Installment #4 - Insurance Issues For the Real Estate Investor
This is an area of much debate and confusion so let's clarify some things.
Simply stated, the higher your deductible, the lower your premium. If you are a multi-property owner, and your units are insured under separate policies, your deductible will apply, per location, if you are on what is typically referred to as a “package” or “blanket” policy, your deductible usually applies per occurrence (with exceptions, such as a "percentage" deductible for wind/hail). This could be a big difference, out-of- pocket, in the event of a local catastrophe such as a tornado. 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 $1500 claim, then certainly don’t carry a $500 or $1000 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.
@Ivan Oberon thanks this is really helpful.
I couldn't agree more @Ivan Oberon
I've owned a lot of homes in my life, and have learned from experience that your homeowner's insurance should be used as an absolute last resort. Early on in my life, I had the misfortune of having my primary residence broken into, and a whole lot of things were stolen. Long story short...I had a $20K claim (due to theft and damage). When I went to purchase my next home, finding anyone to offer me a policy became almost impossible (even though they caught and arrested the person who broke into my house, and knew it was a legitimate claim).
That experience left a really bad taste in my mouth, as it relates to insurance companies. They don't want to pay ANY claims, and if they do, they want to drop you like a bad habit. Because of that experience, my view on insurance changed, completely. I now view it as something to have for a catastrophic (i.e. fire, hurricane, car into house, etc) event only. I now know that there is ZERO chance that I'm filing a claim for anything minor, so I now carry a $5000.00 deductible to ensure that the insurance companies get very little of my money, when it comes to the premium that I pay.
Thank you both!
Oh man! What a terrible experience @John White! I believe you are doing it the right way now and in the long run, you will come out ahead I am sure.
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