Ep. #48 - Do You Require Renter's Insurance?

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Do you / should you require your Tenants to have Renter's Insurance? Even if you don't yet have any properties, you will soon, right? Right!? So then this is the question that you should ask and answer, as it relates to one of the critical aspects of how you'll run your Rental Property business.

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Intro...

Welcome to Episode #48 - Do You Require Renter's Insurance?

That's the question... "Do You / Should You Require Your Tenants To Have Renter's Insurance?"

Well, when I first started out, I didn't. It was completely optional - based solely upon the Tenant's preference. Although I did make them sign a waiver, which stated they were voluntarily choosing NOT to get insurance coverage of their own, and so they fully understood that their personal belongings were NOT covered by my property insurance as the owner.

The system that I use to generate my lease has a template that gives the option of stating that failing to have renters insurance is a lease violation (or not); however, I would go with the choice that it's highly recommended, but not required - and then add in the insurance waiver to become a part of the lease.

I never really thought much about this, as my homes are in "good" locations that are not obviously prone to suffer a break-in - and I even offer my tenants Vivint Alarm Systems to further discourage a break-in. But I later came to understand the risk to me as the owner / Landlord - by not requiring Renter's Insurance.

You see, it's not just a matter of covering their personal belongings in the event of a break-in - which is all that I was thinking. But also fire or a tree falling on the property (which does happen) - or any other such event that causes damage to the Tenant's property within the home. But it's also protection against someone getting hurt inside the home or on the property.

Should anything take place at the home that might become an insurance claim or even becoming a lawsuit - having Renter's Insurance in place will likely mean that it becomes the first source of coverage, before my owner's property insurance comes into play.

This is a significant consideration. For example, I've got several properties with coverage from the same provider. So if I were to have a claim against one of those properties, it could easily result in my coverage going up (not just for the property in question) - for ALL of my properties with that provider. They could even cancel my coverage for that property, or all of them. And once you are known to have filed a claim on coverage with one provider, it can sort-of "black ball" you with others.

It could easily be the case that a claim against my property insurance could end up causing real problems for me with coverage for other (or all) of my properties. Yet with renters insurance in place, many claims may never even touch my property insurance - and be confined solely to the Tenant's Renters Insurance.

So just think how much better you'll sleep, knowing that in the event of a break-in or fire or someone getting hurt at your property - that you've got NOT ONE, but TWO Insurance Policies in place before things reach you (or your LLC) - and that your insurance policy may never even need to come into play, as the Tenant's policy may be first in line.

So I've taken to now requiring Renter's Insurance and that the management company and/or the owning entity for the property be listed as an additional insured on the Tenant's Renter's Insurance policy. In this way, I am directly covered - and also get notified in the event of a lapse in the policy coverage.

And to make things easier for my tenants, the same system in which they applied for the rental and where they primarily pay their rent (Cozy.co) - is also where they can order a Renter's Insurance policy.

But I've recently come across a study on Renter's Insurance a the ConsumerAdvocate.org Website (and I'll post a link in the show notes): https://www.consumersadvocate.org/renters-insurance - which provides good insight into the features, options and providers of Renter's Insurance Policies.

There is even an FAQ section within this report (at: https://www.consumersadvocate.org/renters-insurance#toc-faqs) - that answers some common questions Tenants often have as to why they even need Renter's Insurance - as they may not think they own anything of significant value such that it needs to be insured.

I found this research and report to be very insightful, as it covers reviews of: Progressive; State Farm; Amica; Liberty Mutual; and several other providers of Renters Insurance.

So consider if you'll be making the same policy change that I made - and REQUIRE RENTERS INSURANCE of all tenants going forward. If so, you can integrate information such as found in this report to explain this requirement to your existing and prospective new tenants.

Why not put a layer (an additional layer) of protection between you and any liability? Checkout Episode #45 on "LLC Obsession" for details of how people get fixated on LLC's for liability protection - but your #1 protection is how you operate your business. And adding an additional layer of protection through a Tenant Rental Insurance requirement (that costs you nothing) - provides a great deal of protection and piece of mind for both you and your Tenants. How better to run a Rental Property business?

And having this requirement in place, may be a good excuse to start allowing pets in your Rental Properties - which itself can be a source of additional revenue. And if you're already allowing pets, then you certainly want the additional protection of requiring those Tenant's to have Renter's Insurance. Or do you want to have someone get bitten by a dog that lives on your property and now it stands for you and your insurance to pay their medical bills. I just don't need those headaches in my life.

Best of all, if you state upfront that a Tenant paid Renter's Insurance policy must be in place as a requirement for Occupancy - it will cause a certainly number of prospective Tenant's to self-eliminate themselves for consideration. And those would have been the Tenant's who cause the majority of your problems. Again, I don't need those headaches in my life.

If the relatively small cost of a Tenant Renter's Insurance Policy is a cause for concern on their part, then it means their finances are extremely tight - which is certain to quickly become YOUR problem, when they can't pay the rent on time. It will also mean they are unable to properly care for the home, so wear and tear will increase.

They may not think their belongings are even worthy of insurance protection, so what care do you think they'll apply to your property if they care so little for their own stuff so as to be wiling to protect it. Or worse - maybe they think it is YOUR responsibility as the Landlord to protect their things, which right there shows you how their Tenancy is going to go.

So many red flags are raised when a person is not even willing (or able) to pay a few bucks to protect their own stuff. So make this a requirement of Tenancy - even in cases where the rent is subsidized by a third party organization or entity (such as Section 8). And you can even go as far as making it a lease violation for there ever to NOT be insurance in place with you listed as a loss payee.

This is importantly because it is not just a policy to protect the Tenant's belongings, but also coverage for certain aspects of the property as well. So the tenant is protecting their own stuff, while also extending that protection over certain aspects of your property also.

And the perfect example of that may be one of the fears of Landlords everywhere - when a disgruntled Tenant places cement in the toilets just to get back at you for evicting them or something.

It's certainly never happened to me, and is likely one of those urban legends as to if it has ever happened with any frequency so as to make it a real thing to be concerned about. But how much better for you if it did happen (or something like it), and you have a Renter's Insurance Policy in place that lists you as the loss payee as the damaged party (versus listing only the tenant). And even with you listed as the loss payee, I know its debatable if the insurance provider would actually pay out in such a scenario - but that's not the point I'm trying to make.

My point is that with a Renter's Insurance requirement enforce, if you ever do end up with hostility between you and a Tenant over an eviction situation (it will surely happen even for me at some point)... You may be able to bring some sanity and restraint back into the situation (and make the Tenant think twice about doing any damage) - by mentioning (and thereby reminding them), that any property damage done may become both a criminal and legal matter for them that could linger for years. But that you'll likely be protected and made whole by their own Renter's Insurance policy, which could then get charged back to them.

True or not, it's possible under certain circumstances - and may be just the realization a hostile Tenant might need to understand they cannot really do you any harm without potentially harming themselves far worse in the attempt. And so much of being a successful Landlord is all about how you deal with people - which should be in a reasonable manner that lessens the likelihood of blow-back upon yourself. And I like for as many protections as possible to be placed in between me and any such blow-back - even if it just a perception.

Renter's Insurance is just one such protection, perception or whatever you want to consider it's value in the end - but I'd rather have it there than not. And I don't even allow for the option of it not being their any longer. How about you?

Outro...

Disclaimer

Owner's Property Insurance is not the only type of Insurance that you need to consider... Another is Renter's Insurance. And do you / should you require your Tenants to obtain Renter's Insurance? That's the question being asked and answered (from my point of view) in this episode of the... and Landlord! Rental Real Estate Investing Podcast.

Here I go into details as to some of the ways you're protected by having Tenant's obtain their own coverage in the form of Renter's Insurance. Not least of these protections is that the mere fact that you've impose this requirement will result in certain prospective Tenants (who might have been problematic) - self-eliminating from consideration of occupying your property in the first place. Putting reasonable (and LEGAL) barriers to Tenancy in place will help to get you the best Tenants - and a Renter's Insurance requirement can be just one means of doing so.

Much of what we discuss on this Podcast is about how to be the best Landlord you can be - with the fewest headaches. Well, having a Renter's Insurance requirement for Tenants can be one of many means to that end. Renter's Insurance is a protection not just for your Tenant, but for your property, for YOU and your LLC - paid for by your Tenant. What's better than a benefit for you that is paid and provided by someone else - and for which they benefit as well?

Ep. #47 - The Note Closers Show Podcast Host - Scott Carson

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Ok, so while I know you love listening to just me in the solo-cast format - I don't know everything (Yes, I'm shocked by that as well). So I'll occasionally have a guest on the show to share their expertise or experience. Actually, I'm going to try to do that a lot more often - with the thought that if they have something to say that interests me, it might also be of interest to you. In line with that, I'm interested in Real Estate Note Investing, and so my guest on today's episode is Scott "The Note Guy" Carson.

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Intro...

Welcome to Episode #47 - with The Note Closers Show Podcast Host - Scott Carson

So I won't delay this... Just a little background. I first meet Scott Carson at Podfest Expo 2019 in Orlando, Florida. I went to this event about a month prior to releasing the first episode of this Podcast. Scott was one of the many great speakers at the event, and I took more than one nugget from his presentation that became the... and Landlord Podcast!

So, if you're considering starting a Podcast, Podfest Expo will take place again early next month - and it's certainly a worthwhile event. If I can get my schedule right, I'll be attending again, as it'll give me a chance to get more great guests on the show, like Scott Carson. So without further delay, here's my first guest interview since way back at episode #20. Keep listening and you'll learn why I'll certainly give Note Investing a try.

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* Automated Transcript *

J.T. Smith (00:05):
All right, so welcome to the and landlord podcast and I'm excited to have a guest today on the show. I'll be doing an interview with Scott Carson, who is the host of a popular podcast. The note closers show podcast. Scott is a nationally syndicated radio host. He's been an active real estate investor and entrepreneur since 2002. He focuses on the thing that we're going to discuss today, the niche of distressed mortgage and note investing. He's done that since 2008. He is a highly sought after speaker and podcast guests, which is why I'm so excited to have him on the show. He's been on hundreds of different speaking engagements and appearances at conferences, real estate clubs, networking events across the country, and he's also been featured in many media outlets, not limited to Investor's Business Daily, The Wall Street Journal, Ink.com. He calls his home Austin, Texas. So join me in welcoming to the show, Scott "The Note Guy" Carson.

Scott Carson (01:09):
Hey J.T, I'm so honored to be on here, man. Excited to have some fun with it today and deliver some nuggets to your your amazing audience. Honored to be here.

J.T. Smith:
So before we get into it, what do you do for your free time when you're not related to real estate or something like that?

Scott Carson:
So that's a great, great question. I'm a big sports fan. I played college football for a couple of years in college. And so, I love attending football, baseball, sporting events. I like going to concerts. But we also do a lot of stuff here locally in Austin. Austin's a beautiful city, the live music capital of the world. So we love going out to different venues here, great food and also enjoy the artsy side of things, theater plays, we just like to have a lot of fun. And so I think he has some of the biggest things is when my father left know, passed away years ago, one of the biggest things he always said to me is life is about making memories. And so if you can't, if you can't enjoy it, you're doing something wrong. And so we try to do something fun every week if we can or try to experience the life because life is a buffet and it's a, it's an amazing ride if you can enjoy it and, and die from that table.

J.T. Smith (02:19):
I've had some good outings in the Austin area when I was there for conferences. So yeah, you're right. That is a place that has some pretty good nightlife activities and the colleges are there. So if you're a fan of any of those local teams, you can definitely find a game. So, yeah, no doubt there. So the reason that I wanted to talk to you, I'm fascinated with the idea of different ways of investing in real estate. As , I'm a landlord. I concentrate on buying properties directly and renting them out. But the idea of going about it a different way of getting the note was always something that was fascinating to me. But I had a little fear and I feared losing money and

Scott Carson (03:00):
Investing in distressed assets. So I was wondering if you could just give me a high level overview of the note investing business such that it's not going to scare me away and think that I'm going to lose all my mind. No, it's a, it's a really good question Jonathan. That's one of the most common questions we get from people is why the heck would I want to invest in a distress note? And the biggest thing that you have to realize is while the note and the mortgage is distressed, and what do you mean by distress? It means that somebody has either fallen on hard times or something's just not making their mortgage payments. And that can happen for a variety of reasons. They've been laid off, the market is crashed, which we obviously saw over a decade ago. They've gotten sick loss of a loved one going through a divorce.

Scott Carson (03:42):
, there's a variety of things that people won't make mortar fan, but we find that most people want to pay the mortgage on time. They want that dream of home ownership. So the distress side of things is just on the mortgage. But the beautiful thing that backs the mortgage as collateral is the real estate. And so I'll give you an example. Borrows $120,000 on a house is only worth a hundred K or maybe making payments or haven't made payments in six months or so. We oftentimes can pick up that mortgage somewhere around 30 to 60 cents on the value of the property, which gives us a lot of flexibility to pick up deals at well below what other people are paying in the traditional retail markets. , so that's the thing that I like is that Hey, we buy the debt at a substantial discount from the bank through the hedge funds out there.

Scott Carson (04:34):
We become the bank where I'm only buying first liens. And so that way we can negotiate it. Since we bought the note Dame discount, we can reach back out to mr and mrs borrower and say, listen, Hey, I know you've gone through some hard times. , let's get you back on track. , I don't actually want to keep them in the house. I don't want to take the property back. I mean, we'd still do that if they won't work with us, but I actually make more money when somebody starts paying a mortgage back on time or , reinstated or Longmont, , doing loan mods that the returns, I don't have to go out and deal with toilets, tenants and trash outs and still own the house. They still own the house. Exactly. We just become the bank. If we get them to say we paid 40 cents of value, we paid 40 grand for that.

Scott Carson (05:20):
$120,000 not, we basically paid 33 cents on the dollar. Well, mr borrower, he starts paying on time again. Yeah. We've got the flexibility with like, listen, I know you're six months behind. Let's take that six months and I did it with face amount of the loan or Hey, let's drop your balance to a hundred after you pay on time for 12 months. Listen, I'm not worried about the back payments because I bought it at a discount, so I've got the flexibility to forgive that if I need to, but they pay on time for 12 months. It's not considered a re-performing note that I could sell at 80 85 90% of value and that's a pretty good profit margin in 12 months plus the cashflow along the way. Or I just hold onto the notes. So going back to same numbers, $120,000 mortgage, they might have a principal and interest payment of say $600 a month.

Scott Carson (06:08):
Well 600 times 12 is study 200 if I paid 40 grand for that note, sitting 200 on top of 40,000 is a, it's a decent return. But when you add in that extra income or a lot of times we like to have the borrowers pay a little bit extra, a little bit of skin in the game. I mean I've been paid for six months or 12 months. What have they been doing with their money, especially if they've been working. That boosts the returns up and we really got some great returns that we see. Well, they'll have to do all the heavy lifting, , then we're not paying for taxes, they're not paying for upkeep and we've got some legal fees. And some servicing costs. But I'm only buying first liens. I like to buy owner occupied properties cause then it's usually not too damaged.

Scott Carson (06:49):
If it's a vacant property, it needs a lot more work. And this way we're able to kind of the beautiful thing is we're not doing all ourselves. There's so many vendors out there that help us do this in so many markets, but it's what I believe is really the last place to find a lot of good deals below. What we're seeing in traditional REO markets or retail markets where I think a lot of new investors are overpaying for assets. So it gives us access to deals, bigger discounts, and often better returns, a lot, lot less work. So when I'm looking for deals, I'm trying to find a distressed home that I may be able to get for 30, 40% below it's otherwise completed and rehabbed value with some room in there for the rehab budget. Where are you able or how are you able to find assets where you can buy the note at such a deep discount off of what is otherwise owed on that property?

Scott Carson (07:47):
We go direct to banks in different real estate hedge funds that have, , either financed assets inside the banks. Every bank sells debt. They just, they just won't tell you a lot of times, okay, now you're not going to go down to your local bank of America chase or Citibank and knock on their door, say, Hey, I want to buy your notes. They'll say, see you later. , I used to be a banker for JP Morgan chase. I didn't even know about this aspect of God until I got into the real estate side of investing. So the, the internal departments of your regional banks are often the better places to go. Banks that have at least five branches or more at least. I mean, there's a lot of them. I mean, that's, there's over 1600 different banks across the country to have at least five branches or more.

Scott Carson (08:28):
And then that doesn't include in all the mortgage companies that are originating loans right now that having to take some stuff back or other things. So the internal departments go by specific names, special asset managers, secondary marketing managers or a whole loan sales departments. These are the guys and the girls or the ladies and gentlemen, as we should say inside the department that actually have a couple of brain cells. They're looking at the bank's portfolio and saying, okay, what do we have that's performing? And then what are our problem? Children, what are the non-performing, cause they nonperforming notes is a, is not a good thing for a bank. It costs them about 10 times. What the balance balances, what they went out taught and fees that they can't generate or Oh, a arbitrage out dramatically. So it hurt affects your bottom line.

Scott Carson (09:14):
So that's why if you start being seven days late on a mortgage payment the, the phone starts ringing off the hook. You start having certify letters show up because when it gets to 31 days, it'd be on one month in default. The value of that mortgage starts dropping five to 10% each month you're in the fall. So it's a matter of we do a lot of drip marketing and in my drip marketing, I mean email blast out to asset managers , on a regular basis we leverage LinkedIn to find people at different, ,

J.T. Smith (09:43):
Identified themselves as an asset manager or something related to the industry on their LinkedIn profile.

Scott Carson (09:49):
Yeah, exactly. You do a search for like special asset manager. You may find like some are between 70,000 to 100,000 people that have that title currently and then it's a matter of reaching out to them. We use a couple of things like lead fuse or octopus CRM that are tools for LinkedIn that we can help automate the process. Like in the last hour I've had messages, direct messages going out in LinkedIn to the asset managers saying, Hey, what do you have on your books? And one of the, the gentleman sent me back said, Hey, I've got a list of some performing notes that I'm willing to solve the discount to, which I'm like, I'm all excited about the discount performing up that I can pick up at a yield at 12 to 15% without having to do a lot of work.

J.T. Smith (10:27):
So when you're out working with the asset managers, is it just general properties or can you target specific properties with them?

Scott Carson (10:36):
So that's the thing. The more specific you try to dig down, the harder it's going to be. Cause these guys and gals are dealing with, , big portfolios. So I would say, Hey, tell me what you've got and I'll take a look at cherry pictures. If you go in and try to say, Hey, I want in a specific zip code, or I just want in a Durham, , North Carolina, North Carolina is a really popular market. So the more, what I would say is get on the radar, get a listen to you, build that relationship and then start, , they'll, I got, I got a list. So yesterday's study, seven assets all across the country, single family, first lane homes, and then I can air it down by doing my due diligence. Okay. Square footage, , values, , if they're in a city or on the outskirts, , if it's mobile homes, I usually eliminate those because they usually need a lot of work. what I mean? And I like, I like bread and butter assets. Three bedroom, two bath. Yeah. At least a thousand square foot. In a, in a city that's going to have at least 50,000 people or more because it means I've got plenty of people there, vendors, realtors, that if I do have to foreclose, I've got the team to do it in those areas and people that could actually buy the property from you in a timely fashion.

J.T. Smith (11:45):
So you have to be comfortable working out of your local market, but you've already identified certain markets that when something comes up in that market, you're ready to jump it. Yeah. I mean,

Scott Carson (11:54):
Austin, Texas is a, is a great market. We've got, we didn't hit see a big downturn in the economy over a decade ago. I mean property is going through the roof here. I haven't bought anything in Austin, in my own market here in Texas alone. I tell you, I think about it. I bought a couple, I bought like four notes in, in Dallas and Houston and a couple other places in the last day or for the most part, 99% of the deals that I bought had been outside of my home state. And that's a thing with, , a beautiful thing called the internet these days. , you've heard about that, right? I've heard of this thing. Exactly. You've got Facebook groups, you've got meetup groups, there are vendors that are put in place in the mortgage industry, the servicing industry to help you with that borrower outreach.

Scott Carson (12:38):
And then, , dealing with the property if something, if they don't pay or helping you with a foreclosure and things like that. And that's the, that's the beautiful thing. I've got a a servicing company out of Reno, Nevada that handles the collections and the, , mailing out to the borrowers. If a bar doesn't respond, then we've got attorneys that will expedite that aspect of re but you're not sending legal documents. And then if we take the property back or foreclosed and of course we just reach out to local realtors and a couple of teams there that handle us with the either the the fixing, , the up or helping us list a property and get it sold. So are you also leveraging realtors to put eyes on the properties before you commit? Oh yeah. That's a big thing is well am I get a listing of 77 70.

Scott Carson (13:23):
I make 20 offers in the first 24 hours. I don't have to go put eyes immediately on the property. I jump online and do a little bit of due diligence online street view and exactly. , pulling rent numbers, looking at the payment history. I'm doing a little bit of social sleuthing on the borrower to see what's going on. I mean that's the thing is we get a little bit more type of due diligence versus just the property in numbers. Cause you, I want to know what the likelihood is that you can bring them back to a paying status. Exactly. Exactly. Cause we get the low file. So we get copies of the loan file. We can see the call logs. We can see the discussion back and forth with a servicing company. We can see the, , the whole loan application.

Scott Carson (14:05):
If a borrower has tried to do a loan mot or sitting in a hardship letter to the bank or the lender, we often will get those. So we can take a look at that and see what kind of their emotional statuses. Yeah, we look at where, what are they? Are they working? Can we tell that online? I have one borrower who posted on Facebook when we were looking like, Hmm, am I going to make my mortgage payment or go to Disney this month? I guess I'm going to go to Disney. , that's probably a good sign. They're not going to re perform. what I mean? But so, but we always do put eyes on a property that would either be realtors by pulling local cops. I mean you're not going to get into the properties most of the time unless the bar is trying to do a short sale or trying to sell the house out.

Scott Carson (14:40):
But , we do drive-bys. We take a look at condition the property, he wants a long look like, , what's the car look like, what are the notes in the file? And then then we'd go from there. And the more dude, I mean, here's the thing, if you buy occupied assets, which is what we just focus on, there's a more likelihood and you actually have more exit strategies to get that loan performing. If it's a vacant property, it's, it's, you're not going to get re performance and become either a foreclosure, a cash for keys, and then go that, , that that road of taking the asset back if possible, you're not going to get it re performing most of the time. And am I over 12 years of doing this? I've only had two people move back into their houses and start re-performing that when we looked at the list exactly when we were looking at first. Yeah.

J.T. Smith (15:29):
So I've experienced several scenarios where banks seem to be reluctant to do a short sale with the owner occupant. Why would they go the route of selling the note at a discount versus working with the borrower already in the home?

Scott Carson (15:43):
So there's a lot of the reasons why it depends on where they're at in a foreclosure. , timeline. If they're basically up to a point where they're foreclosing next month or less, they're very unlikely to do a short sale and they're very unlikely to sell the note to me cause I did most of the heavy lifting. Now if they're in a state that has a longer foreclosure timeline, you have to realize the short-sale apartment is inside of loss mitigation. Okay. The note sales is in special assets or secondary marketing, two completely different departments in the bank. A lot of times they don't even communicate exactly. They don't. And we have on the short sale side, you've got somebody who's making 10 to 17 bucks an hour who's a stack of files on their desk. They're not motivated to really work with a bar.

Scott Carson (16:28):
Not everything is accurate in a short sale stack. They just put at the bottom and go from there. Whereas the secondary marketing side over here or whatever side, the sooner they can get that note off their books, if even they sell it at 50 cents on the dollar, they can take that 50% in and leverage it out 10 to 15 times in a year to make back those fees. So it's total different department. It depends on the foreclosure timeframes. But hearing in Texas, the reason I'm, I bought a lot of notes in Texas is because we foreclosed so fast here you have 21 days, , it's a non judicial state. North Carolina is a relatively faster foreclosure state for the most part and really popular. So that also leads into things being more affordable. I'm just, sorry, sorry. Less affordable because the banks know that they can sell it and be, , if they've done most heavy lifting, they can take it back as an REO and be likely to sell it off for the most part, even though banks don't really like Oreos, , so it depends on where the lenders at the top of the foreclosure timeframe and what that market is doing.

J.T. Smith (17:26):
So in my scenario, when I'm buying properties, I'm typically funding them with a short term funds from either a hard money lender or a private lender. In your scenario, am I right in assuming that you're working with private lenders to fund the note purchases?

Scott Carson (17:41):
Yeah. You're not going to get a hard money lender most of the time to fund the deal, which I don't understand it cause they're in the note game of origination, but they want to own the property. Now I will see some RA sorry. Hard money lenders lend on properties where the borrower signed a deed in lieu and, and it back. Cause that's basically an REO at that point. So, yeah, we deal either with private lenders who use either their funds or their self directed IRAs, , suffer good. Iras are great way to fund these deals. We get a lot of IRA investors are using their own funds or other people's money. , people will take out lines of credit. And when we start giving up to some of the larger balance loans, like on the commercial side, sometimes even the banks will finance the purchase on a note kind of on a million plus balance loan to keep it on their books, take it off from the non-performing side of the performing side. But most of the time you're going to need cash and OPM to take these things down.

J.T. Smith (18:36):
And so are they, when they're lending, are they securitized by the first position note that you're acquiring or is it some other scenario that

Scott Carson (18:44):
Their security, I mean that's the thing is what secures the ownership of a note is what's called an assignment of mortgage, an AOM. So like if chase chase originates a loan and then they go to sell the loan to say me, there would be an assignment of mortgage filed at the County that transfers the ownership of the note or the ownership of the bank basically from chase Manhattan bank to inverse acid fonder Scott Carson. And we'll see. So that's five of the public records. I'm not the lender. The mortgage stays the same saying the Dean stays the same, it's just that you have that collateral file to be able to foreclose. Now you have the assignment to be able to foreclose. So when we're securitizing individual busters, we're doing a couple of ways. One we're either a creating a special purpose LLC that they're part owners of with us or B. Depending what they want to do, we can code name them on the assignment of the mortgage. So they showed us say 50% interest to their LLC or IRA and 50% interest to our entity.

J.T. Smith (19:41):
Okay, that makes sense. So I'm, I'm curious about what my experience would be if I tried to do note investing or distressed mortgage asset investing. But at the same time as is the name of the and landlord podcast. I love being a landlord. I hear a lot of people say things like, you don't have to deal with tenants and toilets and termites and things of that nature. But in my experience it's because those landlords are doing it wrong. And so I don't get those calls at 2:00 AM about the toilet being clogged or anything like that. My life is blissful and I don't have tenant troubles, but at the same time, I want to pursue as many different investment avenues as possible. So for a person who's weighing the difference between being a landlord or being a note investor, other than fear over tenant troubles, is there something that makes one just miles above the other as far as its return on investment or just life value? The time on your, your own time that you have to invest in? Yeah.

Scott Carson (20:44):
Yeah. So here it all comes down to how big of a control freak anybody. And I think a lot of real estate offers, we're all control freaks. We want to touch it or dive into it. , if, if people are, have a full time job and they don't have a lot of time to do the work, I mean you have basically two classes, you're performing notes and then nonperforming notes. If you're looking more passive where you don't have to do a lot of work, I'm a big believer of performing notes or work well for you, you can still get a great, eight to 15% return on investment by buying in a performing note. , there's people like me that buy nonperforming, get it re performing and we sell it off to people that want to get the deal.

Scott Carson (21:22):
And then you're basically dealing just with cashflow each month. You're not dealing with vacancy. You're, you're not dealing, , property management taking a cut out of it. So if you're a really active landlord where you're having to do a lot of stuff, nobody ever called bank of America to unclog a toilet at two o'clock in the morning, what I mean? So that's the way to look at it that way. We have a lot of people that like to get into the non-performing side because they want to increase their re rental holdings. They use it as a way to find deals that they can buy a big discount cause that's the thing that we're seeing is still the substantial discount below what most people are buying on a retail side. That's my thought process as well. Another source of distress properties.

Scott Carson (22:07):
Yeah. And here's the thing too. [inaudible] Most of the time most real estate investors are sending out postcards or flyers or bandit signs or doing the right thing to get one deal from one borrower. We like, I like to know the business cause I'm not dealing with the drama of a homeowner until after I buy, I'm dealing with a bank and I'm often one bank will feed me deals on a monthly, quarterly, annual basis that may not just be one deal. It will be a hundred notes this quarter or 50 notes this quarter. So it's a continued lead source that I don't have to do a lot of work. I'm not doing any direct mail campaigns. I'm not really driving for dollars. I'm just doing an email blast out to our list of banks and they're sending what they have on their books. They're looking to move this quarter or this month.

Scott Carson (22:50):
And if it makes sense, great to the doesn't then we just move on and wait for the next list. So when you're recruiting them among other ways through LinkedIn, yeah, LinkedIn and then once we connect with them there, I mean there are some websites out there that you can jump on like a, there's a service called lane guide. Like in your lane it's like $165 a year. That kind of tracks what banks have, what about what banks? And that's a great way to track down the right person. There are conferences like secondary marketing conferences that we'll go to or kind of stock to see who's showing up to that is as sources I guess you say if you don't want to travel. Even some States some States will actually publish the list of mortgage bankers are licensed to do business in that state. And that's a great way to reach out to those, , those licensed mortgage bankers. Cause if they're a banker, they usually have a warehouse line or they're lending off their own portfolio and they will often have loans that they've to take back that they couldn't sell off to Fannie Mae or Freddie because of something, some issue or something like that. Most can often be really great. This counts as well too.

J.T. Smith (23:54):
So when I first got into real estate investing that the method that I tried was tax lien investing and here in North Carolina they have something called a 10 day update period. People that don't even go to the auction can update you at any time and it just didn't work out for me. Have you done tax deed or tax lien investing as well or?

Scott Carson (24:13):
Yeah, I don't do it North Carolina just for that reason. , not Texas, Texas, one of the best States to invest in tax liens. I do a little bit of that. But most of the time when we're doing a tax sale, it's usually, we're usually I hate to say it is we're using a tax lien in our favor to help expedite the foreclosure, to wipe out liens or to clean up the title. So that's a strategy, the acquisition process. Yeah, exactly. Although today I just got to check in for 20 grand from a, from Duvall County, Jacksonville, Florida on a note that we paid four grand for a year and a half ago. It needs some work, but we, it was just, it wasn't worth putting the work into it based on the value of the property. Well, it went to tax foreclosure and it got bid up 18 grand over what was owed in taxes. So that 18 grand overage goes back to the first lien holder, which I've got 18 grand on basically something I paid five grand for. So we like, we'll check the tax overages and there's all of that happened in the, in there. Tax liens are great in different areas, but I would tell people like, , I like to stay in my lane, we find enough deals in our lane and then go from there. So,

J.T. Smith (25:23):
And you're doing this business with the aid of the team you've built and virtual assistants or,

Scott Carson (25:29):
Yeah, I mean that's a thing is there's, there's teams all across. I've got , we've been doing this a little longer than in a lot of people. So I have a, I have a full time person that works remotely from her house in New Jersey. She used to work for my servicing company, so she handles a lot of the workout strategies, calling the borrowers, tracking things, working with our attorneys or attorneys or remote. Like I said, my servicing companies in Reno, Nevada. I have another one in, in Southern California that we work with. , they're sending spreadsheets to me where we're jumping on the phone. My attorneys are across the country and the States that they're licensed to do business in. So we're working with them remotely. So, yeah, I have a team that's 99% of the way. Not locally. I mean, when I was traveling last summer over in Europe, I answered a few emails on a couple of months.

Scott Carson (26:17):
, that's the beautiful thing is with these vendors, you can set parameters of what you want to do. Like we bought a portfolio of 60 notes. I said, okay, here's what I'd like to do. Here's the options that we want to offer up these borrowers. And if they fall in that, great, you can approve the loan modification or the Trop payment plan. If they won't fall through this, then we want to expedite these to the legal side and go from there. So it's a, there's a lot of great ways to set systems up for you. Basically checking your email and checking spreadsheets and communicating back and forth that way without having to do a lot of borrower outreach yourself.

J.T. Smith (26:47):
So, correct me if I'm wrong, you teach this business as well, correct?

Scott Carson (26:51):
Yeah, I I've been teaching it. I had back when I started doing this in 2008 I had so many deals and I obviously I was brand new going through, I had gotten, went through the downturn, got my niece kicked in on a couple of bad deals that went South. And so I was like, well, I'm just like everybody else is going through the, the, the downturn here. So I started reaching out to the banks and had so many deals coming to me. If you were like, how are you doing these deals? , I just started teaching, people ask, what can you teach me how to do this? I'm like, yeah, there's plenty of deals to go around. And so I still believe that she'll think there's plenty of inventory up there. And so yeah, we've been teaching workshops on how to buy notes.

Scott Carson (27:26):
We used to call it note buying for dummies, but we changed it up to our virtual note buying workshop cause we do three to four big three day workshops online throughout the year teaching people how to find fund and flip. And then we're also for people that are curious, a little more curious about it, want to dip their toe in, in the water before diving in. We've got a, a couple of things that we call note weekend where it's a one day all day. Basically nine to six would just mean teaching kind of the one on one, no investing one on one of the basics of what note investing is and then go from there. And Austin are online. It's an online, I do everything online these days.

J.T. Smith (28:03):
Okay. Okay. Well I'll, I want to link to that. I'll put it in the show notes for anyone who's interested in finding out more about it. I'm, I'm a junkie for education myself. I like to know how to do things so you don't be surprised if I want that education myself. Sure. Would you say that at the same time, are there any books on the subject that are beneficial

Scott Carson (28:23):
So that, , there's a lot of videos online, which is probably the better place to start. There's a couple older ones by Oh no. If you look cashflow, not investing in, there's a few, there had been a few years ago, I've got a book actually I put together, it's a 73 page book. It's easy for people to read how to buy real estate for 40% off. If you want the book, I'm glad to give it away for free. You just got to know blueprint.com/free book and you can download the city three page book. And it's basically me just talking about what note investing is the basics of it. Great place to learn. , we've got the podcast obviously that we've spent a big chunk of time going through specific niches and civic nuggets on each episode and interviewing vendors and other investors on the business.

Scott Carson (29:10):
So that's probably the best place for people to go for the most part. But I mean Google is a beautiful thing. You do the beautiful thing and there's, I'm not the only person teaching this anymore. I'm, I'm very fortunate though that we've done a really good job and had a lot of successful students that have gone on and use note investing as a way to either leave their job that they just disliked or add money to their bottom line on a monthly or annual basis or, , going out and, and change the world that they're living in because they've done a great job in closing on deals. So for Repatha,

J.T. Smith (29:41):
Well, I like my teachers

Scott Carson (29:42):
To be people who have actually performed in the business. I'd like you to be making your money at the business, not at selling the education. So that's why I'm very cautious of who I collect information from. I want to know that you are actually in this business and successful at it. Oh yeah, man. I mean, I wish I could sit here and tell you every deal has been wonderful, but , you had, it's like anything else. You have ups and downs and deal some deals. We think we're going to get modified and then suddenly the bar goes quite honest and then we have to foreclose. The biggest thing, this is not a get rich quick scheme at all and if anybody ever tells you that they're lying to you this is a build a wealth thing. And then part of the reason I love the note business is because the banks are in the note business.

Scott Carson (30:25):
Everybody, everybody's in the, in the paper game, everybody's in the note business. It's just that most people are on the wrong side of the payment streams you're paying out versus coming in. And if you can understand how to arbitrage and leverage money, and I know you're a big fan of leveraging funds and debt and things like that. Correct. , there's a great way, that's why the banks are the biggest institutions in the country besides Amazon. , that's something to think about there. But yeah, we've, we've, I've closed on over a thousand deals, bought over a half a billion dollars in debt. I'm still have what, 325 loans on my portfolio that we're working through. A big chunk of this performing. Others are non-performing that we're working through to foreclose or work some sort of exit strategy with. So yeah, I, I eat and breathed this on a day in, day out basis.

J.T. Smith (31:11):
Well I thank you for your time. I'll let you get back to it before I do let you go. If there is someone who would like to reach out to you, what's the best way to get in touch with you?

Scott Carson (31:19):
Yeah, it's, it's, it's really easy. Our website is, we closed notes.com you can go there. Contact me there, checkout or different schedules and things we've got going on, but it's easy, scott@weekclosednotes.com is the best, , of course I'm on all the social media channels as well there, but Scott, we closed down and stuff. I comms the best email to reach me and glad to spend 20, 30 minutes, , talking with somebody and then let them pick my brain a little bit about the note business and what's right for them or it's not, I'll tell them

J.T. Smith (31:47):
So. Okay. And I do remember you saying that you'll probably be going to pod Fest. I'm not sure if I'll be making it this year. My goal is to do so. So I'll see you there. And I know you travel a lot, so if someone wants to meet up with you in person, I've met you before in person at events like that. So yeah, it's always good. And I appreciate you being a free with your information and time. You've been very helpful and, and just directing on certain things. So I appreciate that

Scott Carson (32:13):
Anytime, man. That's the beauty about going to conferences. And then what I love about the podcast industry is that you get a lot of people that have, are friendly and pulling each other ways. I mean, Europe, I had you on my episode. I'm excited that's coming out. February 27th, I believe is the date it'll be out live. The YouTube video replay is already out there as well. And it's been across our radio network as well too. But you, you do such a great job. You've got a passion as well. And if you're listening to this guy's on any podcast platform, dude, you tried T a big favor, go on over and hit the subscribe button and leave him a five star review. He didn't pay me to do that, although he's doing an amazing job and that's the beauty. There's, I don't think there's enough people out there that are providing the type of content that he's doing and, and, and really the , beneath the kimono kind of showing you what's working, what's not working and why he's so successful, what he does. So leave him a review and subscribe to the Atlanta landlord podcast and you'll, you'll make him happy. That is true. Thank you for your kind words. Thank you for your time today, Scott Scott, the note guy Carlson. I appreciate your time. Have a great 2020. You too. Bye. Thanks.

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Outro...

Disclaimer

I LOVE owning Rental Real Estate and being a Landlord - however, maybe it's not for you... But that doesn't mean you cannot be a Real Estate Investor - as there are ways of doing so without having to buy Real Estate and becoming a Landlord. One such means is Real Estate Note Investing. And so who better to have on the show than Scott "The Note Guy" Carson - to cover the basics of Investing in Real Estate by obtaining the Note.

Scott Carson joins us for an episode of the... and Landlord Rental Real Estate Investing Podcast - to discuss both Performing and non-Performing Note Investing. So what is Note Investing? What is a "Performing" versus "non-Performing" Note? Well listen to Scott answer these questions - and many more about Real Estate Note Investing in this 47th episode of the... and Landlord Podcast. You can also watch the video of the interview below...

Video Interview: Ep. #47 - The Note Closers Show Podcast Host - Scott Carson

For me... I've got a lot going on right now, but I will certainly get into Note Investing at some point. And it never hurts to have additional ways of getting a property and/or more monthly cash-flow. And when I'm ready to enter this area of Real Estate Investing, I'll certainly be reaching out to Scott for guidance. He teaches this business, so its certainly worth visiting his site at: https://weclosenotes.com - and listening to his Note Investing Podcast.

Ep. #46 - Marketing For Deals

Show Episode Transcript

So you want to be a Residential Rental Real Estate Investor... and Landlord - of course. Well, I already told you that I started in 2015 when things were rather easy in comparison to now. And those who started like 5 years before that really had it good. But its not too late to get started - you just need to be good at Marketing for Deals...

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Intro...

Welcome to Episode #46 - Marketing For Deals

So - Deal Flow... Whether you're a Wholesaler, Realtor, Flipper, Landlord - all of the above... You need a consistent Deal Flow if you hope to create a real business. And a consistent Deal Flow is created through effective Marketing for Deals.

You're not really much of a Wholesaler if you've got no properties to sell. So Job #1 is Marketing for Deals (and off topic for this episode, Job #2 is negotiating those deals). If you're a Realtor, you likely don't consider it Marketing for Deals - but you've got to market your services to find clients. And in my case (or any Realtor who focuses on getting Investors as clients) - you're Marketing for Deals on behalf of those Investor Clients.

If you're a Flipper, you're likely wanting to have more than one property - as you can't really claim the title and consider it a business having only done it once - so you've got to Market for Deals. And likewise, if you're a Landlord seeking financial freedom through Rental Real Estate Investing (like me) - its certainly going to take more than 1 or 2 properties to get there.

Let's say your goal is to replace your day job income with rental properties and you determine that you'll need $10,000 a month to live your desired lifestyle. Well if you're making only $200 of positive cash-flow per property (which is not an uncommon amount) - then you'll need as many as 50 properties to reach your income goal. And you won't get even a 5th of that amount without being good at Marketing for Deals.

So a great skill to have... A great thing to educate yourself on... a great focus of your efforts, and what I personally spend a lot of time on - is to learn how to effectively Market for Deals. But what is a "Deal"?

Marketing for Deals... But what is a Deal? Not so much for Realtors, unless they're representing themselves or Investor Clients. But Wholesalers, Flippers, and Landlords are all seeking "Deals" - which are properties that for whatever reason can be obtained for LESS than its eventual or ultimate value.

Let's say a property would have a value of $200,000 based upon nearby recent comps - if it were in ideal move-in / live-in ready condition with no significant repairs or rehab needed and no deferred maintenance. But instead, that's NOT the current condition of the home.

Maybe the roof leaks or is about to cave in. Maybe the HVAC system is on its last breath and would legally be of age to drink if it were a person. Holes in the walls and floors. Or maybe its like a duplex I went to look at this past weekend, where there is was literally a foot of standing water in the crawl space.

Whatever the reason, the house certainly isn't worth $200,000 in its current condition. In fact, you determine that it will take $50,000 of rehab and repairs to make this home THEN worth $200,000. So what would you be willing to pay for this house? At what price does it become a deal? $150,000? And then you put in $50,000 in repairs to make it worth $200,000?

Hmmm - I'd say NO... because there's no room in there for your expenses beyond the rehab and profit - What about the profit? You're going to have closing costs, and holding costs, and then you want to make some money - and have some equity present and profit potential. So maybe instead you offer $100,000 on the house, which then gives you a potential of $50,000 to cover those expenses and provides room for profit.

So finding a property that can be had for $100,000 and needs only $50,000 of rehab to then be worth $200,000 requires that you be good at Marketing for Deals. And finding them consistently may require that you be great at it. And again, off topic for this episode (I'll certainly do a coming episode on it later) - but if you've got some negotiating skills, you might be able to get that same house for $75,000.

And actually a common calculation for flippers to determine if a property is a deal or not, would be to subtract 30% from the After-Repair or Rehab Value (ARV) of $200,000 (in the prior example) - which is then $140,000. And then subtract the rehab budget of $50,000 (in that example) from this amount - which is then $90,000. So by that calculation, this hypothetical house becomes a deal at $90,000, and like I said, if you're skilled at negotiations, you might be able to obtain it for only $75,000 or even $80,000 may be good - then you've really got a deal.

But think about it... That's what wholesalers have to do. They've got to get a deal that leaves enough meat on the bone for a flipper or BRRRR Landlord to be interested in it - and then get it down another $5,000 or $10,000 or more to create some profit for themselves in the deal. That takes both great marketing and great negotiation stills. But yet somehow people think that wholesaling is an easy entry point into Real Estate Investing - good luck with that!

So a "deal" is a property that can be obtained for enough below its ultimate value (or ARV), such that it can then be rehabbed or repaired as needed to rent or resale at that increased value - and have room present to cover all expenses and create some profit for yourself in the process (or equity if you keep it as a rental). But how do you go about Marketing for Deals?

So Marketing for Deals may entail many things... The most obvious and annoyingly visible of which are those "We Buy Houses" signs and the variants that you see everywhere. I HATE those signs, as they make us all in the business look bad. But Hey - They must work, or people would stop using them. Or maybe its just the newbies leaving the latest seminar or boot-camp that are still using that marketing method - and maybe it really doesn't work.

Certainly they worked years ago, but I have to believe at this point that most people with a house to sell are not looking to call some random google voice number on an illegal sign stapled to some street corner light-pole or stuck in the ground. Why would anyone believe that that person using that marketing method actually has any money to "Buy Homes For Cash" as likely claimed on the sign!? I don't get it! So I would say to stay away from the aptly named "Bandit Signs" - as they're often illegal.

Next is Direct Mail - which does still work. And I can attest to that... But it can also get expensive. There are many providers out there for Direct Mail. First you need a list of prospects to send mail to - then you need the actual mailing. I use a service that provides both a means of compiling an effective list, plus handles the actual message and mailing. I actually wish they allowed for greater and easier customization of the message, but many services exist that offer full customization of the message, handle the mailer and may also provide a means to compile the prospect list.

By whatever means and whomever you end up using for your Direct Mail (including the option of just doing it all yourself) - Direct Mail can be an effective means of Marketing for Deals. Now some will claim you need to hit the same list repeatedly, and that it takes something like 7 touches to get a response on average. But I couldn't disagree with that more. I think that is the sort of thing that people say when they stand to benefit from you doing a bunch of touches, such as the marketing company you're using.

For example, I've done some online ads for my tech company, and they claim that to get results, the ad needs to be online for months and be seen (you guested it) - 7 times on average. But I call BS on that. An ad that works will have immediate results - so if you send a mailing and get no results - don't repeat it even a 2nd time (and certainly not 7). That's complete marketing BS.

For direct mail, at best, I may hit the same list a 2nd time, 3 or 6 months later, but once is fine. And if do hit it more than once, its only when I'm targeting all homes within a certain community and I want to stay top of mind or increase the chance that my mailing lands right when the person is thinking of selling. But remember that my scenario is likely a little different than yours.

I'm a Realtor, so I'm marketing both for people who need a Real Estate Agent to help them sell their home at full retail price; as well as, I'm seeking people with a distressed house that I can buy myself at a discount. So my message may be some form of "I'll buy your house or help you sell it" / "I'll sell your house or buy it myself". So I'm marketing with a dual message that may benefit from multiple touches.

Whereas if you're just looking for distressed houses to buy, a person who likes your message and knows that they may seek to sell at some point in the future - they're likely to place your card aside. Then you get a call a year later on a mailing from the prior year. And there would have been no additional benefit to sending additional mailings during that period of time. In fact, sending such a person multiple mailings may anger them to the point of now they'd never want to do business with you.

So compile your list, perfect your message, and send your mailer ONCE to that list - or maybe twice per year. But certainly not more than once per quarter. And even that is likely too much. I'd stick with just once or twice per year / per list.

Now there are on-going debates about if you're mailings should appear to come from a business entity or an individual. I suggest that latter, as if you're just some guy or girl who happens to buy an occasional house or two. I think the more business like you appear, the more money someone might think you have and thereby expect you to pay a higher price.

But it could also be the case that someone might have more trust and confidence in a person to solve their problem, if that person appears to be apart of some established company that does this at a high level. Either or both can be true for one person or another - so if you're going to hit the same list multiple times, I'd suggest alternating between a personal versus business representation.

Also a matter of debate is the type of message that should be sent, such as hand-written (or appearing to be so) versus typed. Colorful versus bland. Yellow letter or postcard. There are even those who send more elaborate mailings - like mini-Rubik's Cubes with a message of "I can also solve your housing problem." - Anything to make yourself standout from all the other mailers the person may also be getting. Be creative = Nothing wrong with that, and it's all worth a try.

Now even more so than Direct Mail, I like Online Marketing. How could I not, when I have a Tech Company that provides Websites, Web Hosting and related services. Having an amazing Website that at least has the potential to rank well in search engines (meaning Google) is the purpose of that business, which is ViUX (V-I-U-X.com).

So if you go to ViUX.com, BlueChariot.com or andlandlord.com - hopefully (if I've done my job well), you'll be impressed with those sites. Well likewise, I've got various landing pages designed specially to rank well for certain keywords that a person with a house to sell is likely to enter into Google or on various Social Media sites. And beyond seeking organic ranking, I engage in certain paid marketing efforts, including PPC on Google Adwords, Facebook Ads, Instagram and retargetting - which causes my ads to follow a person around the Internet for weeks after they visit one of my sites.

But the best of both worlds is to merge your Offline Marketing (Direct Mail) with your Online Marketing. Instead of hitting the same Direct Mail list over and over again - likely making those people mad in the process. And I've never really understood how or why - but people can really get mad because you dared to send them a piece of mail inquiring about buying their house - "How date you!?"

So instead of hitting up the same people with repeated mailers (costing more money and risking making them mad), I download that list into a Facebook Audience formatted file, and use that to target ads to those same people on Facebook.

So I'm in their mailbox once or twice; and I'm on their Social Media Channels. Plus if they click through from Social Media, search me out on Google or otherwise come to my website - then I follow them around the Internet like a Stalker. I'm just short of jumping out of the bushes while their out walking their dog - saying "I want to buy your house for cash!"

So jokes aside - The integration of Offline and Online Marketing works well to stay in front of them (and top of mind) for whenever something clicks / something changes - and they're finally ready to sell their distressed house. And this just increases the likelihood that I'll be the one who gets that call when it does. And I might combine this with still more types of marketing integration.

So if I'm targeting a specific community, like a Townhouse development and I just want to own anything and everything in that community, I may choose to do some door knocking and leave some door hangers for those that don't answer. For those who do answer, I will introduce myself and leave a refrigerator magnet business card.

And in that introduction, I will likely mention that I've sent them prior mailings about possibly buying their house. And I'll ask if they might consider selling or know anyone seeking to buy or sell a house in the area. And I'll walk that line between seeking to buy the house myself at a discount or wanting to represent them as their Realtor in selling at retail to someone else. I'll say something like - "I'm seeking houses like yours to buy myself to then rehab into rentals. But if your home doesn't need any rehab, I can also act as your Realtor to get it sold for top price on the open market." - And I'm not sure I ever say it the same way twice, but you get the idea.

I'm leveraging the fact that I'm a Realtor to have two opportunities to monetize every lead. If you're a Realtor you should certainly do the same thing, as its one of many reasons for getting your license. But you can also partner with an Agent to send them leads for people who might not workout for a discounted sale, but are potential sellers at retail. However, even here it makes it easier for you to be paid a referral commission by that Agent if you've got your license.

You should also have your presentation ready (Realtor or not) as to why and how working with you to sell their distressed house is better than going with an Open Door or any of the other iBuyer's out there, including Realtors who have their own version of a "Guaranteed Offer" program. There's one Realtor who comes to mind in my market who's advertising a lot about their iBuyer program - and then Zillow is getting into that game. I expect to see Amazon and many others entering this business very soon (if not already) - so now is the time to build your brand and ramp up your Marketing for Deals Machine.

Outro...

Disclaimer

The cover-art for this episode has multiple paper airplanes flying - but one is a different color and is soaring higher than the others. You could consider that one to be the successful attempt at flight; whereas the others failed. Well, this is what Marketing for Deals is like. Each paper plane represents a different marketing method, channel, message or attempt - and you may have no idea which one(s) will take off and soar high into the air with success; versus which will fall to the ground in failure.

To be successful in the business of Residential Rental Real Estate Investing, you must be able to find an ample number of distressed properties that can then be obtained for below there typical value - even after accounting for the rehab required. And to do that, you must be good (if not great) at Marketing for Deals. And that's what this episode of the… and Landlord Podcast is all about. Marketing for Deals and creating your Marketing for Deals Machine.

Ep. #45 - LLC Obsession... Protection or Paranoia?

Show Episode Transcript

So before I started recording this episode, I had to check to see just how many LLC's I have - It's a lot... I've now reached double digits! So am I obsessed with LLC's? Hopefully not, as its an obsession that can waste a lot of money, but more importantly - it can waste your time. So don't become Obsessed with LLC's...

Intro...

Welcome to Episode #45 - LLC Obsession

So as you start to educate yourself on different aspects of Rental Real Estate Investing, you're certain to encounter the debate on the merits of / the need for an LLC (or multiple LLC's) - to protect you from getting sued in our litigious society.

So let me preface this with an in-episode disclaimer (so that you don't have to wait until the end as normal) - to remind you that I'm NOT an attorney (and I don't play one on TV or here), and so you should seek the advise and console of an attorney local to you on any and all legal matters. Do what they say, as my advise is ultimately worth exactly what you're paying for it.

Now with that said... Far too often, those who are new to Rental Real Estate Investing get hung-up on forming their LLC - before they can do anything else. It becomes an obsession and they can't move forward with anything until their precious LLC is in place.

They are primed to believe (often by those who stand to profit from this belief) - that without a shinny new (and expensive) LLC established to stand as a brick wall in between them and the perceived pitch-fork carrying horde of Tenants (who of course each tripped and fell on their property) - that they will be sued for everything they're worth and end up homeless and crying in the street or gutter or whatever.

So they pay (often far too much) to have their LLC created for them. And with their proverbial brick wall now in place for protection, they now feel empowered to proceed in business. But the thing is... As you get further into things, you'll learn that other than matters of eviction and security deposits - it is exceedingly rare to actually get sued or end up in court as a Landlord. The tripping or slip and fall tenant is largely a myth. It's anecdotal, but I've spoken to several Rental Real Estate Investors at the many events I attend - and I've yet to met one who got ever got sued.

Turns out, its largely a myth that Tenants (or their guests) will slip and fall on your property (fake or real) - and then take you to court. Not that it can't happen, and not even that it doesn't happen (so not full Unicorn status) - but certainly Zebra rare. When some would have you think stampeding horses trampling you on their way to court - if not for the protection of that LLC brick wall of course.

Now know that one of my favorite quotes is... "Just because I'm paranoid, doesn't mean they're NOT out to get me." - so I like to have all the protection I can get (Tenant lawsuits being Zebra rare or not). As long as its not full Unicorn or Bigfoot status (non-existent), then I like having the added protection of an LLC. It just irks me when I see the LLC becoming an excuse (or an unnecessary obstacle) to those starting out trying to get their first deal done or first Rental Property owned and occupied.

There is a place and a need for an LLC in Rental Real Estate Investing. That's why I'm into double digits with the number of LLC's that I have. But I also have a double digit property / unit count. But my first 4 properties (so two full years into the business) - were each purchased directly in my personal name (along with my wife). I had no LLC then - at least not for that.

What I had was a corporation. In 2015 (before I had bought my first property) - I created Blue Chariot, Inc. So Blue Chariot was initially created as an S-Corp, before I knew that was not ideal for holding Rental Real Estate. So I eventually changed Blue Chariot, Inc. to Blue Chariot, LLC - and this became my short-term hold entity (for Flips and Wholesaling and New Builds). I continued acquiring properties, and later I created Blue Chariot Properties, LLC - as my long-term hold entity (for Rental Properties).

So I do now hold properties within entities (LLC's) for liability protection (and other reasons). But to this day, I still have my first 4 properties held in my personal name. And I sleep just fine at night. Why? Because I know that having an LLC is NOT the first line of defense against lawsuits.

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LLC or not, your FIRST line of defense against lawsuits is how you operate your business. A funny thing about human nature... People tend NOT to sue someone they like. That same thing often extends to people they respect or whom they appreciate. Do you know what is the primary determining factor of which doctors are most likely to have malpractice lawsuits filed against them? You'd think it would be determined by the doctor's intelligence and skills. Surely greatly skilled doctors get sued less than doctors of lessor skill - right?

Wrong... Bedside manner is the number one determining factor of which doctor's get sued for malpractice. If the patient likes a doctor and feels that he / she listened to their needs and gave freely of his or her time - that doctor is very unlikely to get sued (even in cases where there was a mistake made and a negative outcome resulted). On the other hand, a disliked doctor is far more likely to be sued, even in cases where no mistake was made.

So the take away from this is that HOW you run your business, HOW you treat people, and the impression people have of you as a PERSON - will all go a long way to determine if you ever end up in court and thereby may benefit from being protected by an LLC in that court. Being liked / respected / appreciated is your first line of defense against a lawsuit. And that all stems from how you conduct and run your business.

And in the Rental Real Estate Business, you can be liked and respected by just having (and sticking to) your clearly established (but also reasonable) polices as to how you handle your properties - and then always treating others kindly and with respect - because you GET what you GIVE.

Want to get a punch in the mouth? You need do nothing more than throw a punch at someone. There are certain negative things you can do or say to another person, that will guarantee a negative response right back at you. The same is true of positive words and actions, although the response is not always as direct and immediate as for the negative. None the less, there is a response, and it will keep you out of court. Again, you get what you give. So if you want kindness and respect, then treat others with what? Kindness and respect.

How I treat people is one reason why I don't worry about getting sued, and its also one of many reasons that my tenants stay for so long. I also have some really nice houses at a fair rent, but who wants to deal with a Landlord who's a jerk? So I'm not a jerk, because jerks end up getting sued. And as far as I know, I can honestly say that I've never done dirt or intentional (even un-intentional) harm to anyone. So my slate is clean and I don't see anyone trying to sue me.

So your first line of protection against law suits is being a good operator. Not having an LLC.

Your second line of protection is property and liability insurance, including a personal umbrella policy. I won't go too far into these in this episode, as Rental Property, Business and Personal Liability Insurance really deserve an episode (or few) all to their own. But just know that many things which could result in your ending up in court, may actually be covered by one or more insurance policies. So having good (and the right) insurance is a protection that stands in line right behind you as a good operator (and person) - but before your LLC even comes into play.

This is why I'm comfortable having rental properties in my personal name, as I operate my rental business properly - such that I'm good even with people for whom I decided NOT to renew their lease for some reason. And if I ever did have to evict someone (hasn't happened yet) - it will be due to a clear violation of the lease that no attorney would touch, even if by some means the tenant did want to take me to court.

And then you still have yet another line of protection that comes into play BEFORE having an LLC does. And as I see business, assets and debt, that third line of protection is maintaining a low equity position in your properties.

So what does that mean? I run into other Landlords all the time who are to be congratulated for having a rental property (or few). In some cases they may have several - and their laudable goal is to pay them off as quickly as possible. Nothing wrong with that... And you'll even meet those who buy their properties with 100% cash, so they have them paid off from Day #1. Again, nothing wrong with that.

BUT... For me... I'm only in my mid 40's. And while I certainly do want to own free and clear Rental Properties when I retire maybe sometime in my 60's - as why would I retire before then, when I enjoy what I do and I've already been self-employed for 18 years. So until then (God willing), I've got another 20 years or so of income from other sources before I've got to worry about maximum income from my rentals. So for that reason, I don't really care to have them paid off now or anytime soon. I'd rather use my income to buy as many rentals as I can now and in the coming years, instead of using that income to pay off fewer properties earlier.

But back to my point... Owing money on your rental properties is actually a protection for you. If you owe money, then you have lower or less equity. Now you likely started out with a 20% equity position if you purchased with a conventional loan, like most Rental Property Investors. Then as pay-down occurs on one side and appreciation (hopefully) on the other - that equity position quickly starts to grow, to the eventual destination at 100%.

But the lower your equity position, the less lightly an attorney is to take on a case against you when the merits should be questionable (you're a good person and operator - right?) - and the prize for winning is minimal, because you owe a lot to the bank / lender on the property. The lender gets paid first, so even if an attorney could sue you, win and force a sale, they'll have little to nothing left after court costs and attorney fees - so why bother?

On the other hand, if you own this (let's say) half-million dollar property free and clear - that's a nice honey pot for an attorney to go after, even if the merits of the case are questionable. Maybe they can get you to settle to avoid the cost of defense. And this would be true whether you have an LLC in place or not. But protecting yourself with a $400,000 mortgage against that $500,000 property, removes that honey pot - and likely gives you more resources to go buy another $500,000 property or few.

And that for me is where the LLC really comes into play. That is why I have a double digit count of LLC's. If I'm owning multiple properties with values of several hundred thousand dollars each, I do NOT want them all to be held within the same entity or in my personal name.

I use LLC's to limit my equity exposure. I look at the amount of equity present within each property, and I thus segregate those properties into certain entities based upon the total equity present. As result, each LLC is limited as to the amount of total equity present within the property or properties held within that specific LLC.

This is a legitimate use of multiple LLC's, and they are created and held in such a way so as to become "disregarded entities" for tax purposes, but still effective at liability protection. But I cannot stress enough, that I got to this point over the course of many years. I did NOT do what many do who are considering or just starting in Real Estate Investing - which is to agonize over their LLC creation and spends thousands (somethings tens of thousands) on some complex out of state LLC structure. Money they could have used to just buy a property or two in their personal name, and worry about the LLC later.

And so my final point about LLC's relates to in-state versus out of state. As you start your Real Estate Investment journey, you'll encounter all sorts of information and advice about using out of state LLC's, such as Nevada. I think Wisconsin is another that is often stated as a state with great LLC protection. This gets legal far beyond what I'm comfortable doing here, but certain states limit LLC liability to what's called a "charging order".

And as I understand it, this ultimately means that a person cannot get more out of the company than the owner's themselves get. So if you never have a profit and never distribute a dividend to yourself, then the winner in court of a charging order against your company also gets nothing - or the same as what you take out of the company.

Now that requires an entire debate itself, and you'd certainly want to check your state to see if and what sort of protections they offer for LLC's. But in my state of North Carolina, I didn't see a lot of what's called "piercing the corporate veil" - or in other words, allowing a judgement in court to attach to the personal assets of the company owner, instead of limiting any judgement to the assets of the specific LLC named in any lawsuit.

From my prospective, it appeared that outside of instances of fraud and deliberate misrepresentation by the owner, the LLC protections largely stood solid here in NC. And if so, I see no reason to pay additional annual fees (and possibly taxes) to have out of state entities. Then having to pay North Carolina to register those "foreign entities" here inside the state. This just seems like needless waste, if you follow the first three rules of...

Be a good operator (and person)
Have Property, Liability and Umbrella Insurance
Limit your equity position in each property and within each entity

If you do these 3 things, then (I think) you're fine to operate in your personal name (as I did with my first 4 properties) - until you really do need an LLC. And then, just go with your state LLC process, unless your state really does have a precedent of attaching the assets of the owner even without the presence of fraud. Because you're not going to be committing any fraud - right!?

So Don't get obsessed with your LLC. You're not going to win a prize. And to not move forward with your business endeavors for fear of getting sued ultimately just becomes another excuse not to act. Do you really have that much to lose anyway? I know I didn't when I got started. But hey, if you've got the money to spare, then by all means spend it on an elaborate LLC structure. I'm not really talking to you anyway. I'm talking to everyone else who is just trying to build their empire and I want to remove this obstacle to your even getting started.

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Outro...

Disclaimer

One of my favorite quotes is... "Just because I'm paranoid, doesn't mean they're not out to get me!" - so I'm primed to be one who is paranoid about and fears the risk of proceeding in business (especially Rental Properties) - without having an LLC in place for liability and asset protection.

"What if someone slips and falls (or otherwise gets hurt) on one of my properties?"

"What if there's a fire?"

"What if there's an issue with CO2 or Radon?"

"What is someone dies!?"

If you're a Landlord and you've not asked yourself these exact questions, then you've certainly expressed some collection of concerns that if they happened - you feared ending up in court. And so you certainly wanted to have the best protections in place, such as having your business established as and properties held within an LLC. Is this valid protection for legitimate concerns or just unfounded paranoia?

Well, I actually believe BOTH are true. You certainly want to have proper protections in place for liability and asset protection. But this episode of the [... and Landlord!] Podcast is about how far too often, those who are new to business and Real Estate Investing are encouraged to spend time (and even more money) to setup an LLC (and sometimes a complex system of LLC's).

This adds cost, often complexity and may waste time. Not that an LLC (or a few) is unnecessary, but LLC's are pitched as step 1 and the first line protection against law suits for those in business - when really an LLC is nearer to being the 4th line of protection. There are other things that come BEFORE having an LLC that will provide protection and potentially keep you out of court.

So on this episode, I discuss those other things that provide protection to maybe lessen the obsession with LLC's. As you progress, you will reach a point of needing an LLC (maybe several) - but you don't need it from day one, and you certainly don't need to spend thousands on some complex out of state LLC setup from day one (if at all).