Q & A With America’s Real Estate Professor: Rental Property as Investment

Q & A With America’s Real Estate Professor
Zillow
Jul 24, 2012

 

Rental Property as Investment

Q. I own one real estate property that has been effortless to manage because of the great renters. I am considering a second duplex purchase to rent if I can afford it. I am wondering if I should keep buying more rental properties? Jonathan G., North Carolina

A. That’s great news that your rental property has been effortless to manage due to great renters. However, I can assure you that over time real estate is rarely effortless. Most likely you’re going to experience what other property owners encounter – plumbing and electrical issues, a neighborly dispute or two, tenants who damage the property or tenants who don’t pay rent. If some or all of these problems do not occur over time, you’ll be the one landlord in a million who has escaped these issues.

Back to your question, should you keep buying rental properties? Although most real estate people are not diversified because all their money is typically in property, all people really should have a diversified investment portfolio. What that means is that they should split their investments into stocks, bonds, real estate and maybe other assets.

A fee only financial advisor, like one from LPL Financial or Charles Schwab (just to name two out of thousands), should be the individual to ask about how your investment portfolio is split between asset classes – typically termed “asset allocation.” They’re going to look at your assets, age, family, income and risk tolerance and help you make a better decision. So that’s really the best guidance I can give you and all the readers.

Now, if part of an advisor’s guidance is in fact to buy more real estate, I suggest you continue to educate yourself as much as possible about rental properties, cash flows, taxes, title issues and insurance to make sure you are making smart purchase decisions going forward on every property you purchase.

Lastly, if you have great renters, it’s probably because you treat them well and with respect, keep your property in good shape, and don’t charge or blame them for broken items. Great job! You’ll make the most money with the least hassles by treating them the way you’d like to be treated if you were renting someone else’s property.

Loss Assessment Insurance for HOAs

Q. I’m renewing my interior HO-6 insurance policy for my condominium and I see a line item called “Loss Assessment”. I’m wondering if that covers special assessments, if any, on my unit? It’s only $8 per year too! Lisa S., Plano, Texas

A. Wouldn’t that be nice! Unfortunately, Loss Assessment insurance is not for covering the type of special assessments you are thinking about. Even though it sure sounds like it does.

But don’t worry. You’re not alone in your misunderstanding. Many insurance agents also get this wrong as they don’t know how this coverage works.

This insurance, in general, only covers a very specific type of loss or two. The most likely coverage is if your HOA gets sued and there is a big judgment against it and the HOAs liability insurance is not enough to pay the claim. For example, if the HOA has a lawsuit judgment against it for $4,000,000 and it only has $2,000,000 of general liability insurance. Theoretically, and possibly, that could mean the extra $2,000,000 uninsured loss could be allocated to each unit owner, pro-rata, and each would be responsible to pay their portion of judgment. If there were 100 units, that could be a $20,000 per unit special assessment. If you have Loss Assessment insurance, your insurance company would cover this loss. It’s rarely needed. I’ve never heard of any cases – and that’s why it’s only $5 to $10 per year.

It could also cover other extraordinary issues. Check with your agent and read your policy related to this issue.

So no, it doesn’t cover regular, general maintenance-related special assessments. That’s your job as a percentage owner in the community.

Leonard Baron, MBA, is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com