They say prevention is better than cure. That is why when it comes to properties, we have insurances that protect us from risks such as fire, theft, flood, and some other damages. However, not all insurances are made easy to understand and without a hitch. Almost all of the time, they have with them some nuances that, when not looked at very well, might lead you to a whole other damage. Marco, together with MC Laubscher of CashFlow Ninja Podcast and the president of Producers Wealth, explore some of the basics of property insurances as well as some of the uncommon scenarios – from the costs and policies to beneficiaries and more. They break down some of the basic types of insurance, coverage, and even things you need to know about short-term rentals like Airbnb.
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Insurance, It’s Not What You Know But What You Need To Know
Property insurance provides protection against most risks to property such as fire, theft and some other damage. These include specialized forms of insurance such as building insurance, contents insurance, fire insurance, flood insurance and even earthquake insurance. They say prevention is better than cure. The cost of property insurance often depends on what it would cost to replace the property in which additional items to be insured are attached to that policy. The insurance policy itself is a lengthy contract as you know and the names on that contract determine who the beneficiaries are. It also specifies what will and will not be covered or paid in the case of various events. Let’s explore some of the basics and nuances of property insurance as well as some of the uncommon or even strange scenarios with my guest.
It’s my pleasure to welcome Ed Babtkis to the show. Ed is the Founder of Ross Diversified Insurance Services and they’re licensed pretty much nationwide. The last count was in 49 states. They insure thousands of properties all around the United States. They’re investors themselves, which is refreshing because a lot of insurance agents out there do not buy property and invest themselves. They fully recognize the needs of customized insurance for real estate investors. Ed, welcome to the show.
Thanks. I’m enjoying the opportunity.
Let’s cover some of the basics when it comes to insurance. From that, we’ll talk about some of the more uncommon or strange scenarios that come up with insurance that we didn’t talk about last time. You told me that it’s not what you know, but it’s what you don’t know that you should know about insurance. It’s all about what you need to know. Let’s start with the most fundamental and basic thing. How much insurance should an investor have in place? It’s more about what kinds of insurance should they have in place.
The type of insurance is commonly referred to as an owner and landlord-tenant policy or simply a single-family rental insurance policy where the investor who buys the property, the property is not his home. It’s not a homeowner’s policy. It has different exposures in regard to liability through its tenant. It has different exposures with people who may break into the property because it may be vacant in between occupancies. Commonly this industry is called an owner landlord-tenant policy. OLT would be an acronym. The investors who are buying properties need to have something to protect their interests much more comprehensively than just something that is plain vanilla.
Let’s break down the different types of insurance. You’ve got your property insurance, you have liability insurance, and then you have rental loss insurance. Don’t go into a lot of depth with these. Just break down the landscape of insurance coverage.
If the house itself burns down, that’s a property insurance claim or a property insurance coverage. If it gets vandalized, if something happens to the property, windstorm, hailstorm, that would be the property coverage attached to that policy. The second component and the easy one that you mentioned is the loss of rents. If the tenant is forced to move out as a result of a covered peril, that hailstorm that takes the roof off the house or that windstorm or the fire and the tenant physically can’t inhabit their property, there’s a component called the loss of rents. That would pay the monthly rent until the home is reconstructed back to where it is habitable not when it’s occupied by the tenant because the tenant may have gone on to somewhere else. The third component is the liability coverage. All three of these, by the way, are what lenders require for those financing their investment properties. All lenders are looking for the same type of coverage. The replacement costs for the structure, loss of rents in case something happens to the property forcing the tenant to move. The last component being a liability, someone gets hurt on that property and unfortunately, the owner gets sued. A crack in the driveway and you get out of the car on an icy driveway and you fall, that would be something covered under the liability policy.
There are many liability scenarios. If you have a tenant with a dog and there’s a dog bite situation, we do have dog bites coverage for example on our liability coverage. Lenders are looking for those three components and we put all three of those components in a very competitive packaged replacement cost policy fashion. A lot of people hear the terms actual cash value and they hear replacement cost and they’re not sure how to attach meaning to either one. In the space that we’re speaking of, the investor-owned properties, actual cash value means we are subtracting out depreciation in the event of a claim. If you have an older property that you bought, and it was mildly rehabbed, and you have a tenant in there and maybe was built in 1950 or 1960, the adjuster is going to go out there and they’re going to use Marshall & Swift/Boeckh or MSB. It’s a very common software like a Kelley Blue Book for houses. They’re going to have a depreciation component to that loss and they’re going to subtract that depreciation component along with the deductible from your claim proceeds. That can reduce the claim proceeds significantly.
The lenders recognize this, and lenders will not even accept the actual cash value policies. I’m not trying to be self-serving at every opportunity, but Ross and my competitors as well, 99% of the time only offer replacement cost policies. That way it satisfies lender requirements. That way there are no problems in the event of a claim. All that said, there is one caveat. Even on replacement cost policies, there is a condition that you have to rebuild the property. If you do not rebuild the property, then the settlement clause will say the claim is settled at actual cash value. The way you get that depreciation component back is when you rebuild the property on the replacement cost coverage.
You’re saying the actual cash value what is the actual value of this property. If that’s a later point in time, you have to deduct whatever the depreciation is. I’m sure that follows a formula in the insurance industry as to how they calculate depreciation over time. If I purchased another property and I need to determine what kind of insurance coverage I want in terms of property insurance, do I go with replacement cost or do I go with actual cash value? Let’s say five years from now or ten years from now when I’ve had depreciation taken off of that property and it’s legitimately calculated, do I change my policy down the road from the actual cash value now to replacement costs tomorrow?
Most lenders won’t even allow you the opportunity to go actual cash value. There is a formula. It’s a lifetime to a home of 70 years is what the calculations generally are computed on. If you’ve remodeled that home, effectively that 1950s house is a 2018 home because you redid the roof, you redid the electrical, you redid the wiring, you put in all the cosmetics of new flooring and new cabinets, the effective date of that home truly is 2018. Maybe they’ll depreciate the studs in the wall a little bit but for all intents of purposes, you can demonstrate that this is relatively a new home, so the depreciation component will not be that big of a deduction. I say that because if it’s lender financed, you don’t even have that option. They’re going to require the replacement cost. Secondly, your home may only have a small depreciation component after five years or seven years. It’s not as if you’re going to redo the pipes all over again if there’s no need to do so. The depreciation deduction would be very small and there would be no reason to even get into a mental decision. Do I switch coverages or don’t I switch coverages?
Does that say that there’s more and more of a case to be made to get actual cash value or replacement cost as time goes on?
With the replacement costs, the intent that most investors have is to rebuild their property and get that rent coming back in as soon as possible. They would get the loss of rents during such time as it takes to rebuild the property. The actual cash value component gets reduced and diminished more and more because it’s not even a component of the calculation of what that investor’s mindset is. The actual cash value is if you’re going to walk away from the property. You have no intention to rebuild and you just want a barebone settlement and you’re going to sell the place as is maybe to another fix and flipper a contractor who’s going to clear the lot and start all over again. You will take your actual cash value settlement and you walk away. The replacement cost doesn’t have to be modified every year because the depreciation deduction on a year to year basis is very small. It comes into play when you have an older home that’s never been remodeled, and it’s never been touched and you’re going to walk away from the property if it burns down. It’s almost like a throwaway asset. You’re going to take your minimal settlement and you’ll be done.
I would assume that replacement cost goes up over time whereas actual cash value goes down over time.
The replacement costs can be adjusted by the investor of the property to increase it, should they choose but it’s going to be on what the condition of the property is. For example, we use a $65 square foot component to calculate the coverage amount. Most homes, we call them Home Depot houses. They’re not three-inch granite kitchen counters, they are not a four-inch thick plush carpeting, they’re not customized cabinets in the bathrooms and in the kitchen. It’s something that you’re simply going to go in and if you need a toilet, you’re going to go to Home Depot. If you need a kitchen cabinet to replace, you’re going to grab them to Home Depot. Most of the turnkey providers we work with are very comfortable at $65 a square foot. We may get into certain pockets in the country where we suggest you talk to your turnkey provider and maybe you’ll get $75 a square foot or $80 a square foot. Make sure you have enough to rebuild the property in certain areas where the properties may be more expensive than a traditional type of rental property.
Their replacement cost is much set when you first close your loan and the coverage is first issued. The need to increase that coverage as time goes by isn’t there on a rental property. On a homeowner’s, it might be because you’re doing subtle upgrades and you’re increasing the value of the property, but on a rental property, it stays flatlined. It’s not getting a lot of needed rehab’s or upgrades along the way as perhaps you would do with your own home. The coverage amount stays stagnant once it’s established when you first buy the property.
Let’s talk about coverage. How much coverage should an investor carry on their property? What is the rule of thumb or advice you would give an investor?
I’ll start with the easy stuff. It helps that it’s lender-driven to a large degree. I don’t want to use that as a default but the common sense behind what the lenders are requiring works well whether you own the property free and clear. The law severance is all about cash return on your investment. If something happens to their property and that tenant is forced to move out, you still want that income coming in. The loss of rent is relatively cheap. It’s maybe $50 to $60 a year for twelve months loss of rents. That keeps the cashflow coming while you’re rebuilding the property should something happen to it and the tenant is no longer paying rent. Twelve months loss of rent is a standard coverage. We talked about the three coverages.
I’m going to go to the liability component. Most lenders require $1 million per occurrence, $2 million aggregate. What does that mean for people who aren’t familiar with that terminology? $1 million per occurrence. If someone slips and falls, the carrier is going to pay on any one occurrence or any one claim is $1 million. The aggregate means the summation of. The most the lender will pay in any one calendar year is $2 million. That coverage runs about $150 a year. Relative to the amount that I’m speaking of, it’s a component of the insurance but it’s nothing astronomical. That would be the liability component of coverage amount. Many lenders require $1 million per occurrence, $2 million aggregate. If I own the place free and clear, I certainly want $1 million per occurrence and $2 million aggregate. I don’t even want to play with it, maybe because I’m in California and everybody is sue-happy here as well. As a consequence, I want to protect my wallet and that $1 million occurrence and $2 million aggregate lets me sleep at night very well.
The final component is the coverage for the property itself. This is where we truly do encourage discussion with the people you are buying the property from. We’re at $65 a square foot so if I’m in Memphis and I have a thousand square foot home, I’m going to take a thousand times 65 and I’m going to put $65,000 of coverage on that property. Most of the turnkey providers we work within Memphis are very comfortable with that amount. Parts of Ohio, parts of Missouri, type of thing. If I go into a slightly higher neighborhood then maybe I want to go up to $75 or $80 a square foot because maybe the insides of the property have been upgraded a little bit. Maybe there is a granite countertop in the kitchen, maybe there are some upgraded light fixtures in the home, maybe it’s one step above a Home Depot House.
That’s the discussion to have with the turnkey provider because you want enough money to rebuild the property in the event of a claim. You’re not talking about major dollars that are going to detract from your rate of return. Every investor has their ROI. They want to see their cashflow. If it’s 7.25, it better be 7.25 when I buy this thing. Why is the insurance making it 7.18 all of us sudden? You want to be careful that you don’t over zone in on that rate or return to where it can cost you some money in the event of a claim. Insurance premiums are reasonable. Most turnkey providers are right on the money with their forecasts of insurance estimate but have a little discussion and if you have to pay $10 more for the insurance policy, don’t worry about it.
You don’t want to be penny wise and pound foolish when it comes to insurance. The incremental cost is so small to increase the amount of coverage. It is a smart business decision to have that extra coverage because the difference is so small. We’re talking about deductible amounts here. What do you recommend in terms of deductibles when it comes to property coverage?
The programs that we offer have a $2,500 minimal deductible and we do that for a few different reasons. Claim frequency can get your policies canceled. Dollar claim amounts can get your policies canceled. The insurance companies are in business not to lose money. Let’s be honest about what we’re talking about here. If they lost money, they won’t be offering the product and we have to have competitive rates. We have a $2,500 deductible. What this means is, all the nuisance claims, the hot water heater breaks and it creates a little $1,500 drywall damage in the garage, we’re not going to cover. An AC unit on the side of the home that might get stolen, we’re not going to cover. Usually, those things run about $1,500 and another $500 to install. The nuisance claims bring that overall premium down and as a consequence, a lot of that is driven by that $2,500 deductible.
The deductible is a big factor. The second major factor is the geographical location of the property. If I’m in Florida along the Gulf, Alabama, Mississippi, Louisiana, I now have a hurricane risk component and that wind component is huge.
That’s additional coverage.
It’s not necessarily additional coverage. In California we cover wind, in Memphis, I go back there because we insure so much in the Tennessee area. Wind is part of our normal coverage but when you’re in the states that have that hurricane risk and we see the billions that are being paid out unfortunately almost annually by the carriers, that wind-driven damage gets a surcharge. That’s why the Gulf properties have substantially higher rates. You ask what’s a component of a rate, certainly the geographical coverage does it. We’re now going to see that in California. All the brush fires, all the remote locations in the northern part of the state, in particular, that horrible tragedy that struck Paradise. They have 6,000 houses literally a whole town for all intents and purposes destroyed. The insurance carriers are getting more sensitive to the perils, the major catastrophes that are starting to occur a little bit more regularly. I’m saying, you don’t have to be a genius to see what’s happened in Houston with all the flooding the wildfires in California and all the damages along the Gulf and Coast states.
The insurance carriers are now getting more specific on where those rates are going up. A hailstorm, which never used to be a big component of rate is all of a sudden becoming very real. In Atlanta, for example, we had more roofs destroyed by hail in Denver. It used to be hail was a size of maybe a quarter but now it’s the size of the baseball. When you have that type of size hail dropping from the atmosphere, it creates major damage. It goes through roofs and it creates problems. Hailstorm frequency is now becoming a component rate. All that said, the rates are still relatively respectable. There are pockets, of course, that is higher than other pockets, but the rates are relatively respectable. You can go into areas and you can get a good estimate from the turnkey provider, so you know what your rate of return is going to be on that property with an accurate insurance calculation for the premium.
Let’s talk about some uncommon and strange scenarios where you may or may not have coverage or may or may not be able to get coverage. One thing that has become more popular here over the last few years is the growth of Airbnb. I know a number of people who are doing Airbnb rentals. There are a lot more management and moving parts and it’s certainly a lot more complex than your traditional one or two-year lease rental, but people are doing it. Some of them are making good money at it. How do you ensure a short-term rental like an Airbnb?
The first thing before I get into some of the perils is Ross Diversified encourages you to go online direct. We can hold your hand but there’s no need for it. There are two major providers. One is Proper Insurance and one is CBIZ Insurance. Short-term rentals are definitely more complicated. I’m going to give you some basic ways that the audience can attach meaning to what I’m going to say. If I have a long-term rental and my tenant mops the floor and his kid comes running in and slips on that floor and breaks their head open, they’re going to take the kid to the hospital and get the kids sewn up and you’re never going to get a phone call. Conversely, if I have an Airbnb rental and the tenant comes and gets the keys from me and the kid comes running through the front door of the tenant and slips on that floor and cracks their head open, I’m now exposed. I’m now going to get sued. I’m a hotel operator. It’s no different than if the kid got caught in an escalator going up to the second floor in the Hyatt Hotel. You have to realize you are a hotel. You are no longer a short-term rental homeowner. You have to think very differently. If you have a front lawn and the kid runs across it and trips on a sprinkler and breaks their leg, they’re going to come after you.
If you provide bicycles because maybe it’s a nice bicycling community where your Airbnb is located and they go out on the sidewalk and they get hit by a car, you have liability exposure. I can go on and on. I’ve seen silly stupid stuff. You are a great Airbnb host, so you leave a bottle of wine on the counter welcoming your guests and all of a sudden someone opens up a bottle of wine and splits her hand open and require stitches, they’re going to turn around and sue you. You have to think in terms of, “I am a hotel. I am not just an owner, I’m a short-term rental property.” That’s the liability stuff. Now we can talk about property damage from the tenants. Airbnb has guarantees and as an insurance guy, that word disturbs me. Airbnb is not an insurance company. They cannot operate as if they’re an insurance company. They’re saying, “We have someone’s credit card. We’re going to have a deposit and we may come after them for more if they do damage to the property,” but that’s not an insurance policy. That’s simply an Airbnb guarantee and to get a claim paid out of Airbnb on one of these guarantees is about a 90 to 180-day process.
I’ve heard people use attorneys. I’ve heard people document everything. There’s an answering machine when you call to file a claim on the Airbnb. It’s not to take a shot at them. This whole thing that we’re doing is for education and I want to create awareness. I’m not self-servicing because I don’t offer them. I’m directing the audience where to go, Proper and CBIZ. When you have a true policy, you’re going to file claims for tenant damage, you’re going to file claims for anything that happens to the property as if it’s a homeowner’s coverage. You’re not going to call Airbnb and say, “I need to make a claim on this guarantee that comes with an Airbnb rental.” If someone gets hurt on the property, you truly have a liability insurance policy that you’re going to fall back on.
The risk that I see a lot of our investors do is they will take our policy and they’ll put an Airbnb person in there. Every policy has a business activity exclusion, an Airbnb is a business activity. Now you’re going to try to use something and the insurance company already has an out to deny the claim. These insurance adjusters aren’t stupid and they’re going to say, “Let me look on Google to see if there is an Airbnb listing for this property address. There is. Business activity exclusion, we don’t have to pay the claim.” They never told us they were using it as an Airbnb. Since we’re on this topic, I’ll digress quickly or sidebar to marijuana growers. We see a lot of basements now being used to grow marijuana. That’s a business activity.
I’m going to deny your claim if I’m an insurance adjuster because the property has a business activity exclusion. You use the home as a daycare center, you use the home for rehab, you find all these reasons to use the home and you don’t think, “On my insurance, do I still have coverage? I’m now using it as an old age because I have four bedrooms and I have four different beds that I can rent out at $1,000 a bed.” Is that a business activity? The answer is yes, that is a business activity. You have to be very careful in knowing what you’re insuring with that short-term rental once you decide to go in that direction. The returns can be very exciting. I know many people that even sublease places so they can turn around and Airbnb it. It’s a great business model to fine tune and understands, but know your insurance risk and purchase. They’re expensive because the risk is so high. Please purchase the right coverage.
You’re making me think of a scenario called house hacking. What happens when you have a property, let’s say it’s a duplex or even a fourplex, but you live in part of the property and you are renting out the other part of it to Airbnb? Do you need two types of coverage?
That same Proper or CBIZ policy contemplates that and you would, on the application, complete it with that information. One of the units is owner-occupied, a triplex, the other two units are Airbnb. The policy would be comprehensive enough to cover you as a homeowner of the one unit you occupy and you as a hotel operator in the other two units that you’re using for Airbnb.
We’re talking about uncommon and strange scenarios here. What happens when a tree falls on your roof?
If it’s on your property and it’s your tree that fell on your roof, you’re going to be covered. The insurance company is going to want to know, was the tree dead? If the tree was dead, why wasn’t it removed? That becomes owner maintenance. You have a dead tree. You knew it was dead and you did nothing about it. This was an event that is likely to occur, and you took no preventative measure to stop it. If it’s a live tree and we talk about those wind storms that are now hitting more areas of the country with more force, freak tornadoes and that ranch go flying off of your tree onto your roof, you’re absolutely covered. The area of trees gets more muddied and more unclear when we have what we call acts of God. Acts of God is something that’s excluded from any policy. The tree that fell on your roof was from 80 miles away that was in a tornado or a hurricane and it came flying across the neighborhood and went to your roof. That’s an act of God. Will we file the claim? Will we try to force coverage payment? We will, and we will be your best advocate because it’s damage to your property and we will argue that it’s a wind claim, not just the tree fallen on the property. It can be unclear when your tree falls on your neighbor’s property. You have an overhanging tree on the property line and that tree falls on your neighbor’s property. If the tree wasn’t dead and they never asked you to cut back the tree, then they need to file with their own homeowners or their own policy. They may come at you, we may deny the claim on that type of basis.
Trees are very confusing. Each scenario has its own set of facts and it’s not cut and dry. What we advocate is trim your trees. Make sure it’s not a dead tree because trees provide shade, they provide beauty. It makes your home more rentable. We’re not saying get rid of all your trees but what we are saying is maintain them. Don’t let the leaves get in the rain gutters. Common sense stuff. If you have overhanging branches, cut them back. If you have an attic in the home with glass and your tree is enormous, cut the tree back so you’re not creating exposure for yourself should a branch fall off that tree.
That’s happened to me before and it was covered. Another scenario that happened to me is frozen pipes bursting in the winter. The house wasn’t winterized and so I had pipes burst and then it flooded part of the property. It wasn’t that bad, but it was bad enough. That I assume is covered by your regular policy.
It is, and it isn’t. I’m going to sound like a typical insurance guy. We give it in paragraph two and we take it away in paragraph seven. We’re not going to tell you one way or the other. Burst pipes on houses that are winterized meaning the water were turned off and you took all the necessary steps. Maybe you kept the temperature in the house at 72 degrees or maybe you kept the water dripping a constant drip so there’s water flowing through those pipes, yet we have a sudden drop in temperature. The place has only been vacant for a week and everything freezes and the pipe burst. That sudden burst is going to be covered. If you winterize the property, it’s going to be covered. If you don’t winterize the property and it’s at sub-freezing temperature and the place has been vacant for three months while you’re trying to rent it and the pipes burst, then it’s not going to be covered.
We look at the time frame. If the window of time is 30 days or less and the pipe bursts, you’re going to have coverage. If you winterize a property and somehow something freak happened and a pipe burst, you’re going to have coverage. If you have running water and you have a property manager signs, “All the water’s running. I have pictures here with the water dripping through every pipe,” and one pipe burst somewhere, you’re going to have coverage. It’s simply when the place is vacant, you’re trying to get it rented. No one’s been in there for a couple of months and a pipe burst because someone forgot to turn off a particular faucet or they didn’t flush the water out before turning off the main water valve, the pipe burst and you would not have coverage in that scenario.
Another thing that happened to me was a sewer backup. Fortunately, this only happened once. How do you cover yourself for a sewage backup? In my scenario, it was not because of anything I did, it was not under my property or on my property, it was because of something to do with the city. Needless to say, it backed up and created some cleanup and a mess in my property.
We do have sewer coverage with our policies, first of all, sewer backup. You identified a few things there. One is if it’s a county problem or city problem, that means the problem occurred from something that went from the city to your sewer line and hookup and that created the backup, then you’re going to have coverage under our program. It’s almost easier to describe when you would not have coverage with sewer backup. I hate to go back to my favorite, trees, but this is real. This happens in their awkward conversations to have and we try to educate on the front side as much as we can.
When you have a tree, normally, you have roots. If those roots break up the sewer line from the sidewalk to the house and you have a sewer backup because it was your tree roots that broke up that pipe, you’re not going to have coverage under anyone’s policy because that’s an owner maintenance item. You have a tree with roots breaking up everything. Maybe breaking up the driveway too for that matter. Maybe breaking up the sidewalks. You have to know what the situation is relative to the sewer line from the sidewalk or the street to your house and where your trees are on that property. If that causes the sewer back up, you’re not going to have coverage.
If you have a tenant who flushes something down the toilet and you have a sewer back up or a plumber backs up for that reason, that falls under the deductible. Should that occur, and it exceeds the deductible, you’re going to have coverage. That’s a water damage situation but sewer itself is two things. One is a county blew it between their line to your house hookup, which caused your line to backup or two, a tree root problem got in there and tore the pipe up because it’s a 35-year-old house. Those tree roots have been strangling that pipe for a long time and unfortunately, you just bought the house and now it turns out to be your situation.
The thing is you have to have regular maintenance on that stuff because you can’t see when a root is growing into a pipe or breaking a pipe or plugging a pipe under the ground. You have to have someone come out once in a while and sneak it. I don’t know if that’s every two years or every year, but you have to have a check. I’ve had that happen. I don’t know what the tool is, but they clean it out. Let’s talk about one last thing. Talk about rent loss coverage. What is it? How does it work and how do you get it? Fortunately, not a lot of investors obsess over rent lost coverage because they have traditional rentals. They’ll have a one or two-year lease and many tenants tend to stay for one to three-plus years at a time. What is it and how does it work?
Rental lost coverage can be a little bit confusing so I’m going to go with the big puzzle pieces. First of all, it has nothing to do with your tenant moving out of the property. If the tenant moves out and the place stays vacant, you don’t file a claim for rental loss coverage. That’s simply vacancy and the insurance companies could care less if the tenant is out for two months or three months while you try to rent your property. Rental loss or loss of rents or even called business income by some of the carriers, it is because something happened to the property that forced the tenant to vacate. A fire, a wind, severe water damage, a tree falls on the roof. The county backs up your sewer line so it’s a covered peril and I’m glad you said that the tree fell on the roof because it has to be a covered peril. It has to be an approved claim that triggered the vacancy of the tenant being forced to move out. You file your loss of rents and you have coverage until the property is made habitable again for someone to occupy the premises. It has nothing to do with unemployment, nothing to do with tenants moving in and out of the property. The damage occurred to the property forcing the tenant to move which creates the loss of rents.
Why do you ask for insurance payments when mortgage loans are escrowed?
Investors, including us who own property, you get used to that mailbox money terminology. You feel as if you can live in the Bahamas and kick your feet up and it’s all electrical these days and money in and money out and so you go into this no-think mode. You got a great property manager and you’re still in this, “I don’t have to deal with any of this. This is a great investment. It works like clockwork like Marco said it would. This is wonderful stuff. I’m going to get 1,000 of these things.” Investors who allow their insurance premiums to be escrowed with your payment so they don’t have to think about it assume that all these lenders are good at what they do. That’s a misnomer. I’m so glad you brought it up because it creates friction with the insurance company. It creates friction with the insurance agent like myself. It creates awkward conversations because investors get cancellation notices. Real scenario, December 1, your premium is due. What does the insurance company do? 45 days ago, they sent out a renewal notice with the bill to your investors saying, “Pay this impound or escrowed money to renew the policy.” It doesn’t come in. Ten days, they send another letter out to that lender saying, “Pay your insurance premium or we’re going to have to cancel the policy.”
You may get notified as a borrower. We email all of our investors who are borrowers, “The insurance wasn’t paid,” and they’re saying, “Call my lender.” “I’m an agent. I don’t know your loan number. I don’t know your Social Security number. We all know security. They’re going to ask me fifteen questions to make sure that I’m you in order to talk to me about your loan. They’re not going to talk to me.” You the investor have to call the lender yourself and you’re saying, “I thought you’d handle this for me.” You’re going to have to say, “Mr. Lender, why didn’t you pay my bill?” They’re going to create all sorts of reasons and all sorts of excuses. You’re going to have to squawk loud or you may even have to pay the premium to keep your policy from being canceled and then get reimbursed from your lender. It can be a real mess and the conversations can be very awkward.
There’s another half to it where the investor has to get more proactive. If you change lenders and you don’t tell your agent and the insurance company, how are we to know to bill somebody other than who we have when you first close the loan is our billing party? We need to know where that bill should be sent to. Many investors don’t pay attention to that. The servicer changes. I took out my loan with ABC mortgage and then we all know that these loans get swapped and traded and everything else. Now I make my payments to XYZ lender, but they forget to tell us. The servicer is changed, we send out a bill to ABC lender who could care less, they don’t have the loan on their books anymore. XYZ is sitting over here waiting for a bill because they have the money in the escrow account and we’re sending out a cancellation notice because we didn’t get payment. It’s a very necessary component of investor maintenance on the insurance piece. It can be a very frustrating process and we don’t want to be the irritant. We’re simply the messengers so don’t shoot us. If your policy is going to cancel, we’re going to tell you why. Let’s say the lending community as a whole is not perfect. There are many times where they will send in premiums 45 to 90 days after the fact and the insurance carriers already cancel the policy and returns the money back to that lender.
Is the solution just to put a reminder in your calendar to check with your mortgage lender to make sure that they paid the policy from your escrow?
We advocate that to the nth degree. It is such a wonderful proactive measure. Wait until the cancellation of the policy because by that time it may be too late. Thirty days in advance of that policy expiration, did you get the bill? Did you pay my insurance carrier or the premium? That proactiveness will go a long way in eliminating a lot of aggravation.
Your company is essentially nationwide insurance provider. You have an insurance program. Explain to us here how that works.
We have a wonderful program. It’s written through Lloyd’s of London, A-rated class fifteen, the largest insurance category you get rated by best. It’s designed for investors with one or two or multiple portfolios that were your property isn’t just now on the street from where you live. If I’m a homeowner and in a certain ZIP code and I own a rental property in that certain ZIP code, let me call my Allstate agent or my state farm agent and insure along with my homeowner’s policy. The easiest thing to do and if they take it on their books it makes your life less complicated. However, if I’m an investor and I own two properties in Atlanta and I own one property in North Carolina. I own another property in Memphis and one in Ohio or I simply own out of my immediate ZIP code. I want a program where I can call one agency, Ross Diversified Insurance, and say, “Ed, I just bought this rental property. I want to get a policy for it.” We’re going to ask you three questions. “Is the electrical on circuit breakers 99.99% obsolete?” We don’t care if it’s a new roof or if the plumbing is old, but we do tell you if the roof is old, we’re going to pay that actual cash value in the event of a claim.
If the turnkey provider put on a new roof or modified the roof or replace the shingles, all we need to know you get replacement cost coverage for. How’s the plumbing? Did you buy one of those 1930 Garden Homes in Chicago that everything leaks all the time and the plumbing hasn’t been addressed or has plumbing at least been touched since 1980 or 1970? Plumbing 50 years or older is prone to leak. We ask those three questions and then we issue a policy. We work with closing agencies all over the country. We work with many of the lenders who are in this lending space. They know who we are and we know who they are. We give them the evidence of insurance. The rates are extremely competitive. We work with over 100 turnkey providers all over the country. They know what our premiums are going in so when they give you the calculation for that rate of return, it’s accurate. It’s not a lowball number. You’re getting a very accurate number that fits with the projections of what you’re getting. We’re very hands-on. We have a fine staff here and we use our cell phones and we get everybody very comfortable with the process and our rates are truly competitive. Our phone number is 1-800-210-7677.
Thanks for all the valuable information. I know this is going to be helpful for many people. I appreciate you coming back on, Ed. This is always educational and enlightening to hear. Insurance is so important. People need it. It’s not an option. It’s something you have to have.
We appreciate this opportunity. One more point of contact, if you Google, Ross Diversified Insurance, our website RossDiv.com will pop up where we have a lot more information and a lot more contacts of how to make the process as easy and painless as we can.
Thanks for coming back on.
Thank you for this opportunity.
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Don’t neglect insurance. It’s important to have it from property insurance to liability insurance, even umbrella coverages to that backstop the policies you have. Don’t neglect it, don’t be cheap. It’s part of your investing. It’s part of your real estate business and it’s something that is a very low cost for the benefit. It could and can provide you. If you have not downloaded the free report, The Ultimate Guide to Passive Real Estate Investing, it is chock-full of great information. It is a fantastic primer. You can download that on both of our websites. I’m sure you know what they are but if you don’t, just go to PassiveRealEstateInvesting.com. If you are looking to invest or thinking about it and you want to have a conversation for free with one of our investment counselors, head on over to our website and request a free strategy session.
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