Important Insurance Coverage Issues

I just went through a lawsuit experience that underscores the importance of adequate insurance coverage and why with recent developments, you might want to examine the policy you have in place.

 

As  background, my family owns a three unit building comprising of two residential units and one commercial. Our commercial tenant is a church. We hold title through an LLC. We have an insurance policy with a million dollar limit for personal injury and a one million dollar limit for each occurrence. I also made the church get a million dollar policy` similar to ours. So, between the LLC and the inusrance policies, I felt pretty secure. Well, the risks that I saw in lawsuit made me think many landlords might not have enough coverage.

 

So, in May of 2011, a person was walking and supposedly tripped by the church entrance. She broke her ankle. I won’t get into details but it was not clear as to whether we were at fault or  whether the church was. Plus, the lease was a tad ambiguous on who had the responsibility for repairs/liability(I used a Blumberg form). So, the plaintiff sued both the church and us. The Brooklyn Courts are so slow that the case did not come up for trial till May of this year. Now, when you have a suit like this, the landlord does not pay. The insurance company does. So, the insurance company had counsel ready to go. So, I was expecting a settlement but both sides were prepping for trial. I spoke to “our” counsel and he told me a pretty scary revelation. Recently, a plaintiff won over a million dollars for a similar set of circumstances and it was affirmed on appeal. A million bucks for a broken ankle? Seems crazy but those are the risks. Now, my folks had an umbrella policy also so there was not a huge risk of anyone being able to get their house. Indeed, the property was owned through an LLC(with the intent of no one being able to get to my parents personal assets). However, let’s say you had a policy limit of $500k and owned the property in your name outright. You could be in trouble and depending on the facts. Given the current legal landscape, a plaintiff might not want to settle. Now, I am not 100% sure what would happen if you lost. I would think most likely anything not paid out by the insurance company could result in a lien on your property or the plaintiff goes after your personal assets. Not sure but that seems to be the risk. Now, I created the LLC because there was no mortgage on the property and a transfer of ownership would be easy. We upped our limits on the insurance in 2008. I told the church that a policy less than a million bucks was a deal breaker. My folks were wise enough to have the umbrella policy of a million bucks. Like I said, I was pretty confident that we would not get hurt but we were pretty diligent. The case settled and the plaintiff got a pretty generous settlement. The insurance company couldn’t take the risk. There was no money out of our pocket. But, folks, take a look at your policies as they are more important than owning your property through an LLC(if you do this). If you own property in your own name, I think it is imperative to have a lot of insurance coverage.

First things first

So, before we get into some of the nitty gritty of being an NYC landlord, what are the pluses and minuses of being a landlord in NYC?

Pluses 

Value and Appreciation. No need to state the obvious. The NYC housing market is very strong in some parts and didn't get hit by the bubble to the same extent as the rest of the country. Manhattan and Brooklyn are hot right now. Also, the rapid price appreciation in these two markets is driving people to the other boroughs which should translate into higher prices and rents.  Now, perhaps, an investor should not rely on the hot market when planning for the the long term. Traditionally, property investors have looked at gradual appreciation with the benefits of tax breaks and rental income making investments profitable in the long term. Having said all this, if you got in at the right price, you are doing well. 

Rental Income. Another obvious point, if you have a good paying tenant, he or she could pay a significant part of your mortgage. So, over the long run, especially when factoring inflation, you have someone else essentially paying the majority cost of your investment. If you have a small mortgage or no mortgage, your rental income can cover your non real estate bills especially if you have a two, three or four family and you live there.

Tax breaks. I will go into this more later but a landlord can write off mortgage interest, all related expenses, property taxes. Also, landlords can depreciate their property which gives a nice boost as well.

 

Minuses

Cost. Ok, it costs a lot to get into a property in NYC. With traditional bank financing one would have to save up for a downpayment of 20% to 35% and closing costs are expensive in the five boroughs. So, lets say you have found a $500k property. 20% is 100K. Let’s assume a 4% closing costs, that is $20,000. Insurance can be about $2500-$4000 a year. Property taxes in NYC are relatively low compared to the burbs but that still is a couple of thousand a year at least. And then, depending how you have your utilities divided, you could be paying a lot for heat and electric. So, the barrier to entry is quite high. Not to mention, you could be competing with cash buyers who are bidding everything up. 

Pro tenant courts. Some will argue this but I think an objective person will say that the laws are very pro tenant. I had a tenant with no lease and it took us 7 months to get her out. She never paid us a dime despite her signing a stipulation to leave(she lied and never honored it). We had to hire the Marshal to get rid of her. Let’s hope I can get some money out of her by pursing a money judgment in court. Not counting on it. If you have a mortgage, a bad tenant could put you in foreclosure. There also does not seem to be much sympathy for the small landlord out there. I don’t know why.

NYC Bureaucracy. I had to get a Letter of No Objection from the city for one of my units(it is a Section 8 rental). It took six or seven weeks for something that should have been in a computer database and taken a day. This is not factoring the three months NYCHA couldn’t figure out to ask for the Letter. I am not saying that government people are not nice. The people were cool to deal with but it was a lot of running around. I also had the tax class for my building changed and that took a few months. I will say 311 and emailing the city was easy and I did get the info I needed but that is only the first step. You still have to get the forms, drop them off and have appointments with the city. If you have a regular job, you would likely have to take an afternoon or morning off to deal with each phase of the govt. Even getting an LLC required me to go to the Brooklyn Courthouse to find out what newspapers to use for the publication requirement. 

Management. I always like to say that being a landlord is a full contact sport. Unless you have a management company, if a tenant has a problem, he or she is calling you. My tenants aren't too bad but I have gotten a bunch of text messages early in the morning. We have a guy who lets Con Ed in to read the electric meters but without him, I would have to be there. You can’t do everything on the weekends either. For our annual boiler inspection, I have to take a morning off from work. I also had an instance where I got up at 6 a.m. to go out for an 8 a.m. Con Ed appointment and Con Ed calls me at 8:30 saying that the appointment has to be rescheduled. I complained and Con Ed got there at 10 but I didn't leave till 11:30. So, I sat around all morning doing nothing. Owning real estate is not like owning stock. You have to actively manage it and it is not liquid like a stock so if you want to get rid of it, you can’t just hit the sell bottom on Etrade. Ever try to prepare your taxes? Royal pain. I have a separate bank account that I do all of the building’s business out of and it was still a hassle reconciling everything. 

Tenants. Not a people person? Might be tough to be a landlord if you can't deal with people. Yes, there are landlords that are aholes and ignore tenants. But, do you really want to operate like that? Tenants can be demanding, disrespectful and not pay on time or at all. What they consider emergencies might not be urgent at all. If you have good ones, might be worth it to keep them even if can get more money. If you get a ghetto tenant or a crook or complainer, you could be in trouble. I have a good relationship with my tenants because I told them upfront what I could and could not do, they were pretty cool to start with and now they realize that they are getting a good deal. This is not to mean I have not gotten stupid text messages(my primary mode of communication) from my tenants that have not pissed me off. But, at the same time, one tenant pays in rent close to what I pay for my mortgage on my condo and I wouldn’t live where he does. So, I can handle some texts every once in a while. Treating people with respect goes a long way too. Now, the ghetto tenant didn’t deserve respect and I dealt with her through my lawyer. I’m hoping I don’t have to deal with anyone like her again.

Welcome

I took an active role in the management of my parents property two years ago and have dealt with a range of issues. It has completely been learning by doing. I saw that while there were some decent listservs, there was no blog or site completely dedicated to the small landlord in NYC. So, here goes nothing.