401: Risk Mitigation—What Risk Do You Have?
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Episode Transcript
Welcome to Episode One of Season Four of the Growing Empires show. This season is all about risk mitigation — what you need to protect yourself and how to avoid unnecessary risk. So stay tuned.
00:14
Welcome to Growing Empires hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:32
Risk Mitigation, so everyone is taught risk mitigation from a very early age, think back to your mother telling you put your coat on before you go outside, bundle up so you don't get sick. Don't touch the hot stove, I don't want you to get burned. Risk mitigation is a way of life. Certainly there's no crystal ball so there's no way to predict what it's going to happen in the future. But there are things that you can do to set yourself up for protection as it relates to investment properties and that's what we're going to talk about today. So think back to when you're buying the property, there's a period called due diligence period. And honestly, for lack of a better term, that is your risk mitigation period. That is the period of time when you're analyzing your investment property to make sure that the numbers make sense, they're what you intended them to be. You're looking at condition of the property. You're looking at anything and everything that pertains to that particular property. Why? Because you don't want to take on unnecessary risk. So I want you to follow through with that, even after you own the property. Because what I find is that there's a period of time where people go from making sure that they're protecting themselves from a risk perspective and then once you own the property, we kind of transform into this “now I don't want to spend any money”. And it's very much a disconnection. So how are you going to protect yourself? Insurance is one of the biggest most common ways to mitigate risk. But do you know everything that you need to know about protecting yourself and an investment property? When you talk to your insurance advisor, I want you to ask about things called a vacancy writer. Now a vacancy writer is exactly what you think it is. It's for properties that are typically vacant for longer than 30 days. And one of the things that I've watched people get caught up on is they failed to tell their insurance provider when a property is going to be vacant for longer than 30 days. And if something were to happen and you fail to get the proper vacancy writer or vacancy coverage on your property, you're likely going to be denied any kind of claim. You're going to want to talk to them about sewer and drain coverage. Sewer backups, drain backups, water problems are not things that you can see coming, but likely in your ownership you're going to experience at least one sewer backup, at least one broken pipe, at least one type of drain issue, whether it's tenant caused damage or just, you know, the the lines under the ground eroding away over years and years and years, whatever it may be, you're going to likely experience it. So make sure that you are talking to your insurance provider about sewer and drain coverage. Loss of rent — loss of rent is for times when you're doing restoration. It could be you know, maybe a tenant causes damage and you know, it's going to cost you a lot of time and money to fix up the property. But what about that time when you're not collecting rent? There's a loss of rent coverage that you can get added to your policies for any time that you're not collecting rent. Make sure your insurance provider knows if you're not going to occupy the property, there is a difference between coverage for an investment property and an owner occupied property. I literally just had a client get denied coverage, because they failed to provide the insurance provider an update when they moved out of their investment property and bought something else. So they were an owner occupant at one point. And they then moved out, bought another property, never went back to the initial insurance provider and told them that now it's an investment property and they needed different coverage. They just recently had a problem, had a claim, the claim was denied because they're no longer an owner occupant, and that was the coverage that they had. So make sure when changes happen, that you're updating all of your professionals. Make sure that you check in with them regularly to make sure that everything that you have still pertains to today. Because when you're owning properties, things can change very quickly. And if you're not keeping up to date with how those changes should affect your coverages or the way that you go about business, you could be potentially putting yourself at a lot of risk.
04:34
Let's talk about title insurance. When you go to buy the property, make sure you have title insurance, that is risk mitigation, in the easiest sense of the word. When you get title insurance, that is your title provider, your abstract provider saying essentially that they've checked the history of this property and then they're giving you free and clear title. They're going to issue an insurance policy which is good for the life of your ownership that protects you against anything that maybe hasn't surfaced yet, but it affects your ownership. So for example, they will check mechanic's liens to see if there's any open contractors that have filed suits or filed liens against the property. Maybe a couple owners ago, you know the roofer never got paid for the roof that he placed on the property. So he filed a mechanic's lien, and that affects your ownership of the property. So they're going to check stuff like that they're going to issue you a warranty deed. And some of the other things that a title insurance provider does to protect you is they go back in and get tax certifications, they don't just go by the seller’s word that the taxes were paid. Why? Because the taxes are on the building, not you as the person. So they want to make sure that they are in fact cleared up and paid off. If not, they're going to make sure that they satisfy that at closing. So they get what they call tax certifications, which is a certification from the municipalities and from the taxing authority saying that the taxes were paid, and in fact paid in full. They also do something like a water and sewer escrow. Why? Because water and sewer is lienable on the property, not on the person. So unlike your electric and your gas bills, those are all individual people, right. So if you don't pay your electric bill, your electric gets shut off, you don't pay your gas bill, your gas gets shut off. But your water doesn't, necessarily, specially in investment properties. If the water company knows that there's tenants in the property, they're not going to shut off the water for non payment likely. And sometimes owners have the water bills and in names, which I completely advise against for obvious risk mitigation reasons. But you may not necessarily know when you go to buy a property that the water bill is in the tenants name. And if the tenant hasn't paid for months, years, the waters likely not shut off. And you may not know as the new owner. So one of the things that the title company will do to protect you is they will get a water and sewer escrow until they can get the final bills and verify that it's been paid off. And that's regardless of who is paying the actual water bill. It's not about who's paying it's about the protection for you. And when they issue that title commitment, and that title insurance, it's to expose to you all of the things that they found on the property that you need to be aware of, that's part of your title commitment. It's their commitment to ensure you and commitment to their closing procedures. And then the title insurance that they issue you again is a one time policy that you pay for, but it is a policy that is going to be with you the life of your ownership. So if anything does come up in the future, the title company is going to basically say hey, we're good for it. We're going to make good on because we did the history and if we miss something, we're going to make good and we're going to resolve it for you. Even though municipalities that you likely are purchasing your properties in have risk mitigation enforced as what we call code enforcement or code violations or COs, certificate occupancy, that is a risk mitigation tactic. It is to make sure that every building is maintaining a certain basic standard of habitability to avoid risk. And if you ask any of the code enforcement officers or anybody that comes out to a property, ask them why they do this, they don't want risk. They don't want to have a fire where a child or anybody for that matter dies. Because a smoke alarm wasn't, you know, on and working at the time of the fire. So even down to the municipality level, there's risk mitigation things intact. So as the owner of an investment property, make sure you get proper title insurance, no doubt about it. Make sure that your property is insured appropriately. Don't skimp on your insurance.
08:45
The episode will continue in just a moment.
08:50
To keep your real estate investments working hard at growing passive income, you need to have the right resources to help reduce risk and exposure to over taxation. Having the right attorney, tax advisor and insurance protection is critical to ensuring your investments are safeguarded and set up for success. Knowing tax laws and legal regulations while securing experts who care and understand your goals will allow you to prosper. If you need help finding the right resources to mitigate risk and maximize your tax advantages, let's talk. I can help you know what to look for and how to scrutinize new or existing resources that you have the right fit and get the best protection. Schedule a call with me today and I'll listen to your goals and make recommendations. To get even more information that will make you a smarter real estate investor, be sure to sign up for the Growing Empires Advisor Guides at GrowingEmpires.com. That’s GrowingEmpires.com, and I'll help you get the right resources to protect your investments and your future.
09:46
Let's talk about property management quickly, because even in property management, a lot of the things that we do every single day are about risk mitigation. So for example, one of the things that we do is quarterly inspections, every property, every unit, every quarter, and there's a reason behind it. We want to mitigate your risk from a variety of different areas. One, I want to make sure that the tenants are not damaging your property and if I'm in there four times in a year, around every season, I can make sure that my presence is known, and they are going to be less likely to do something illegal or damage the property because they know I'm going to be stopping by. We also do our quarterly inspections around the seasonal change. Why? Because again, it's risk mitigation, I want to make sure that your building is properly maintained for the season changes. As the leaves fall, we've got to make sure that we clean them out from the gutters so that when it rains, when it snows, the water can drain away from your property. Because if it doesn't, it's damaging your building, it's eroding your building, it's potentially causing a trip and fall hazard. And you don't want to be sued, because a tenant tripped and fell outside of your building because the gutter was clogged so there was a puddle on the ground and it turned into ice and now they slipped and fell. So those quarterly inspections that we do are really about risk mitigation. It's about making sure that the tenants behave, it's about making sure that your property is properly maintained during all of the seasonal changes, and it's to advise you of anything that you may need to know regarding safety features inside your building. A handrail came loose. Well, do you think tenants going to tell you that a handrail came loose in the common area hallway? Likely not. But do you want to make sure as that owner that that handrail is put back up promptly? Absolutely. Because the next time somebody goes down the stairs if they potentially fall, you can expect a lawsuit and that's what we want to try to avoid. Some of the other things that we do from a property management standpoint to mitigate risk is we make sure that we have formal contracts for the work that we do, especially for subbing out the work. So for example, my snowplow guys, my lawn maintenance guys, my contractors, my plumbers, all of those people have contracts for work. One, I want to make sure that we are agreeing on what the work is going to be done and that the work that needs to be done is completed in its full capacity. But I also want to have proof that the work is done. And with over 1000 units, it's not uncommon to be able to say that probably once a year somebody slips and falls. And every single time, we've been able to provide the contract for the snowplow or the contract for the ice removal to prove that we're maintaining the buildings, and that goes a long way to making sure that risk is mitigated for the owner. Even in our leasing, we have risk mitigation procedures. For example, one of the most common things that I get asked is do you require your tenants to have insurance? Yes, we do. Why? Because your insurance policy number one doesn't protect them in the event of a fire or some kind of catastrophic thing that happens in the building. Your insurance is only going to provide you with protection and liability against your building, not the tenants contents, or even the tenants occupancy. So if a tenant is displaced because of a fire, they can't live there, because it's not safe — unless they have a renter's insurance policy, they're not going to have any kind of reimbursement for maybe hotel stays, they're not going to have any reimbursement for their personal belongings, because again, your insurance policy doesn't cover their stuff. So tenants need their own insurance, we actually have the option internally that in the lease, it'll say that the tenant is required to have insurance, we actually have an option that allows our owners to place an additional liability policy on the property in the event that the tenant doesn't maintain their own insurance, and it's something that the tenants gonna pay for. But that additional insurance is a liability policy that additionally covers you as the landlord for any damage that the tenant may do. It's a really good way to have additional liability coverage. Your insurance will cover a lot of times tenant damage, tenant caused damage, but if the tenant has renter's insurance, their insurance policy is going to cover it first. A couple of other ways that we protect and mitigate risk in our leases is we have a lead based paint addendum and notification to the tenants. This is actually required in any buildings that were built prior to 1978. But there's no way for us to know — unless we're out testing every building, there's no way for us to know which buildings have lead based paint, but I can likely assure you that the majority of them do. A lot of the homes in our area are over 100 years old, they have lead based paint. So in one of the ways to mitigate the risk is number one to inform people of the dangers of lead based paint. So not only do we have it in our leases, but we also provide them with full details about how to protect themselves and their children in the homes that potentially have lead based paint.
14:46
We mitigate risk from the perspective of evictions in our leases. If you have a month to month lease, or you have a lease that doesn't have what they call a “Notice to Quit”, in Pennsylvania that means that it reverts back to the state regulations and the state says that I must provide every tenant a 10-day option to correct any behavior or problem that violates their lease. However, when you have the right legal counsel and you have the right people on your team, they're going to know workarounds to help you protect yourself additionally. One of the things that we do is we put a “No Notice to Quit” in our lease. And what that basically means is that the tenant is giving up their right for us to give them that 10-day notice. Therefore, if they violate any lease term, we can immediately evict them and we're not required by the state any longer to give them a notice to correct the violation. Why do we do that we want to mitigate your risk. We want to make sure that in the event of a tenant violating your lease for any reason — nonpayment, noise, anything, drugs, anything, anything at all that could be potentially happening in your property — we want to make sure that we can get them out as quickly as possible. The quicker we get them out, the less risk you have. Even something as simple as our leasing policy and our notice to renew or not renew is a risk mitigation tool. And what I mean by that is that we require all of our tenants to tell us 60-days in advance whether they're going to be renewing their lease or not renewing their lease. Why? Because if I can put the property on the market for rent and potentially show the property prior to the current tenant moving out, I likely have no vacancy. Matter of fact, I can guarantee you're going to have no vacancy. And because of that I'm helping you to mitigate your risk. Number one, there's not going to be any loss of rent, but number two, and probably the most important is that you don't have a vacant property. A vacant property is an open door for potential problems — you could have people break in, you can have a broken pipe that you don't know about. So many things can happen. And especially as the seasons changing, we go into winter, your risk elevates when you have a vacant property. There's plenty of homeless people out there, you think that they don't break into these properties that they know are vacant for a period of time to find shelter? They absolutely do. So something as simple as making sure that we have consistent occupancy is a risk mitigation tool that we provide to you as part of our services. When you're buying investment properties you're going to hear me talk about don't put all your eggs in one basket. That saying that I use over and over again, is really about risk mitigation. You do not want to have all your eggs in one basket, you want to have variety of things. So for example, let's say that I am investing in Allentown, Bethlehem and Easton, well, let's say Allentown changes all the regulations, like New York City just did, and puts in some kind of, you know, rent control or something of that nature, or the municipality changes their regulations and increases all of their fees. If all the properties that I had, were in Allentown, all of my properties are affected. But if I have properties that span across different cities, I'm somewhat mitigating my risk. You also want to have your investment money in other things, stocks, IRA, think about life insurance. Life insurance is a risk mitigation tool in itself, right? For your family, especially. What if something happens to you? You can also invest in hedge funds — hedge funds are a less risky way to invest your money, because you don't actually own the asset. If you don't own the asset, you don't have the opportunity to get sued. And in a hedge fund, you're actually mitigating your risk, because now you're in a pool of investors. So if, for example, five people own the same property versus one person, if something breaks, you spread that cost across five people, not one person. So it's a risk mitigation tool as well.
18:43
So just to recap a little bit, this season is going to be all about risk mitigation and you are going to hear from some very knowledgeable, very educated professionals in their field. And we are going to talk about in detail a lot of the topics that I brought up today regarding risk mitigation. I hope you enjoyed today's segment. Make sure you stay tuned for the rest of Season Four and until next time, take care.
19:10
For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio visit GrowingEmpires.com.