Welcome to Passive Real Estate Investing. I’m your host Marco Santarelli.
And today we’re going to talk about something that has come up in the past and I’ve had some experience with over the years. But that is the question of how can you do something to help guarantee your rental income to guarantee the outcome of what you expect your property to produce or how you want it to perform. And up until recently, there was really no way to ensure, if you will, your rental income until now. And so what we’ve done is we’ve partnered with a person who I’ve known for quite a while, a trusted individual in the insurance space to essentially provide an opportunity for you to insure against your rent loss. It’s essentially rent default insurance.
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And so today I have John on the episode with me here. He’s my insurance partner and he administers the landlord rent default insurance. And so we’re going to have a conversation about what this is all about and how you can use it. So, John, welcome to the show. Thanks, Mark. I’ll have it to be here. Well, that’s great. So this is something that we started talking about, if I’m not mistaken, about a year and a half ago when we were down at one of the IMN events and I believe in Florida. Is that about right?
That’s correct. And um, you know, things have happened always more slowly than you want, but we’re happy to be here today, not a podcast, I guess roughly 18 months later.
Well, it’s come a long way and I know you’ve been putting a lot of time and energy and work into building this thing and making it happen with the underwriter. So, you know, I like to always start with the most basic of questions and that really is what is landlord rent default insurance.
So rent default insurance or landlord rent fall insurance is a product. Um, that’s actually a pretty well adopted around the world but never really took off in the US essentially what it does is it protects property owners against lost rental income in the event of tenant nonpayment. As you know, Marco being a, you know, a landlord for a long time, no matter how long or how good you are picking tenants, sometimes good tenants go bad, you know, someone loses their job, their break up with their spouse, et cetera. And what these types of insurance programs do is they indemnify that owner against that loss rental income. So similar to your house burns down and you’ve got loss of rents on your rental unit, burns down, it’s covered, it’s covered peril. And because of that, you’ll collect your loss rental income, but no one offers if your tenant just stops paying. And really that’s what we’ve created here at my firm and are excited to be working with groups such as yourself and the neurotic team.
Well, I appreciate that. So let’s talk about what this actually covers. Cause some people are probably listening to this thinking, Hey, this sounds really interesting and it might be a good fit for what I’m doing in terms of the portfolio that I’ve built in the properties that I own. So what does this actually cover? Let’s talk about that. So these rental fault insurance programs cover the nonpayment of rent by the tenant. So if a tenant skips town, you know, disappears in the middle of the night or just as a bad tenant, as you know, there are all these horror stories of every once in a while you get just a bad tenant. This product rent fall insurance protects the owner against that. So if the tenant hasn’t paid for some reason, generally people are mortgaging these investment properties in order to get higher cash on cash or a higher return.
Right? And so that’s how the saucepan Spain, they sell their mortgage payments, et cetera. Well, with rental phone insurance, they can recoup the lost rental income that the tenant didn’t pay in order to be made whole. As you know, if you get one bad tenant experience it can turn your investment upside down and what you thought would be a great return might be underwater for you know, a year or more because of that one bad outcome and with this type of insurance property investors are able to isolate, um, and guaranteed their yield on their, on their cash flow in property, which is a really big step in a game-changer for the industry. Right. And many investors don’t think about this or they don’t realize that the turnover is actually the most costly thing typically in owning rental property. That’s why you want a tenant that pays on time and stays for a period of time longer than a year.
Ideally, there’s no ideal, I guess it’s just as many years as possible, but if you have a turn every single year, it is quite possible that the turnover, in other words, the tenant moving out, the cleanup and then the new tenant moving in, the cost of that turnover, whether it’s a week or two or as long as four weeks or more, is really the most costly part of having that rental property aside from major expenses such as replacing a roof or whatever it may be. So you want to minimize the turnover of course. And that’s why good locations and good property management are critically important. But at the same time, if you have an issue with a tenant where they lose their job or whatever the case is, and you’re now out that rental income, this is a way to insure against that loss. So turns can be expensive.
You want to minimize them as much as possible. So absolutely right, Mark Lum, it’s all about making sure that units rented, occupied and cashflow. So I’m going to ask a question that might be one of those, well, duh, this is an obvious answer to a question, but who should consider getting this? Cause I can’t imagine this is for everybody, although you’d like to say it is, really who should consider getting this and maybe who shouldn’t consider getting this cause it’s really not a fit. I will start with who shouldn’t. And I think the, who shouldn’t start kinda your big multifamily owners, people that have, you know, a large portfolio of rental properties where they’re diversifying their cashflow. And so one, you know, bad
tenant outcome isn’t gonna make a big difference to their bottom line. It’s really for the product was built for the investor that has less than say, 20 properties and they should consider it. If they want to make sure that they’re buying an asset for a certain yield and a certain return profile, they should buy it because they want to ensure that they hit that return profile. Um, ensure that they’ll be made whole. It should that occur. The other thing, you know, one thing to note is it’s not really appropriate for section eight tenants today. A section eight tenants, you know, have an implicit government guarantee behind it. But um, you know, in the future there could be modifications that that would make it more appropriate. So it’s really for your middle of the road landlord that’s investing in properties. Generally, out-of-state properties tend to be, a lot of the owners that work with us are buying it because they own a property in a different state and whether it’s professionally managed or not, they want certainty to know that, Hey, if that property is far away and somebody goes bad with it, I wanna make sure that I can recoup my loss rental ICAP.
Got it. So some people are probably thinking right now that they have property insurance coverage on their property or portfolio of properties and they’re thinking, well, I probably have some sort of coverage there. And I know that with some of my policies there actually is rental loss coverage, but this is not the same thing. So explain the difference between the two.
Yup. No, absolutely. And so the difference is rental loss coverage and for your property policy, for instance, would be from a covered peril. So say you rent the unit for a thousand a month and there’s a tornado or a, you know, w some sort of event or burns down, they would cover you. If you’ve got that loss of rents coverage on your policy, you would still collect that rental cash flow because you’ve got that in the result of the loss was a covered peril. This is different. This isolates solely on tenant performance. So if your tenant doesn’t pay this insurance well, and that’s something that’s not covered by any other insurance policies out there in the market.
Okay. So what kind of events would not be covered by this policy then?
So the unit has to be in a, it has to be habitable. So for instance, if I go back to the property policy that the place does burn down, well, you can’t rent that unit, we, and so no one can live in it. So, therefore, we can’t pay for that. And that would be covered by your loss or rent and your traditional property policy. Um, we also can’t pay if there’s a fraud. Obviously, if there’s some sort of collusion between the owner of the property and the tenant or other fraud, you know, the insurance providers won’t pay on that. Other ways people don’t pay. Those are really the two main ones. For most other instances the insurance will pay. But for any insurance specific questions, there’s going to be, I believe, some a landing page on your site, Marco, that will tell them all the information they need.
Um, and in a whole FAQ section. But it’s really very limited exclusions, uh, because this product was built with the investor in mind, actually, one of the creators of the product suffered this loss themselves. And that was the impetus for creating the product is, Hey, there’s gotta be another way. And they had a unit go unexpectedly. Then, the tenant flew the coop and they had a big loss from it. I thought there’s gotta be another way. And so the products really were built with the end landlord in mind. And that real estate investor and how if you’re that buyer, that program or product, what’s the product that you want to buy? It’s gotta be affordable, customizable, um, with a limited exclusion so you can get paid in the event that things go sideways for you.
So the way this policy’s being offered is pretty interesting because it’s a one-year policy, so it covers 12 months, but you can actually pick and choose how many months of coverage if you will, you have within that one year period. You want to explain that for a minute and then maybe talk about what the maximum coverage is for lost rent.
So, um, as everyone knows that Maxim real estate is local. And so along with that as are all the laws with regards to tenant protections, evictions, et cetera. So it doesn’t make sense to be forced to buy more than you need or want. Rather you should have the ability to customize or, or buy the right amount of coverage for your specific situation. And so individuals out there can buy rent fall insurance from six weeks up to six months of lost rent. And then the annual policy period. So think about it, if it’s $1,000 a month rent, you could buy purchase up to $1,500, of coverage limit up to $6,000 a covers limit or you know, at a more expensive unit, multiples of that. Um, but it’s really just to ensure that you can build the right product and have it match your expectations and demands. In Georgia, you get someone out of a unit if they don’t pay very quickly in California or New York, uh, might be a different story. I take a bit longer. So you want to buy, have a pod, a product or a policy that’s more customizable to the needs of the end-user.
Okay. So when you choose the length of time for the lost rent coverage, that ranges from what, one and a half months to a maximum of, is it six? I think that’s correct. Okay. And so when you choose the length of time, you’re essentially just paying a little bit more in the premium so you can control the cost of it if you want. Or you can look at it another way around and say, well it doesn’t matter what the cost is, whether it’s you know, $200 $300 $400 per year, I want the maximum coverage, which could be six months.
Correct. And it depends, you know, on your, your risk tolerance and your situation and the jurisdiction in which your property rental property is.
Now, most people associated deductible when it comes to insurance. As far as I know, most insurance policies have some type of deductible. Is there a deductible on this? How does it work?
Oh, there’s no deductible in rent a fault insurance policies or at least the ones that have been created. But you know, on this podcast are the ones being discussed in this podcast. And the reason being is if you’ve got a, a bad tenant, it doesn’t make sense that you’d suffer a loss of rent for a month before you can make a claim and start to receive policy benefits for something you’ve paid for. You know, it doesn’t go the complete way. So the policy was created without a deductible. If there’s a security deposit in place, the security deposit is used first before the loss of rent kicks in and the rent default coverage. But really in our experience, when you’ve got a bad tenant, they’ve generally done some damage to the unit or you know, there are some other uses of that security deposit that are unnecessary.
If you’ve got an evict to maybe you use that for a legal expense. So that’ll be used up. So why should you have a deductible to always take a one-month loss on that instead you should be able to claim for what was due to you and that’s exactly how the product was created. Okay, perfect. Well, that’s refreshing in a way to hear that when you make a claim, I guess the question would be when is the right time to make a claim and is there a complicated process in doing that or is it a matter of just contacting whoever the assigned agent is to you? Yup. There’s a totally online experience or it can be emailed or you can contact a real person to submit a claim. Um, you know, the time to make a claim is as soon as the tenant is late on rent, um, and you do not think they’re going to be caught up.
Do you want to notify the insurance agencies that, you know, there’s a claim to be expected and then uh, provide that information. One thing to note and then that can be done online over the phone, email, et cetera. One thing to note is that many people use property managers to manage their units. And a lot of instances people have their property managers, Smith claim on their behalf, uh, for their benefits since the property manager is the one managing and responsible for that property and has all the day to day details. So that can make it easier, especially for those passive investors. Okay.
Perfect. So, John, I don’t know if you want to get into a lot of detail about this, but I’m just wondering what the basic requirements are to qualify for a policy. You know, every insurance policy has essentially qualification criteria. So without going into it too deeply, what are the basic requirements for this?
So the basic requirements are kind of consistent with standard practices and property management, which is, you know, minimum income to rent multiple of say two and a half times or greater, you know, minimum credit score requirements for the tenants. You know, somewhere in the high, high five hundred, no bankruptcy or eviction histories and the recent past, it’s pretty straight forward. There had to be some guardrails on it in order to keep the price prices affordable, but it’s pretty much consistent or even more lenient than the screening and tenant selection pro practices we’ve found with most professional property managers that manage for the single-family rental investor.
Perfect. Well, I think everything we’ve covered gives people an idea of what this is and what it can do for them. You know, I tried to stay broad and allow you to provide some depth and I think we’ve done that. Is there anything that I didn’t ask you that I might’ve missed or I should have asked you here? I think you know, where can you find more information? It’s probably something that’s not a question, you can probably let people know that. Yeah, of course. And like you had mentioned, there’s going to be a page effect the page has done and up on our site. So by the time this episode goes live, people can go to our website and look that up. It’ll actually be on the front page or the homepage of the site along with um, you know, other places on the website for more information.
But I really think the big announcement here is that by the time this goes live, we are going to be offering and including this policy as part of the investment that our clients, the investors make in purchasing and acquiring property through us. So for that first year, they will have for free, essentially a one-year policy that goes along with their investment. So there’s no catch, there’s no obligation, there’s no cost to you listening to this. Now, if you’re listening to this and you’re investing on your own, doing your own thing and your own local market, working with you know, a real estate agent or broker somewhere and you are interested in this rent default insurance, then you can still benefit from it. You can still purchase it. Just contact your investment counselor here or if you don’t have one, just fill out the form on our website.
We will contact you, um, or just go to the page as a form on the insurance page, the landlord rents the fault insurance page where you just fill that in, just name and email and we will follow up with you and get you the additional information that you need and put you in touch with the right people. So it’s available essentially to everybody. Um, but we are including it as a value add, if you will, a free bonus with, um, with the investment that you make through our network. So, John, I think that pretty much covers it. Um, unless I missed anything,, I think we did a pretty good job at summarizing this program. Yeah, no, I think you touched on it at all. And I think, um, you know, it’s very compelling for you to offer that with your services because really when people are investing in a turnkey property, they’re investing for asset appreciation and yield and to have certainty.
And Neil, the component of that investment, um, friends, a lot of value I think to all of your customers. Yeah, exactly. I mean cashflow, I like to call it the glue that holds your deal together. Cashflow is nice and you build it up over time and it gets to the point where it creates financial independence and financial freedom for you. But along that journey, you know, then creating that net worth and that equity in your properties, you want to make sure that you’ve got income coming in and evictions are going to happen. Tenant turnover is going to happen. It’s just part of the game. And to help cover some of that gap, you can insure yourself some of those turns, especially the unexpected ones or the unfortunate ones. And this is a product that might make sense for a lot of people. So here it is.
And you can take advantage of it. Absolutely. Well, thank you very much, Marco. I really appreciate the time. So John, no problem. Thanks for coming on. You and I are going to be doing a lot of work together in closing up here. Just remember if you’re listening to this and you’re interested in what you heard, contact your investment counselor. Also, if you’re thinking about real estate investing, just contact us for a free strategy session. We do them every day, every week. If you have a question about real estate investing, just let me know. Click the ask Marco button at the top of the website and I’ll be happy to cover your question in a future episode and if you haven’t already, please remember to subscribe. Thank you for listening and we’ll see you in our next episode.
For more information and inquiries please visit: https://www.noradarealestate.
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
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