BiggerPockets

Convenient Insurance?

Friday, May 20

Convenient insurance almost sounds like an oxymoron and most of the time it is.  The way traditional insurance works is generally very inconvenient, especially when it comes to real estate investing.  You have enough things to worry about that seem to take precedence over insurance.  You’re focused on financing, closing, title companies, rehabbing, contractors, tenants, management companies, and so much more.

Unfortunately, if insurance gets tossed to the back burner it can often times result in improper coverage.  I’m sure you’ve heard some horror stories about someone that thought they were covered only to find out they weren’t.  We specialize in investment property insurance so we know what coverage is needed when.  We make sure you don’t waste money on necessary coverage but at the same time we make sure you’re covered for the unique situations that investors have to deal with.

We are investors ourselves so we know what is important for you.  We’ve built our programs specifically for the real estate investor and we insure thousands of investors and properties across the country. 

Some of the unique features we provide are:

• ·         Convenient monthly billing for increased cashflow and flexibility
• ·         All properties (no matter how many) on one monthly statement
• ·         Same day proof of insurance
• ·         Dedicated service rep – you’ll know who to contact every time
• ·         No inspections – most of the time
• ·         Insure properties held in IRAs and trusts

We provide renovation, vacant, and rental property insurance on over 8,500 properties all over the country.  Why don’t we insure yours?

If you’d like us to take a look at your portfolio follow this link.  http://www.nreinsurance.com/wp/request-a-proposal/

RENTAL PROPERTIES INSURED WITH PERSONAL HOMEOWNERS POLICY

Monday, May 16

Many real estate investors, especially new ones, think that it’s perfectly fine to purchase a rental property in their personal name and combine it with their personal home insurance.  While it may be cheaper and initially easier this idea is full of problems.

First, it’s never a good idea to purchase an investment property in your personal name.  Asset protection is all about “compartmentalization.”  The more compartmentalized your assets are the more protection you have.  Get with your attorney about setting up the property entities to hold your properties.

Just like separating your “ownership” of the properties, you must separate the insurance from your personal coverage.  By separating your personal homeowners policy from your investment property policy you are putting another “wall” of protection between a claim and yourself.  Using your personal dwelling policy to cover your investments requires the liability to be extended from your homeowners policy thereby exposing you to more risk.

Aside from the extra exposure when combining personal and investment coverage, we must look at the coverage itself to be sure it’s sufficient for investment properties.  Many coverages that are vital to rental property are either missing or need to be purchased over and above your homeowners policy.  We suggest utilizing commercial policies that have these rental property specific coverages built in.

Any connection between your investments and your personal assets can be utilized by the other party in case of a claim or incident.  By combining your personal and investments in the same policy you are exposing yourself to unnecessary risk.  It’s your livelihood so be sure to protect it properly.  Find an insurance advisor that has investment experience that can show you how to best protect yourself.

Replacement Cost vs Actual Cash Value

Friday, May 13

As a real estate investor you should become familiar with these two terms, replacement cost and actual cash value.  This is very important for you to understand when looking at insurance.  Insurance companies value property several different ways but these are the most abundant in the investing world.

Generally speaking, insurance companies prefer to pay out on an ACV policy over a RC policy.  This is because ACV policies deduct for depreciation of the property while RC policies do not.

A RC policy pays for any damage to be replaced with new materials of comparable quality.  An ACV policy is based off of replacement cost but it then deducts for depreciation (ACV = RC – Depreciation).  Depending on your property this could be a substantial difference.

For instance, a property has a roof with a 20-year life expectancy destroyed by hail 5 years after its installation and the cost to replace the roof is $10,000.  The current replacement value of $10,000 less depreciation of $2,500 (25%) equals the actual cash value of $7,500.  Under this same scenario a replacement cost policy would pay the full $10,000 to replace the roof.

When I had my house broken into and several items stolen I was glad I had a replacement cost policy.  The carrier took a list of damaged property and stolen property (which included a tv, laptop, camera, ipod, and several other small items) and wrote me a check to replace everything with its brand new equivalent.  Had my policy been an ACV policy they would’ve seen that the camera is a couple of years old, it was a second generation ipod, and my laptop was almost worthless because it was 5 years old.  If depreciation would’ve been taken into consideration I probably would’ve only received about 75% of what it actually cost me to replace those items.  However, since we had RC coverage we received a new door, tv, laptop, ipod, and camera for free!

Because replacement cost does not account for depreciation it is generally a little more expensive than actual cash value.  On occasion that difference may be enough that it makes sense for you to go with an ACV policy.  If you purchase a property for $10,000 it’s not going to be worth you insuring it for replacement cost.

As a general rule of thumb you can bet that replacement cost will be a better coverage but that doesn’t necessarily mean it will be a better policy for your property.  On the other hand, an actual cash value policy is generally cheaper but you may be sacrificing more in coverage than it’s worth.  Be sure you work with an experienced insurance advisor that knows the real estate investing business well.

Liability Insurance Needs for Rental Properties

Thursday, May 12

As real estate investors one of the most important things in your business should be asset protection.  If you haven’t already done so you need to take time to exam your investments and obtain the best possible protection for them.  Asset protection starts first and foremost with your attorney properly setting up the entities in which you hold your properties and run your business.  Insurance should be the second round of protection but it is every bit as important as the legal makeup of your business.

We’re all familiar with property insurance and what it actually does.  In case of a fire or natural disaster it will pay to repair or replace your property.  That’s pretty simple but what’s a little more complicated is liability insurance.

Liability insurance is often over-looked or set aside when it comes to owning property.  It’s very easy to do so since your main concern is the source of your income & wealth, the property.  However, without proper liability coverage your income and wealth are in serious danger of disappearing.  In short, liability insurance protects you against lawsuits and other similar claims.

Arguably, no investment is more important to have the right liability protection for than rental property.  There is a limitless amount of risk when owning rental property.  If you’ve been in the rental business for very long you undoubtedly know that tenants are capable of almost anything.  There’s no telling what your residents, guests of your residents, neighborhood children, or what pets will do. 

The thing to keep in mind is that anything that anyone or anything does while on your property you are responsible for.  That’s right, even though you didn’t put that ice on the sidewalk, you are the target when your tenant slips and breaks his hip.  We’ve heard some absolutely ridiculous liability lawsuits but the sad thing is they are becoming so prevalent. 

Remember the McDonalds hot coffee fiasco?  McDonalds lost a $2.86 million lawsuit because a woman burned herself with her coffee and blamed McDonalds for not telling her it was hot!  Thus, we now have “Caution Hot” written on every cup of coffee.  That may seem a little extreme but that can actually happen to you.  Proper liability coverage protects against lawsuits like that.

When you think about insurance you have to think about risk, not how much your investment is worth or how much you have in it.  The cost or value approach may work for the property itself but  you cannot skimp on liability coverage.  When it comes to liability risk you are virtually limitlessly at risk 24 hours a day.  Your dwelling coverage will pay for your fire damaged property but the severe injury or even death that occurred during the fire are not covered.

Let’s assume the fire was caused by faulty wiring and the tenant files a lawsuit against you for medical bills and “emotional trauma” experienced though the process?  You could spend tens of thousands of dollars defending yourself.  Or, your liability insurance can kick in and pay for the defense and any award granted to the tenant. 

Property Insurance Basics

Thursday, May 12

There are so many types of insurance out there but I want to look more closely at the one we all know of the most.  Dwelling or property insurance is very simple in principle.  If you encounter damage to your property from fire, water, wind, etc. your property insurance will pay to repair or replace the damaged property.  While this is true, it only scratches the surface and does not look into any of the factors that can vary dramatically.

Let’s start with the most basic factor, coverage amount.  Depending on your strategy, property, and situation your coverage amount can vary quite a bit.  Generally speaking we suggest a coverage amount that is at least $65 per square foot.  This means that a 1,000 sq ft house will have a coverage amount of $65,000.  In many cases this is more than the owner has in the property and can be more than the property is worth.

You can insure your property for less than the $65/foot but you may be sacrificing coverage if you do so.  We talk about this more in another article (Replacement Cost vs Actual Cash Value) so we won’t get into it here.  Just know that replacement cost is better protection and what we generally recommend.

You can insure the property for more than the $65 per square foot if the value of the property is higher.  Properties in mid-higher income areas generally are worth more than $65/foot so this issue doesn’t really come into play.

Often times it’s best to have your coverage amount high enough to not only pay for a total loss if one occurs but that will also cover your deductible.  Let’s say you have a total loss on a property insured for $150,000 with a $5,000 deductible.  As a real estate investor, you have contractors that will work for less than retail who will do the work for $145,000.  Insurance will pay you the loss amount minus the deductible so you get $145,000.  This pays for the rebuild and you don’t have to come out of pocket at all.  The added premium for an extra $5,000 in coverage is so minimal it doesn’t make sense to go for the lower coverage amount.

Speaking of deductible, this is actually a very important factor in any dwelling coverage.  Simply stated, the higher the deductible the lower the premium is.  If you own multiple properties and they’re each under separate policies your deductible will apply per location.  If your properties are on a master, package, or blanket policy your deductible usually applies per occurrence.  This could be a big difference in terms of out of pocket expense in the event of a local catastrophe.

For instance, you have 5 properties that get hit by a tornado and all five properties are on separate policies.  You will have to pay your deductible ($2,500) five different times ($12,500).  However, if those five properties are on one policy with a $5,000 deductible you only have to pay $5,000 once.  This is a cost savings of $7,500 in this instance.

You must also consider coverage on other structures such as a detached garage or shed.  Often times these structures are not included in the basic dwelling coverage so you better look closely and make sure you have coverage.  A shed isn’t a big deal but a detached 2 car garage can easily cost $10,000+ to rebuild.  You may also want personal property protection which covers items such as appliances, window A/C units, and any furniture you own.

As a rental property owner, loss of rents coverage can be very important.  This provides coverage for your lack of rental income due to a covered loss.  Some policies have built-in coverage to a certain time limit, such as 12 months.  Other policies may have an endorsement you must purchase at specific levels of coverage.  Either way, this is protection all rental property owners should have.

This is just a few factors that need to be considered when looking at the insurance needs for your portfolio.  This is meant to give you a look into what an experienced insurance advisor will help you sift through.  Remember this piece of advice over everything else in this article, work with an insurance advisor that owns properties himself so he can better understand your needs.

Insurance: The Necessary Evil. Or Is It?

Thursday, March 24

As consumers, let alone real estate investors, we tend to flinch whenever the insurance bill arrives.  Many times, for good reason: rates are higher, coverages seem to diminish, and for what? We have never even filed a claim! However, if we stop thinking of our insurance policies as just another drain on our cash-flow, and more as a legitimate part of our business plan, that premium notice may be a little bit easier to open...

Most of us consider insurance as a “purchasing endeavor”. That is, we either buy it, or it is sold to us. Therein, in my opinion, is the foundational fault of the process. The misconception is still prevalent: insurance is mysterious, difficult to understand, and, at best we hope we can trust the person that is selling it to us. We buy it, because we “have to have it”:... As a licensed “agent” in over 40 states, I cringe whenever I hear the word “quote”. Not that getting the best rate for appropriate coverage shouldn't be our goal, but “quoting” tends to lead to, in many situations, an inadequate transaction between seller (the agent) and end-user (the policyholder). Inadequate, because the agenda for the agent may not fit the needs of the customer (or, as I prefer, client). Please do not misconstrue this as a generalization that all insurance agents are inherently indifferent, or less than legitimate. The attitude that insurance should be treated as a commodity can be blamed on the industry itself, who, as a kneejerk reaction and effort to grow market share, seem to not really understand the needs of the public.

They Contact us to save $XXX on your Coverage advertising campaigns reinforce the public attitude that insurance is a “one size fits all” industry and getting the lowest rate makes the most sense. Unfortunately, when you really need it, this planning, or lack thereof, has hurt more consumers than it has ever helped.

Too many of us, when building our real estate investing portfolios, consider our insurance program an afterthought. Those of us who do understand some of it's value, may not fully comprehend it's place in our business plan/model. I consistently receive calls and emails from people who ask if I think an LLC, an S-Corporation, a Land Trust, or any other entity created to buy/own real estate is the best option over another for them. These bevy of inquiries bolster my theory that the right advice is still not promulgated in our industries (insurance AND real estate investing) to a sufficient degree. Contrary to most opinion, insurance should not be the foundation of an asset protection strategy. Think of your assets, whether personal or business, as the items within your castle that you desire to protect. The legal entities that you create, with the advice and assistance of a legal professional, are the castle walls, the moat, and the watchtower you build to help protect them. What you choose to create is a summation of the needs and issues in which tax, financial, and even estate planning must be taken into consideration. Acknowledge that insurance is the archer in the watch tower, or the knights with the boiling oil, that attempt to keep nasty things like liability claims, fire, windstorms and other catastrophes at bay. We all know insurance does not cover everything. The list of exclusions in most policies is more than a paragraph. Likewise, the archer does not hit every target. That stated, the archer and knights (insurance) need to work in conjunction the walls and the moats legal entities) to appropriately protect your “stuff”. Protecting your assets is more complex than simply finding the cheapest insurance rate.

“That is a nice explanation, and worth consideration, but how does that help me when my next premium comes due”, you may be thinking... Inadequate coverage, whether relating to your property or liability, may be just as damaging to your business model as no coverage at all. There are many cost-saving mechanisms that you can employ, far short of short-changing coverage.

These are but a few:

Higher deductibles---Take a glance at the deductible you have on all your insurance policies. Chances are, if you increase each of them to the next higher incremental level, the premium savings generated will more than offset the difference. A solid rule-of-thumb is to take the minimum claim you would file, double it, and use that as your preferred deductible on any policy. If you would never file a $1000 claim, then certainly don't carry a $500 deductible. Besides, as real estate investors, we typically don't pay “retail” for supplies or labor when it comes to construction/rehab/repair...A deductible is, by definition, “self-insurance”. I am an advocate of self-insuring that which you can control or is of a known amount (a deductible, or even the vacant property you got at a tax sale for $10,000). However, self-insuring unknown risk, such as liability, even with an asset-protection strategy in place, is rarely a good idea.

Combining coverages---The more opportunity you have to combine coverages on either the same
policy, or with the same carrier, usually the better rate you get. If you have 6 rental properties on 6 different policies, not only are you potentially paying a higher rate due to internal policy fees, etc... on each, you may end up paying far more than you think in the event of a catastrophe, such as a wind or hailstorm. On separate policies, you have separate deductibles...If multiple locations are damaged, your deductible will apply per location. On a master, or “blanket”-type policy, where all properties are combined, the deductible usually applies per occurrence. Knowing this, and choosing a deductible that is appropriate for your business, goes a long way in helping you when you really need it...In the recent windstorms as a result of Hurricane Ike, I had one client that had over 150 properties damaged. She had a $5000 deductible. Thank goodness she only had to deal with it once, because her properties were combined on one policy. Otherwise, her 10 years of building a large portfolio of properties may have been wasted...

Dropping coverages you do not need---A quick review of a policy will usually indicate how much you are paying for unnecessary coverages. As real estate investors, many of us have been financially blessed, even in the current economic turmoil. With multiple vehicles at home, do we really need to pay for the “rental car coverage”? If our vehicles are newer, many times “Roadside Assistance” is built in to our purchase or lease. If you are still paying for “Towing” coverage on your auto insurance policy, it's probably a waste of a few dollars. I realize that many of these items are “nickels and dimes”. However, they are yours, and you should spend them on things that you need. Consider reallocating these premium dollars into higher liability limits, for instance.

Find an insurance “Advisor” that understands what it is you need/desire to protect. Let them work with appropriate advice from all of your business team members (attorney, CPA, and financial planner) to develop a fluid adaptable model that makes sense for you. As part of your business plan, insurance can help you when you need it, but not drain you when you do not.