than the standard Rent – Mortgage= Profit equation people often use.
Cash Flow: Income – Expenses. $1350-$1405= -$56
Cash on Cash Return on Investment: Now let’s add up what you spent to acquire the property. You had a down payment of $41,980, assume the selling paid the closing costs, and you did not have any remodeling. Your annual cash flow is -$56×12= -$672. Now, -$672/$41,980= -$1.6% return. Obviously, we now know this isn’t a very good rental unit. If you hadn’t crunched the numbers and assumed the stereotypical Rent-Mortgage = Profit, you would be in big trouble. This isn’t even accounting for the management fee if you had a company take care of it for you.
I hope this helped you understand the costs involved with owning a rental unit. Sometimes it’s better to sell than to rent it out. Granted, this doesn’t account for your internal or overall rate of return, but it gives you an idea of the things you should account for. If you would like to see what we can offer please visit our Owners page. If you found value in this, please like and follow us on Facebook for more info.
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Finding the best property management company for your unit can be daunting. You already must deal with the difficult decision of handing it over to a stranger, how do you decide which one is the best for you?
Here are three things to consider:
First, the small things count. Window shop a little, and check out the website of different companies. Do they look professional and appealing? If you were a tenant, would you like the site? What kind of reviews do they have on Facebook, Google, Yelp, etc? Are those reviews from owners or tenants? Look for a mixture of both. Of course, you would like an abundance of glowing reviews from fellow property owners, but the tenants are who pay your rent. Tenants now do their rental searches almost exclusively online, make sure they are getting a good impression. If the company has a bad reputation with tenants, they may have a hard time attracting qualified renters. After you’ve identified the ones you like, go visit their office. Make sure it looks professional, the staff are courteous and responsive, and it ultimately gives off a professional vibe. First impressions matter for both owners and tenants.
Second, you should be looking for a MANAGER, not necessarily a company. The person handling your account is who you will be interacting with. Find someone you know, like, and can build trust with. You should always meet with several different people to compare their competence, professionalism, and integrity. If a manager isn’t willing to meet with you to talk through the process and answer questions, even on multiple occasions, move on. This is a person you will be doing business with for an extended period of time (2.5 years on average). Establish some common ground and nail down both sides’ expectations.
Finally, consider their pricing structure. Once you have established that you want to do business with a specific person, you need to be comfortable with the cost. Be wary of the “sticker price” some companies put out. “We will manage your unit for a low fee of 4% per month!” Sounds great, but did you notice the fine print where you pay a $200 tenant turnover fee, 4% of rent even if the unit is vacant, a new account set-up fee of $100, $5 document mailing fees, etc? A manager should be able to provide you with a simple list of what their fee covers, what it does not, and how much those extra services cost. If you are unsure about something, ask. A professional manager should be upfront and honest about the agreement you are entering.
The manager you choose to work with will be vital in your financial success. Do the research, interview multiple people, and establish clear and open communication before entering into an agreement. This person will be your eyes and ears on the day to day goings-on of your unit, make sure you can trust them. If you would like to know what Cornerstone can offer you, please visit our Owners page.
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Well, now we know the main reason property management companies want tenants to have it. But c’mon, what’s the likelihood of Tom Mailman breaking his back and suing everybody? What’s really in it for Joe Tenant? Let’s find out.
In addition to covering liability, renter’s insurance also covers YOUR STUFFF. That’s right, your personal belongings are covered in case something happens to them. What does this mean exactly?
There are many different companies and types of renter’s insurance but they all cover your belongings in a similar fashion. Basically, they agree to replace your stuff if a loss occurs due to a covered peril. Well what the heck is a “loss” and “covered peril”? A loss can be looked at as destruction or theft. Now, just because your stuff is destroyed or stolen doesn’t mean it is automatically covered. The damage must come from that “covered peril”. Simply put, insurance companies have a list of things they will and will not cover. Everybody covers fire and theft, but the better companies cover much more.
Making sure you choose a good insurance policy can be the difference between getting nothing, replacing your belongings with brand new items, or getting used items from the thrift store. The lowest level of policies usually only cover fire and theft from the house, that’s it. The better policies can cover much more. The range of covered perils can include fire, theft, theft from vehicle, theft from your person, wind, hail, rain, water damage (not from a flood), a truck smashed into your house and busts the TV, the weight of the snow on the roof caves it in and ruins your laptop, etc. You get the picture. There’s also some nifty language tucked into those policies about HOW they replace your stuff too. You want a policy that has REPLACEMENT COST and not DEPRECIATED VALUE. If you have replacement cost, you get paid the value of what it costs to replace the items. If you have depreciated value, you get the pawn shop trade in value. You get what you pay for.
Well, what should you pay for renter’s insurance? 10-20 bucks a month should get you excellent coverage amounts for your belongings on a very comprehensive policy. Companies base the price on 1) How much stuff you want to insure 2) Your insurance claim history and 3) Your credit. I’ve personally seen the best policies and rates from State Farm.
Well folks, now you know. After understanding what renter’s insurance is and what it can do for you, do you believe it is worth it? Leave a comment below or feel free to ask some questions!We always have tenants best interests at heart, if you would like to see our available units please visit our Rentals page. If you haven’t done so already, please like and follow the page to stay informed and exposed to new opportunities!
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As a tenant, have you ever been required to have a renter’s insurance policy? Have you wondered why? Do you understand what it is and how it benefits you?
Tenants are often required to carry a renter’s insurance policy and here’s why. Renter’s insurance covers two areas; liability and personal property. The area that the property management company is concerned with is the liability. The liability portion of a renter’s policy covers damages and injuries resulting from “negligent acts” of the tenant. For example, let’s say Joe Tenant is responsible for shoveling his sidewalk in the winter. One morning, Joe Tenant forgets, declines, or refuses to shovel the snow. Tom Mailman walks by, slips on the ice, and breaks his back. Who are the potentially responsible parties?
First, the tenant’s lease required him to take care of it, but he didn’t so Joe Tenant gets sued. Secondly, the property owner is ultimately responsible for maintaining his property, so Steve Owner gets sued. Lastly, Steve Owner sues the management company to recover his part of the lawsuit, because he paid them to enforce the conditions in the lease to avoid this kind of thing. This is where insurance comes in to play.
We are going to assume nobody carries insurance in this example. Let’s say Tom Mailman sues for $300,000 in damages. If Joe Tenant didn’t carry renter’s insurance, Joe tenant will end up paying for the lawsuit out of pocket. Most people don’t have that kind of dough laying around. So, Tom Mailman gets what he can out of Joe Tenant, let’s say $20,000. Well that still leaves $280,000. So now Tom Mailman goes after Steve Owner. Steve Owner doesn’t have a rental dwelling insurance policy and must sell his house to cover the $280,000. Now Steve Owner turns around and sues the management company to recover his loss. He paid the management company to enforce the lease conditions and avoid this fiasco. Well the management company can only put $50,000 together, goes broke, and then close doors. Well guess what, Joe Tenant’s life savings are gone, the management company is out of business, and Steve Owner is out $230,000. Nobody is happy.
Now let’s back the situation up and implement some proper insurance practices. When Joe Tenant signed his lease, he was required to carry renter’s insurance with a $100,000 liability limit (pretty average). Joe Tenant is responsible and honest and does just that. When Tom Mailman sues Joe Tenant, the renter’s insurance kicks in and Joe Tenant doesn’t pay much, if anything out of pocket. Now Tom Mailman still wants $200,000 and goes after Steve Owner. A quality management company will ensure that Steve Owner has a rental dwelling policy with a liability limit of AT LEAST $300,000. Steve Owner’s insurance then picks up the rest and Tom Mailman is made whole. Nobody loses their life savings, nobody sells a house, and nobody goes out of business.
To see what we can do for you as a tenant, please check out our Rentals page. Follow us on Facebook to stay up to date, click this link below!
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Tenants, Know Your Rights!
Avoid having your security deposit withheld for unlawful reasons. Follow these steps to maximize your security deposit safety!
1) Prior to the execution of tenancy, make sure your landlord furnishes you with a written statement of the unit’s current condition and verify its accuracy.
2) Request, in writing, the statement of damage and cleaning charges provided to the last tenant.
3) If the landlord refuses to do these things, they are barred from withholding any part of your security deposit for damages to, or cleaning of, your unit unless they can clearly and convincingly furnish evidence that you caused the damage in question.
4) 1 week prior to termination of tenancy, request the landlord to do a walk through of unit to identify necessary cleaning.
5) After your move out inspection, your landlord must provide you with a written statement of additional cleaning needed and allow you 24 hours to remedy the issues.
MCA 70-25-201, 70-25-204, 70-25-206
We also personally recommend doing a video walk through of the entire unit to document cleanliness and current damages. Submit a copy to the landlord and obtain a written acknowledgement of receipt.
School of Hard Knocks
We always treat our tenants with respect and compassion. If you would like to see what we have available, head over to our Rentals page!
Additional information is available online at http://courts.mt.gov/library/topic/landlord. Always consult with an attorney when pursuing any legal action.