What You Need to Know Before Buying Your First Rental

Ashley:
This is Real Estate Rookie episode 284.

Tony:
I really focused in on not just one city, but I was looking at specific zip codes within that city. Within those zip codes, I knew the street boundaries that I wanted to stay within to make sure I was super laser focused on one little niche. That allowed me to get much, much better, much faster, and much more accurate at analyzing deals in those markets, because instead of looking at this big, large set of potential properties, it was this smaller micro set that was easier to digest.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. I love the rookie replies because it takes… Obviously, we’ve got amazing guests on all the other episodes, but it’s cool to hear what our Rookie audience is thinking about, and what’s stopping them from getting started or keeping going, and being able to dive into those questions head on.

Ashley:
So today’s question, we talk about a lot of different things for our Rookie replies. If you guys want to have your question submitted on here, you can always leave us a voicemail at 188-85-rookie. You can write your question in the Real Estate Rookie Facebook group, or you can send myself or Tony a DM at Wealth from Rentals or at Tony J. Robinson on Instagram, and we may play your question on the show. The first thing we’re going to do today, the question is our first deal diary, as Tony had called it. We break down the first deals that we ever did. We talk about partnerships, and then we also talk about closing off-market versus on-market deals. What’s the different paperwork you have to do? How do the processes vary?

Tony:
Then our last one here is actually about Short-Term Rentals, my bread and butter, and the liability that comes along with that and how to protect yourself, and get things set up the right way, so lots of good questions. Before we keep rolling here, I just want to give a quick shout out to someone by the username of Mrs. placidChaos. I’d love to say five star review, and the review says, “Real estate is something I’ve wanted to invest in for several years now, but I’ve been intimidated by the thought that I couldn’t financially make it happen, but this podcast has shown me so many different avenues that can be taken, and I’m confident I’ll have my first property before the end of the year.”
We are confident that you will as well, Mrs. placidChaos. If you’re listening to the Rookie Show, and you’re part of the rookie community, and you haven’t yet left us an honest reading review on Apple Podcast or Spotify, please do. The more views we get, the more folks we can reach, and the more folks we can reach, the more folks we can help.

Ashley:
With that, let’s jump into our Rookie Reply questions.

Tony:
All right, so jumping into our first question, this one comes from Sean Gallagher. Sean’s question is, “I’m new to investing, and was wondering what your first deal was. If you don’t mind, also tell me how did you analyze the deal to determine if it’s good or not?” So first, deal diaries is what we’re doing on this question, Ash. Why don’t you go first? Give us the details of that first deal.

Ashley:
My first deal was the first property I ever looked at. When I decided I want to be a real estate investor, there was one property that I saw on the MLS first, and so I contacted the agent that had listed it, and set up a time to go see it. She said, “I just want you to know there are a lot of foundation issues and flooding that has happened on this property, and that’s why it’s been sitting on the market.” That right there gave me cold feet, and I was like, “You know what? Nevermind. I don’t want to see it.” Then that’s when I actually contacted my parents’ friend who was a real estate agent, and said, “This is what I want to do.”
So, I found a duplex in a market that I knew, because I was already a property manager there, and went and looked at it. I called the person who had already agreed to be my money partner. They wanted to start investing in real estate too, but didn’t have the time, didn’t have any knowledge about it. So, we both went together to look at the property. I ran the numbers, and when I say I ran the numbers, it was a pencil and a piece of paper and me being like, “Okay, I know I can rent each apartment for $700 per month. My water bill is going to be this, because I contacted the village to ask approximately what the water bill would be.”
I got some of the utility cost from the seller. I had my agent ask for that. Then I tried to think of any other expense, property taxes, insurance, and I was like, “Okay, this will work.” My payment was going to be to my actual partner. He was going to pay cash for the property, and then he would receive a mortgage payment from our LLC, so we were paying him directly, and we weren’t paying a bank, which… Then he got 50% of the cash flow, so 5.5% on the capital he put into the property, and he was getting it fully paid back, amortized over 15 years plus the 5.5%, 50% of the cash flow. He was actually making out pretty good.

Tony:
Yeah, it’s a good deal.

Ashley:
I would never do that deal now, but it got me started. He put a lot of trust in me. He took his life savings, and dumped it into that property, so we created an LLC together. Once we got that property under contract, we started an LLC where we were 50/50 on the LLC. Then we went to close on the property. I put in a little money for the rehab. It needed a split unit for AC and heat in the upstairs, so I ended up paying out of pocket for that, and then I think maybe the flooring I paid for. Then we had a couple other… We put new cabinets in, things like that, where he put in the money for that. Then that was just money put into the deal that we didn’t actually pay ourselves back for.
We eventually sold the house, and made a good profit on it. The property did cash flow. I did make one mistake on that property, and that was I did not account for snowplowing. This property was outside of Buffalo, New York, and snowplowing is definitely something you need to pay for, or even if you have a tenant do it. So, I ended up, I think, discounting the lower tenant’s rent. I can’t even remember the amount, but they were in charge of shoveling the driveway since the driveway was used by both tenants of the duplex. That definitely hurt the cash flow a little bit.
It definitely wasn’t a deal breaker, but… That was my first deal. It was definitely not my best deal, but after I got that first one, we closed on our second one, I think, maybe three months later. It was just from there, just really that propeller-

Tony:
Snowballs.

Ashley:
Yeah.

Tony:
When did you close on that first deal, Ashley? What month? What year?

Ashley:
It was September 2014.

Tony:
2014. Man, I didn’t know it was in 2014. I didn’t realize that. That’s awesome. Then do you remember what the cashflow numbers were on that deal? How much were you making while you guys owned it?

Ashley:
Oh God. When we first started out, it was only a couple hundred dollars we were getting in cashflow, because we were basically leveraging the whole thing. We paid, I think, 72,000 for it, and the mortgage was for 72,000 because we were paying my other partner back, so it was 100% leverage by him. I would never do that with a bank or whatever, but it was very minimal cashflow. Then we did the rehab and the upstairs, and then over the years, we were able to increase the rents. We didn’t have a ton of capital expenditures on that property at all, but the lifetime we held it, we actually sold it in… 2020, I think, is when we sold it, and we ended up selling it for 130,000, I think.

Tony:
That’s pretty good.

Ashley:
That property was definitely a great play for appreciation.

Tony:
Did You ever refi, or did you keep it with that debt to the partner?

Ashley:
After we bought that property in February of 2015, we bought our second property, and that one, we used his cash again to purchase. Then when we bought our third property, we went and did a portfolio loan putting those two properties under one mortgage. We used that debt then to go and buy our third property. So, we had a mortgage on them, but we were still paying the partner. It was just… We just kept rolling over like that. The mortgage on property C, that ended up paying for the property D, and it just went through the line. That’s how we had acquired our units at that time.

Tony:
So you’re almost like… I mean, you were BRRRRing basically, right?

Ashley:
Yeah.

Tony:
The true BRRRR where you’re paying cash for it up front, and then refinancing and using that capital too.

Ashley:
Yeah. So basically, we’re just reusing and over… That same capital, we just kept reusing over and over again. So, we’ve actually kept that loan going, and so throughout the years as the cashflow has done well on the properties, my partner would go to Vegas or different things like that. He would take some of that cashflow out, because we’ve always just held it in there, or it would be he wanted to buy something expensive or whatever, and I would pay part of his mortgage off like, “Here’s 20,000. We’re just going to take it off the mortgage over for you.”
I looked the other day, and there’s less than a year left on that mortgage, because we’ve just accelerated the mortgage paydown on that. He is so bummed that he’s not going to be getting that mortgage payment anymore.

Tony:
He’s like, “Slow down. Slow down. Slow down.”

Ashley:
But I’m like, “You do understand. You’re still… We end up getting more cash flow now, because we don’t have your mortgage payment.”

Tony:
That’s awesome. Well, it sounds like a solid first deal. My first deal was back in October 2019. It was a single family house in Shreveport, Louisiana. Not Freeport, not Shreveports, but Shreveport.

Ashley:
I’ll still never remember.

Tony:
You’ll never remember. I actually broke down the numbers in pretty excruciating detail back in episode 10 of the Rookie podcast when I was on as a guest, but I’ll give you the cliff notes version here. So essentially, I found a bank in Shreveport that had a really cool loan product, where if you found a property where the purchase price and the rehab costs were no more than, I think, it was like 72.5% of the after repair value, they would fund the entire purchase and the rehab with a year-long note interest only, and then they would do the backend refinance to put you on permanent debt. So, I did that. I found a property. It was on the MLS listed for $100,000.
I locked it up, got under contract. We closed on it, spent another 60 or so thousand dollars to renovate the property, and then we refied it out, and appraised for $230,000. So, I was just was under that 72.5% on the refi, and I was basically into that deal for literally $0 out of pocket, and it was pretty cool. Then I found a property manager out there. I lived in California. The property was in Louisiana, so I found a property manager that got it leased up for me. I don’t remember what we were renting it for anymore. I had the property for a year, and I ended up selling it, but I want to say the cash was pretty minimal.
It was $150 a month, I think, I was making after accounting for property management, some of the other fees. But again, it was $150 on $0 invested. So even though the actual dollar amount wasn’t all that high, it was an infinite return, because I put no money into the deal. I did that same deal with that bank on two properties there in Louisiana.

Ashley:
Tell us the rest of the story on that first one. So, what happened with it?

Tony:
I mean, so that first deal actually turned out really well. It was the second deal in Shreveport where we had the flood.

Ashley:
We have many, many episodes talking about that second property.

Tony:
That’s second property.

Ashley:
But For the first one, what happened?

Tony:
I mean, so I held the property for a year. We had one tenant in there the whole time. There’s a military basin in that city, and it was a military family that was there on assignment. They ended up getting orders to deploy somewhere else. So, they gave us notice. After that year, we’d already transitioned into the short-term rentals. I was like, “Ah, I think I’m just going to take my money, and sell the property.” So, we ended up selling it, I think, for… It wasn’t 230, even though it appraised for that much. I think we sold it for 215 or something like that.
I still got the check when I sold it, plus all the cashflow, plus the tax benefits. It was honestly a really good… I got on base with that first property, and it was a really good proof of concept for me that I could actually buy real estate, and collect money.

Ashley:
So if you are doing that same thing, and say you’re starting over but in today’s market, do you think you’d be able to find that same loan product, and make that same deal work?

Tony:
I don’t know, because I actually contacted that bank. It wasn’t even until I asked him about the loan products. I think I needed some paperwork or something for my taxes, and I was just chatting with the person at the bank. They’re like, “Oh, actually, since COVID, we stopped doing that type of loan product.” I don’t even know if they offered that anymore. But if they did, I would’ve 100% go after that deal, because it’s such a low risk way to get into it. What was really cool was that the bank, they funded the entire purchase, but they also funded the rehab, but they funded the rehab in draws. So, it was four different draws that they allowed for the contractor to take.
The way that it would work is they did an appraisal before. Then they looked at the bid that the contractor gave me, and said, “Based on the current condition of the property, and if you combine this with the bids the contractor gave you, here’s what we think the property will be worth after you’re done.” So, they almost validated my ARV for me. Then during the construction process, before they would release a draw, they would send an inspector out to the job site to confirm that the work that the contractor said he was doing was actually done.
So, it was this second layer of like… It was almost like training wheels for my first deal, because I had this bank who had a vested interest in making sure that the project went well, who was… They were validating my numbers. They were inspecting the contractor’s work. They were managing all the draw payments. They made it super, super easy for me. So if I could go back and do it again, I probably would.

Ashley:
One thing I did learn about that, I met with this hard moneylender in Texas one time, and just he broke down everything about how hard money works and operates in all these different things, but they did the same thing, where they would have somebody inspect the property, and he kept pushing it and selling it. He’s like, “This is a huge advantage to you,” and it was. But the person that I was there with, he’s like, “Ashley, keep in mind they’re charging you for this service. They’re charging you to send an inspector out. They’re charging you all these fees for them to oversee the project. They’re charging you a fee for a draw.”
I don’t know if it was exactly the same for your bank, but that’s definitely something to be cautious of. That shouldn’t be the only reason you’re going to that bank to do that hard money, or to do that loan because of having that resource as an advantage. You may be able to pay a contractor or a real estate agent, or somebody else to be that oversight for you too, where it may be cheaper, more affordable.

Tony:
That’s a great point. I think I was in a unique position, because they were just a local credit union, so they weren’t a hard moneylender who needed to make their points on fees and all these other things. This is a person who’s nine-to-five employee. They’re just running out at their job, and the inspections and everything didn’t come with any additional cost, because for them, they just wanted to make sure they were protecting the asset. So, it was a fantastic way for me to get started. Honestly, like I said, if that loan product still exists, I might go back to that city to buy another one. It wouldn’t be in a flood zone, but I might go back to that city just to keep that ball rolling.

Ashley:
I think my advice for somebody listening that maybe can’t do the deal that Tony just did, because they can’t find that loan product, is to go back to episode 280, which would’ve been, I think, two weeks ago, we did a Pace Morby. We had him on for a Rookie Reply, and he breaks down creative financing, how to do subject two, and how to do seller financing. I think that is a great alternative in today’s market to be able to get some zero-money-down deal by using those two strategies.

Tony:
Ash, we should also answer the second part of Sean’s question is how did you analyze the deal to determine if it’s good or not? I think Ash and I both have similar… Well, maybe not for your first deal, Ash. I know maybe yours is a little bit different, but for me, that first deal, I was already well entrenched in the bigger pockets community as just like a consumer. So, I was already listening to the OG podcast. I had read several of the BiggerPockets books. I was a pro member with my calculator, and I used the BP calculator to analyze every single property that I was looking at.
I think this was before BP had the BP Insights. So, I was using tools like Rentometer. I was looking on Craigslist and Facebook marketplace, and just trying to analyze what the potential rental revenue would be. I used those numbers to plug them into the BP calculator. Then I actually met with the local property manager, the one that I ended up hiring. I had them give me numbers on potential expenses for a property of that size. That gave me a lot of confidence. I feel like what helped me a ton as well, Sean, was that I really focused in on not just one city, but I was looking at specific zip codes within that city.
Within those zip codes, I knew the street boundaries that I wanted to stay within to make sure I was really just super laser focused on one little niche. That allowed me to get much, much better, much faster, and much more accurate at analyzing deals in those markets, because instead of looking at this big, large set of potential properties, it was this smaller micro set that was easier to digest.

Ashley:
Mine is different actually. I didn’t… I bought that property the end of 2014, and I did not discover BiggerPockets until 2017. For me, my only knowledge of analyzing a deal was because I was managing a 40-unit apartment complex in that same town. I had also previously worked as an accountant. I was an intern at an accounting firm all throughout college. I had graduated with an accounting and finance degree, and so I had a basic understanding or maybe more than basic understanding of financials, of the profit and loss statement, how to calculate cash flow for any business. So, I basically just took what I knew from accounting, and I looked, “Okay, what’s my income? What are my expenses?”
Then to determine what my cash flow would actually be is, “Okay, what’s going to be my principal mortgage payment? Any other loans I’m going to need to be paid back?” That was the only way I knew how to analyze. As the property manager of that 40-unit apartment complex, I saw other expenses that may come up, what the property taxes were like for that town, just different things. So basically, experience from my accounting job and experience from being a property manager is I just figured it out how to analyze the deal.
Obviously, now, I don’t analyze deals that way. I realize there’s a lot more that goes into it, but at that time, I didn’t know what cash on cash return was. I didn’t know what ROI was. I didn’t know what price to rent ratio was. I was just, “Is this going to cash flow?” That was basically it. That was my only metric, I guess, if the property would be a good investment or not.

Tony:
But you got to start somewhere, right? That first deal is one that got you going. Obviously, everyone listening to this podcast has the benefit of already being exposed to everything that BP has to offer, so leverage the podcast, leverage the calculators, leverage the community, leverage the books, leverage the YouTube channel. That’s really going to give you the confidence to move forward and analyze correctly. Sean, hopefully that gets you started off on the right foot. Man, we’re excited to hopefully see you get that first deal closed, and you either be a rookie rockstar maybe a guest on the podcast one day.
All right, so next question here. Aaron J. Nygaard is the person asking this question. I’ve only heard the last name Nygaard one other time. Have you ever seen the show Fargo, Ashley?

Ashley:
No, I haven’t. I have at least heard of it. I’m pretty sure that you and I have never ever watched the same show or movie except for Tommy Boy, only because I except made you.

Tony:
Except the Tommy Boy because you forced me. Fargo is… I think it was on FX. I watched it on Hulu. You can watch the whole first season, but it… I’m not going to spill the beans, but it’s literally probably one of my most favorite shows that I’ve watched recently.

Ashley:
Oh, really?

Tony:
The main character, his last name is… His name is Lester Nygaard. Anyway, not what today’s question is about, but Aaron Nygaard, he says, “What paperwork do I need to close an off-market deal, and why? If there are cash offers, can it all be done between me and the seller? Do you typically ask for an inspection period? Any help with these questions would be great. Thanks.” Ash, I think we’ve both purchased properties both on markets and off market. So, I guess, what paperwork do you typically use to set up your deals when you’re going off? Actually, I guess we should take a step back, and just define…
Pace actually did this when we interviewed him on whatever episode that was. I think it’s maybe important for folks to understand what the difference is between on market and off market. So when you talk on market, those are properties that are typically listed by real estate agents that are on the MLS. So when you open up your phone on Zillow or Redfin or wherever, and you see all of those properties that are listed there, those are on-market properties. The vast majority of which have been listed by real estate agents. Off-market deals are properties that are not found on sites like Zillow, Redfin, et cetera, or are not listed on the MLS. Instead, there’s some direct connection between the buyer and the seller.
It could be that she was a buyer. Maybe it’s a neighbor of yours who’s selling their property next door, and the two of you are just having a conversation. Maybe you’re using a third party like a wholesaler, and the wholesaler is a person that’s found the seller. Now, they’re connecting you, the buyer, with the seller. But typically, it means that the properties are not listed publicly anywhere, and there’s no real estate agents involved typically. That’s the difference between on market and off market. The challenge with off market is that because there is no real estate agent, there is no one there to really guide the transaction to make sure that everything’s done correctly, so that’s the challenge.
Ash, what is your experience typically on the off-market stuff?

Ashley:
I think it’s also we should discuss… Depending on what state you’re in, there’s different ways to close on a property too. In New York State where I’m from, you have to have an attorney to close on a property. In California where Tony is, you do not have to. You can go directly to the title company. In New York State, the attorney is the facilitator between you and the title company along with you and the seller’s attorney. So for me, when I am purchasing an on-market deal, I have my real estate agent drop the contract. If I am purchasing an off-market deal, I have my attorney, usually her assistant, drop the contract.
So, she uses the same exact contract that a real estate agent would use, and fills it in for me. I just send an email with the information, so the property address, the seller’s name, what LLC I want to put the property in, the mailing address I’m going to use, what my offer is, any terms on the property. Then my attorney’s assistant will go in and fill in all of that information, send it to me to look over, and then I usually DocuSign it. Then that’s when I can present it to the seller, or send it over to the seller to sign. From there, I give my attorney the executed documents to sign documents. The seller gives their attorney those documents.
We have also put on the contract as to who each of our attorneys are. Then from there, the attorneys pretty much take over. They order the title work. They handle escrow, and they basically make sure each party is doing their part. Do I need proof of funds? Do I need a commitment letter from the bank after a certain date? Then they set up the closing date, and do the closing. That’s the difference for me when doing on market as off market is I’m just using a different facilitator in a sense, and I’m really not… I’m still pretty hands off in each situation. The big difference I see is if I do an off-market deal, is it just me, the negotiation with the seller, and being able to talk to the seller directly?
I actually think it’s a huge advantage than having to tell my agent to tell their agent to tell the seller. I feel like sometimes it’s playing telephone as to doing that. But whether I’m doing on market or off market, usually, after the real estate contract has attorney approval in either situation and assigned and both attorneys approve, any situations that may come up before the property actually closes, I have found that it’s best to have my attorney negotiate with their attorney to figure out a resolution for that instead of having my agent and their agent figure something out, or go back to the negotiation table or anything.
For example, if I have an inspection done, here are the things that I want fixed. I’ll usually send it to my attorney to just say, “Can we ask for five grand off because these are the things that are result of the inspection, whatever.” Then they ask their attorney and things like that. So, I do try to keep it to one person instead of having my attorney and my agent trying to figure things out throughout the closing process.

Tony:
Ash, what’s the typical cost if for your attorney? What fees do they charge on a usual transaction?

Ashley:
Usually, around $1,200 is what I’m paying right now to close on a property, and that includes the title work. I think my… The title insurance on that too, so I don’t know exactly offhand what is the actual attorney fee on it.

Tony:
That’s about what we pay our escrow company. Our process is super similar to you, but instead of using an attorney, we have a really good relationship with an escrow company that we like to use here in California. Whenever we have an off-market deal saying, “We just send them the details of the transaction, who the buyer is,” if we’re selling the property or who the… vice versa, just the details of both parties. They draft up all of the agreements, the documents. Typically, it’s the same what we would get from a licensed agent here in California as well, because California has a California version of a purchase and sell agreement.
They draft it all up. They send out all the DocuSigns. They collect all the earnest money deposits. They’re coordinating with title to get all the title work done and make sure everything’s clean and clear there. They almost act as almost like a transaction coordinator, but for me personally for each deal that we do. I would encourage anyone that’s listening, if you are doing an off-market transaction, even if you’re not using a real estate agent, still find that qualified third party, whether it’s an attorney if you’re in a New York, or escrow company like how we use, or a title company, whatever it may be.
Find that company to help facilitate that transaction, and that’s how you can make sure that you’re checking all of the right boxes.

Ashley:
One thing I do want to mention too, as far as the process, if you’re buying commercial property, you most likely won’t use the contract that real estate agents use like the statewide contract where real estate agents are just filling in the blanks. Usually in my situation, I use a commercial broker for commercial properties. Even though I’m using him, he doesn’t usually put together the contract. He will, but I usually have my attorney create the contract, because it’s usually so specific as to what’s included, what’s not included, and different things like that.
That’s also something to be cautious of where usually on the commercial side, there’s not just that general generic contract where you’re just plug and play the information. So, keep that in mind too if you’re buying commercial property.

Tony:
Super valid point. There’s just one other part of Aaron’s question here. He says, “Do you you typically ask for an inspection period?” Aaron, typically, all of the things that you would have in a regular real estate purchase and sell agreement, you should also include when you’re going off market. Obviously, it’s really whatever you and the seller agree to, but you can include all those same things. So if you need an inspection contingency, if you want a financing contingency, whatever other things you want to include in that contract, you’re more than welcome to.
You aren’t limited to doing that just because it’s an off-market transaction. So even for us, if we’re buying something off market, depending on who the seller is or what the situation is, we typically still do include an inspection period, because we want to make sure that we’re protecting ourselves, and buying this asset. We do have some wholesalers that we buy from where the EMDs are non-refundable on day one, but in those situations, we still want to make sure that we get eyes on the property before we put that EMD up to make sure that we’re not walking into any unforeseen issues. But yes, you can totally, and you should, include an inspection period when you’re going off market as well.

Ashley:
For me, I haven’t done an inspection in a long time, but I recently put an offer in on a property that I didn’t get unfortunately, but it was the first time I put an inspection in a long time just because it was outdated, but it was very well taken care of. It just didn’t look like it needed extensive rehab where properties have banned the last couple years have needed extensive rehab, and the market was just so competitive that I would skip the inspection on those, because I knew that I was going to be redoing everything anyways. It just gave me a leg up. I feel like the market is shifting, where you have that ability now to put that inspection period back in, and still be competitive in the market. But also, I think it very much varies on what kind of property you’re going in and purchasing too.
When I flip the house in Seattle, Washington, one thing I learned there is if there is something wrong with the sewer line that goes from the main to the house, for some reason, there’s… I can’t remember exactly if it’s a permit issue, or if it’s something, but it has something to do with the cost of repairing that septic. So if Tony sold me a house in Seattle, and there ended up being something wrong with that sewer line, it would cost me a lot more to fix it than it would if Tony, as the current homeowner, went in to fix it. I can’t remember exactly what that detail is, but you guys can ask James Dainer, because he’s the one that I learned it from. He’ll be able to rattle it off the top of his head the specifics.

Tony:
I wonder if it had something to do with maybe the assessed tax value of the property or something like when a property changes hands, they reassess it. Maybe that’s how… I don’t know. I’m shooting in the dark here.

Ashley:
Well, I’m pretty sure it was the direct cost, the cost too, so I don’t know if it was like you had to get a more expensive permit, or you actually had to get a permit where if you were the current owner, and you had already owned the property for so long or something, I don’t remember, but it’s just like those are little things you would never think of. So every single property, he does a sewer scope. He scopes that line, and what he does is he’ll just say, “Okay.” He’ll negotiate with the seller, and maybe one option is it’s going to cost five grand for this to be replaced.
We will actually add five grand onto the purchase price if you go ahead and just do this repair before we close and pay for it, because it’s going to cost us more. So, it’s worth it for us to just pay you to get it done.

Tony:
Cool. Well, let’s move on to our next question here. This one comes from Michael Bafudo. Michael’s question is, “Just went into contract on our first STR.” Congratulations, Michael. “But we went into it as a second home. Wondering if I should take out renter’s insurance or regular homeowners. If I take out renter’s insurance, will it mess up my mortgage? If so… I take out regular homeowners. Does it cover renters in it anyways? Thanks.” Michael, this is a great question. Renter’s insurance is…
Ashley, you can probably speak to this better than I can, but if I’m understanding the question correctly, Michael, renter’s insurance is typically what you make your tenants take out when they move into your property, not necessarily what you as the owner needs to take out on behalf of your tenants. I know every apartment I’ve lived in, and even the long-term rentals that we did have, we had our tenants get their own renter’s insurance, which covered the goods of theirs that were inside of that property. Now, what we do for all of our short-term rentals is we notify the insurance company that it is going to be used as a short-term rental. Even if you have a second home mortgage, you can still do that, because the short-term rental or the second home loan still allows you to rent out that property when you’re not using it for personal use.
So, we still let our insurance companies know that it’s being used as a short-term rental. They add some additional coverage to make sure that it accounts for the increased risk that comes along with having short-term rental occupancy. But in addition to that, what we also do is we got an additional umbrella policy to help with any potential liability that might come from that property. There are two resources I’m going to give you, Michael, to help with the insurance piece. One company is called Steadily. They’re an insurance broker in the short-term rental space. We’ve heard really great reviews from folks in the space about being able to get pretty competitive short-term rental focused insurance policies through Steadily.
Then another company is called Proper Insurance. They specialize in short-term rental home insurance. They offer some additional things like revenue protection. So if you have an instance where your property goes down for some reason, they can recoup your revenue for you, but they also have liability protection for short-term rental host. That’s my initial take. Ash, I don’t know, what are your thoughts for Michael here?

Ashley:
You said it exactly like you’ll have to get the homeowner’s insurance, because first of all, your mortgage is going to require it. If you don’t have a mortgage on the property, you don’t have to have insurance on it, I guess. You can be self-insured. I have actually bought a couple duplexes where the owner’s like, “Oh, I don’t have insurance on it. I’m self-insured.” So, you do have that option, but if you do have a mortgage on the property, the lender is going to require you to show proof of the insurance, and that it is paid every year, and you keep that policy in place.
They may have requirements too as to what kind of insurance you need to have, what kind of limits, what kind of coverage you actually need. As far as the short-term rental, I think, Tony, you couldn’t have explained it better, is going to talk to an agent or a broker who is experienced in putting insurance on short-term rentals. Where I have seen it is that you have your homeowner’s insurance, or maybe it is just an investment property for you. It’s not even a primary home or a second home. It’s just an investment property where you go and get a landlord policy with almost a short-term renter rider agreement that’s added on to your policy. That’s an extra cost.
That’s one way I’ve seen it written up too, but highly recommend having some coverage. For the LLCs, I don’t have that umbrella coverage, but for anything that is in my personal name, I do have umbrella policies on those to go above and beyond any policy or any coverage that my regular homeowner’s insurance coverage may not cover.

Tony:
Yes. You hit the nail on the head. The reason why we did that is because the majority of our short-term rentals are titles held in our personal name. So, we needed that extra layer of protection, because we don’t have that LLC on title to separate everything there, so makes us sleep a little bit easier at night with that additional umbrella. But, have you ever actually had a claim against any of your insurance policies at any of your properties?

Ashley:
No, knock on wood, I haven’t. Good thing I’m sitting at a wood table. But no, I have never had to make a claim. I did have to at the 40-unit apartment complex that I started out managing. We had severe water damage from an ice storm where ice built up on the roof, and then the ice started to melt, but the water had nowhere to go but into the roof and into the eaves. Then it caused $100,000 worth of damage for, I think, it was maybe eight apartments total that were all along this wall. It was an extensive project. We called a home remediation company where they come in. They rip out the drywall. They dry out the…
Basically, you’re down to the studs. They dry it out, and then they go back and rebuild the walls. What we did was we had hired somebody. I can’t think of what the name is, but it’s some kind of… It’s not an insurance broker, but what he does is he’ll come in, and he’ll try and get you more money from the insurance company, so loss rents. If we have to put people up at a hotel, make sure that you’re getting the maximum benefit from your policy. So, the insurance company originally offered to write a check for this to cover it, and we had him come in and actually get us more money from the insurance company, and then we had to pay him a percentage of what he got us over what we had originally got.
I can’t think of what his job title was called, but if you do find yourself in a situation where maybe your policy isn’t going to be covering what you thought it was going to be, it may be worth hiring someone like this, and giving them a cut because it’s better to get a little bit more than no more at all.

Tony:
Ashley, what was the episode where we had the asset protection guide?

Ashley:
I can’t believe I don’t know this offhand, because I give it out all the time.

Tony:
All the time.

Ashley:
I’ll look real quick.

Tony:
Look it over. Look. I’ll share really quickly. We actually haven’t had any claims against any of our insurance policies either, thank God, but I always do get somewhat nervous because obviously with the short-term rental space, we get people coming in and out. We have hot tubs at the majority of our properties. We have now an indoor pool at one of our properties, and those by themselves are just high-risk things to have. I’m just always nervous of those things. That’s why we wanted to make sure that we’re really beefing it up. Did you find it?

Ashley:
Yeah, it’s episode 106, Brian Bradley. He’s a asset protection attorney. He did two episodes with us, so I think it was 105 and 106 or 106 and 107. It was just such a wealth of information. We had to break them up into two episodes there.

Tony:
So if you want to be scared out of potentially ever buying your first long term or short-term rental, then definitely listen to those episodes. All right. Well, I feel like we got through a lot today already, right?

Ashley:
Yeah. This is good. Thank you guys so much for joining us for this week’s Rookie Reply. My name is Ashley at Wealth from Rentals, and he’s Tony at Tony J. Robinson. We will be back on Wednesday with a guest.