I have spent my career advising on insurance options. And for the past 15 years, I have worked exclusively with real estate investors.
Something I have discovered throughout this journey may shock you. Of all my clients, whether they are beginners, experienced investors with high-value assets, or even groups with portfolios in the high millions, only one in 10 have the best insurance policy for their situation!
Can you believe it?
As investors, we do so much research to achieve our goals. We learn how to build pro formas, calculate ROI, and master several other new-to-us skills. But as a whole, we are undereducated when it comes to insurance.
One thing I love about my job is that I can help steer investors toward the best policies for them and provide the information they need to lower their overall insurance costs.
Why Do So Many Investors Get Their Insurance Policy Wrong?
I’ll go ahead and state upfront that it isn’t because anyone’s dumb. In fact, investors tend to be very smart people. But we’re not perfect.
Frankly, most people don’t really want to spend the time to educate themselves about insurance. The very word makes a lot of people recoil—whether it’s a result of bad experiences or a feeling of unnecessary dread.
I get it. My people (insurance agents) don’t always have the best public image. But while we admittedly don’t spend our days rescuing kittens from trees, most of us really want to do good for our clients.
I want to correct our bad image!
So, I’m writing this article to clear up any misconceptions. More importantly, I want to help you determine whether your policy is right for you.
I’ll use plain English, too, with the hope that this information will foster a better understanding of insurance policies by avoiding the dry, miserable tone of most insurance content out there—for both of our sakes.
Mistake #1: Assuming Home and Auto Is the Be-All and End-All
New investors are more susceptible to this mistake—and that totally makes sense. Most people’s first encounter with insurance is when they’re seeking out home or auto coverage.
This often leads to the mistake of using a homeowners policy for a rental property, which can spell serious trouble if you don’t live in the rental property or meet the other criteria necessary for the policy to be effective.
But the truth is that you have a wide array of options beyond this choice. A landlord policy is most important for real estate investors.
I’ve spoken before about the essential types of coverage for rental properties. Getting familiar with the basics doesn’t take long and can save you a lot of money in the long run—both in premiums and in the protections you’ll receive.
Mistake #2: Fear of Commercial Insurance
If you frequent real estate investing forums like I do, you will see tons of conversations about how to avoid commercial insurance, whether you can use your homeowners insurance instead (more on that below), and how many properties you can have before you have to “go commercial.”
All of this panic and fear is completely unnecessary. In fact, the right commercial insurance doesn’t have to be costly.
I understand the reason for all of this hullabaloo though; it’s the many misconceptions around commercial insurance policies. Big-box companies, the type with adorable animal mascots or memorable jingles, will not offer great commercial policies. But often these companies are the ones investors, and in fact most people, are familiar with.
I’m here to tell you that you have alternatives. Commercial insurance from the right provider, set up by the right agent, can even be cheaper than homeowners insurance or other options.
So, how can real estate investors remedy this mistake?
The first step is acknowledging that there is a world beyond the big-box companies. There are groups and providers with experience who cater to investors just like you and can advise you on your best options. Those who operate across state lines will have an especially wide variety of choices that can be tailored to even the most unique situations.
There are also smaller providers who have a great deal of policy options, but if you go this route, you’ll have to do your homework on what (if any) experience they have with real estate investors.
How to Evaluate Whether Your Insurance Policy is Right for You
Fortunately, anyone can figure out whether their insurance policy is truly the best one for them. The process consists of four simple steps.
Step 1: Determine What You Want the Insurance Company to Cover in the Event of Property Damage
Ask yourself truthfully: if your property were damaged tomorrow, would you want the insurance company to do 100 percent of the work, or would you be willing to do some of the repairs yourself? If you own property out-of-state, you might want them to handle everything. But if you invest locally and possess the skills necessary to make the repairs, you might answer differently.
Step 2: Determine What You’re Willing to Spend Out-of-Pocket
If you had a hard time picking a percentage in Step 1, this should help you out. Decide what you would be willing to spend out-of-pocket for claims of the following amounts:
Write them down; get it on paper.
Step 3: See How Your Policy Squares Up With What You Really Want
Check to see if your current policy lines up with the ideals you wrote down in the first two steps. If not, see if your insurance agent can help you make the necessary adjustments. If not, it’s time to start looking for a new one.
Step 4: Audit Your Coverages Line by Line
Standard landlord policies may not provide all of the coverages you truly need—unless you ask for them.
As a refresher, the bare minimum you need are:
- General Liability Coverage
- Building Coverage
- Loss of Rents/Business Income Coverage
Here’s the bottom line: anyone can figure out if their insurance policy is right for them, and it only takes an hour or less. This assessment can not only help ensure you have the bare minimum you need but also provide an opportunity to trim the fat if you have excessive coverage. You would be absolutely amazed at the number of real estate investors I see who have coverages on their policy—that they’re paying for—that are completely irrelevant to the property being insured.
So, while auditing line-by-line may not be your idea of a wild Friday night, it can save you thousands. I find it’s well worth the time.
The wrong policy can cost you thousands, either through lack of appropriate coverage or premiums that are far too high for what you actually need. Carve out 30 to 60 minutes and run through these four steps. And of course, you when in doubt, speak to a qualified insurance agent who has experience serving real estate investors.
How confident are you that you have an appropriate insurance policy? Any specific questions for me?
Ask away in the comment section.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.