Property Insurance is one of those nuisance expenses you always see calculated into mortgage payments and cash flow projections. It’s the second “I” in the acronym “PITI” (Principle, Interest, Taxes, Insurance), which most investors use to describe an overall monthly obligation on a property. While unexciting and usually begrudgingly paid, I would argue that property insurance is one of the most important components in a real estate transaction. Interestingly, I have found that even the most meticulous investors often pay little attention to the price and coverage of an insurance policy … perhaps assuming that all policies and carriers are alike. I can assure you after working with numerous insurance agents and carriers over the years, this is definitely not the case.
While I have seen insurance agents bind policies for investors at $900/yr, I’ve seen almost identical policies on similar properties with premiums of $500/yr. At a difference of $400 dollars a year, an investor could potentially give up a large portion of their monthly cash flow simply because they bound a policy without shopping around first. I’ve found that different insurance agents have relationships with different carriers, and as such, have different programs to offer. I’ve also found that many insurance companies are not particularly interested in landlord policies and either don’t offer them at all, or price them less competitively than other carriers who may be more comfortable with this line of business.
In many cases, insurance agents quote a higher premium assuming an investor wants a higher level of coverage. For example, the investor may have a policy with a lower deductible or additional coverages such as contents, rent loss, etc. As an investor, it is very important to weigh the cost and benefits of paying extra premium (and sacrificing cash flow) for these types of enhancements to the policy. While there is not a right or wrong answer, the important questions to ask are:
- Is this policy competitively priced considering the coverages and deductible?
- What level of insurance do I need to feel comfortable while not sacrificing an unnecessary amount of cash flow in the process.
Finding a good insurance agent is critical for any real estate investor. I encourage investors to shop around and get referrals from other investors before buying an insurance policy. Make sure you are not over-insuring and/or overpaying for your policy. Getting quotes from multiple companies will help you develop a framework for understanding how much you should be paying for insurance. In addition, by speaking to multiple insurers, you may find opportunities to save even more by bundling insurance (i.e. auto and property), association discounts (i.e. military or professional associations), safety discounts (smoke alarms, monitored alarms systems), etc.
As always, it comes back to educating yourself in all aspects of a real estate investment. Property insurance is just another facet to this business that should not be taken for granted. Cash Flow margins are already skinny enough without overpaying for property insurance. Take the time to put the right coverage in place that strikes the balance between peace of mind and profitability!