The Truth about Property Insurance | PREI 020
In today’s episode I talk to one of my insurance agents (Joshua Dupree) to answer many common (and not so common) questions that real estate investors ask. Insurance is a necessity but there is so much confusion surrounding what coverage to get, how much coverage, what deductible, and replacement cost versus actual cash-value. All that and so much more.
Don’t miss this episode – it is full of great information that might have you review and questioning your current insurance policy.
For those interested, here is Joshua’s contact information:
Missouri Farm Bureau Insurance Services
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Welcome to Passive Real Estate Investing. I’m your host, Marco Santarelli. On today’s show, we’re going to talk about the truth about property insurance. We get a lot of questions from investors about where to get insurance, how much insurance, how high their deductible should be, what’s covered and then there’s the always confusing question about replacement cost versus actual cash value, which seems to be debated in perpetuity online in real estate forums. I wanted to bring my insurance agent on, a guy named Joshua in Missouri where I’m buying properties right now. I asked him a bunch of questions about property insurance, what’s the proper coverage, how to compare different policies, how much deductible is enough, etc, etc. It’s really not as confusing as you might think, but it’s important to understand what you’re looking at and how to compare one policy to another policy.
Without further delay, we’re going to get him on here in just a moment. But before I do, I wanted to talk about a listener question that came in recently. The question was, “Can I put my property in an LLC after I close with conventional financing?” The short answer is, yes, you can. After you close escrow on your property and you take title, you can do whatever you want with your title. In other words, if you want to take it out of your name and put it into your LLC, for example a holding LLC, a limited liability company, you’re more than welcome to do that.
Now, keep in mind that lots of mortgage documents, most mortgage documents have what’s called a due-on-sale clause. Technically speaking, if you do transfer title out of your name, when you have a mortgage on that property and you put it into another entity, you technically breached or triggered that due-on-sale clause. What that means is that if the lender wanted to, they could accelerate the loan and demand that the loan is due in full and payable immediately.
Now, I’ve never seen that happen. I’ve heard of it happening. But I think to be quite honest with you, it is extremely rare because at the end of the day, if the lender is getting a payment every month like clockwork from you, they’re not going to care anything about whether you’re holding title in your name or in an LLC. They may not like it but they’re not likely going to accelerate the loan because it’s just too costly and too much of a risk for them to try and do that knowing that they’re going to get monthly payments as opposed to try and collecting the whole amount of that mortgage balance from you.
If you close escrow on a property, you could put it into a trust, you could put it into an LLC. You’re free to do what you choose to do with it. Just keep in mind that there is this due-on-sale clause in the document, but you can hold title in any entity or trust that you choose. Many investors do this. It’s not really a prudent thing to hold title to your rental portfolio in your name. It’s a bit of an exposure. It’s like having a target on your back saying, “Look, I own all these assets.” If you ever get into a lawsuit, it’s pretty easy to find out what you own and then a sharp attorney can try and go after that stuff. Hopefully, I answered your question. If you have any other questions you want to submit for the show, please do so, on our website, PassiveRealEstateInvesting.com. Let’s get to interview.
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The Truth About Property Insurance with Joshua Dupree
I’m here with Joshua DuPree. Joshua is with Missouri Farm Bureau Insurance Services and he happens to be my insurance agent in the state of Missouri. He’s been recognized over the last five out of six years as a five-star agent with Kansas City Magazine which is actually somewhat prestigious. He really knows his stuff. We got into a conversation not too long ago about property insurance and how confusing it can be with real estate investors. I thought it would be perfect to have him on the show to explain real estate insurance and the truth about it. One more interesting little tidbit about Joshua, he has a background in film and broadcasting. I think he was looking for a career here in California but I don’t know if that worked out. Anyway, Joshua, welcome to the show.
Nice to be here.
It’s great to have you. I’ve been looking forward to this episode because insurance, I tell investors all the time, is such a commodity. You could literally Google insurance agents and call 50 different agents, get 50 different quotes. They’ll all be little bit different. I’ve discovered over time that insurance is not always exactly what you think it is and you’re never comparing apples to apples. It just becomes this confusing mess. Let’s start off by talking about where a real estate investor should start when it comes to getting property insurance.
Like you were saying with the intro, insurance is very confusing. Obviously, you want a professional to help you and guide you but you also want someone that has some credibility and that you trust. With my business personally, a lot of my business I do is through word of mouth. I know that if I treat everyone with respect and give them 100% honest answers or opinions and basically tell them exactly what this policy that they have or that I’m showing does, then that’s going to basically get those people that has a great experience with me to, whenever they’re with friends or family and insurance is brought up, maybe they’ll throw my name out there. Going with that is if you know of someone who’s in real estate investment that’s been there for a while, they probably have someone that they use, a professional that they trust and they feel has the credibility that that person has earned.
I guess the answer to the question would be, just try to maybe do some investigating, maybe talk to some people who are also in real estate and maybe try to find someone who can service you and can give you good answers and explain it in a way where you do understand. Because like you mentioned before, these investments are huge investments and you want to make sure you’re insuring them properly and correctly. If and when you would have a claim, you’re not going to be upset, you’re going to be happy with the end result. The only way of doing that is having a policy that you know in and out and that you are familiar with and understand and honestly be happy with the outcome if there is a claim.
Let’s dive down into that. That’s a good segue. There are different types of coverages on standard property insurance. Maybe let’s start off by explaining the different types of coverage so investors are clear, at the 30,000-foot level what they’re looking at as far as policies go.
There’s thousands of insurance companies out here in the States and they have a different terminology or language when it comes to certain things but there is a basic knowledge. There’s policies out there where it’s just fire coverage. Just like it sounds, you just are insured for fire. But you also have a fire and extended coverage. It’s company to company basis on what that extended actually means. This is something that whenever you do see a quote from someone and it shows the coverage and it does say fire or fire extended, you need to say, “What does that extended also include?” But the standard for the insurance industry is basically a lot of companies use levels where you have Level 1, Level 2, Level 3 coverage. To add on that, some companies use basic, broad or special. In basic policy, and I can go into it a little bit, it basically is going to cover you with perils around the country. You got fire, lightning, windstorm, hail, tornado, explosion, riots, little commotion, aircraft or vehicle collision, smoke, vandalism, malicious mischief, theft and breakage of glass. Those are covered under your basic policy. However, those can differ between different companies.
It’s something whenever, like I mentioned before, whenever you get that quote and it shows you your dwelling Coverage A which is your structure, and it says what kind of policy is it, whether it be Level 1, Level 2, Level 3 or basic, broad, special, you have an idea. The broad goes into a little bit more coverage where you have a falling object, like a tree limb or something like that, or a weight of ice, sleet and snow, especially in the areas of the country where you have a lot of snow, and freezing, accidental discharge, collapse and so on and so forth.
But my main goal here is just to give you those general terms so you can tell that agent or whoever you’re talking with about the insurance policy. You’d just be like, “I see you have a basic, you have a broad, or Level 3 coverage, what really does that include?” Any insurance professional should be able to either bounce that right back to you, what the coverages are, or maybe even have like a PDF paper to give you the general idea as to what perils are covered and they can email that to you along with the quote so you know exactly what’s covered. Because heaven forbid, you have a basic form or Level 1 policy and a tree collapses and falls on your property, then you don’t have that coverage, so.
It is a little confusing, but it sounds like the key thing here is for the real estate investor to ask the agent questions. What is covered, and probably more importantly, what is not covered. Because if you don’t ask those questions, I’m not sure that every insurance agent is going to take the time to explain all the things that are covered and go as far as explaining the things that are not covered unless maybe they’re trying to upsell them to a more expensive policy.
Marco, and if you have someone who does not want to go in-depth like that, then that’s probably a sign that maybe that’s someone you don’t want to deal with. You want to deal with someone that’s going to take the time to explain and lets you make sure you understand that policy because you’re putting a lot of money out of your assets into this property and it could be gone tomorrow, a tornado comes or whatever. If you’re not insured properly then it doesn’t matter what the premium is.
I understand. It’s a common question, what do I insure, how much is it going to cost or what should I pay, what limits are there. These are questions that I think a lot of real estate investors ask but many of them don’t think to ask. This stuff that you’re covering is not common knowledge, it’s not like we shop for insurance on a weekly basis just like we fill our car with gas. It’s just something that you do maybe once or twice a year, maybe four times a year but it’s not something you do often.
Let me add, the reason why there are all these different kinds of coverages is because every house, there’s a different situation. Not only does the investor need to decide on the insurance but also the insurance company needs to decide on the risk of that property as well. Say there might be an older home that you’re purchasing and there’s a ton of huge old trees surrounding it. With the age of the house and seeing the trees and maybe they’re not kept up very well, maybe that company’s underwriter sees that and says, “I don’t want to insure it under maybe a broad coverage where you have falling objects until those trees are removed or trimmed quite a bit.” There are agents that know what the company wants and know what’s going to be improved by the underwriter. That’s why you have these different kind of coverages to basically get that house covered for the most perils it can possibly be covered for.
Let’s start peeling back the layers of the onion here. I think the number one question we get asked here at our company is, what is the difference between replacement cost and actual cash value? Before you answer that question, there are a lot of articles and forum posts and investors debating the pros and cons and the comparison of those two all over the internet and it really becomes confusing. You’ve given me a good education a while back when I was getting a policy with you and explained the difference and it was perfect. I wish I recorded that phone conversation but I didn’t. Can you explain replacement cost and actual cash value and then maybe take that a step further and describe when and where it makes sense to have one over the other.
Let me start by this. When it comes to a total loss on a property, that means the loss is so severe that the house needs to be rebuilt or just demolish it and start all over. When it comes to a total loss like that, there is no difference between actual cash value and replacement cost. Whatever you insure that property for, that’s what you’re going to get, minus the deductible, whatever particular policy you have. Where it comes into play is a partial loss, which most claims are partial loss claims, not total loss claims. Basically, every insurance company has a software that whenever they want to insure a property, they will go into the software and basically put in square footage, how many bathrooms it has, how the bathroom are made up, the kitchen, has a fireplace, the flooring. Everything is put into the software, and basically how the house is made up, and it shoots out a replacement cost. It’s a good estimate on how much it would cost to rebuild that particular house if there was a total loss. It’s going to break down labor, materials and equipment.
When it comes to having a replacement cost policy, you have to be, and this is my company and most companies, and other companies may be different so I want to be very clear on this, but with my company and most companies I’m familiar with, if you want to insure a property out of a replacement cost settlement, you have to insure it within 80% of that full replacement cost projection. Now, some people might say, “That doesn’t really make sense. Why do you have to insure for about 80%?” What I say after that is, you can’t think about market value, you can’t think about that at all. You have to differentiate the market to rebuilding a house.
Say you bought a house for $50,000 and you insured it at a replacement cost value but you don’t do replacement cost guide, say that house has a kitchen fire and it’s not a total loss but it’s a partial loss and say it’s going to cost $30,000 for that kitchen to be rebuilt. Now, we’re insuring a house for only $50,000 and we have a replacement cost settlement on it and then it’s going to cost the insurance company $30,000 to just rebuild that kitchen, which is at most a fourth of that house. For the insurance company, that doesn’t make any sense to have that kind of loss with the replacement cost coverage.
That is why when it comes to replacement cost policies, you have to be within a certain percentage up for replacement cost. Now, the actual cash value is a little bit different. Actual cash value means when there’s a partial loss, you get a depreciated value for whatever was lost. Let’s take that kitchen fire, for example, so you have that kitchen fire and say when you purchased that house, the kitchen was updated maybe 20 years ago. What they will do, they’ll depreciate 20 years from whatever was lost, the cabinets, the countertops, the appliances, the flooring and basically give you the cash value to repair that.
The interesting thing about actual cash value and something you brought to my attention is that if you’re buying a newly refurbished property or a turnkey property that’s just been renovated, which is what we sell, you had made the comment that it actually makes more sense to get an actual cash value or what’s known as an ACV policy instead of a replacement cost policy. Because number one, it’s going to be cheaper so your monthly, your annual premium is going to be lower. But it actually ends up being the same amount of coverage because that newly refurbished property is going to have a similar value and it doesn’t have the depreciation that an older property would have. Did I explain that right?
Yes. That’s what I guide clients to, is say you buy house, let’s just use $50,000 again. You buy a house for $50,000. It’s been refurbished, new bathrooms, new kitchen, new appliances, new flooring, a lot of the cosmetic updates. Then you do a replacement cost guide on that same house you just bought for $50,000 but let’s just say the replacement cost guide is $200,000 to rebuild. You don’t want to spend that cost to insure that replacement cost settlement because you have to insure it within 80% at least $200,000. If you want to save money on premium, you can insure that actual cash basis for what you purchased it for because whenever there is a partial loss there won’t be much depreciation. Because, like I said, the actual cash value policy, it depreciates the age of whatever was lost. If you had a lot of upgrades on that house, then there won’t be much depreciation, if and when there is a claim.
Here’s another angle on that same question. All properties that investors purchase are made up of two parts. There’s the land and there’s the improvements that sit on top of that land. To take a simple example, let’s just call it a $100,000 property. The property itself might be $80,000 and the land value might be worth $20,000 and that makes up the $100,000 market value of that property. What should an investor do in that scenario? Should they be insuring the $100,000, or what I believe is they should just be insuring the $80,000 structure that sits on top of the land. Because the land can’t burn down. It doesn’t go anywhere, it’s always there.
This is a question I get all the time. This is what I always ask. I answer a question with a question. If there was a total loss to that house, heaven forbid, what would you do? I ask that to clients. If I have a client that tells me, “I will rebuild that house, it has sentimental value, no matter happens, I love the neighborhood, I love my neighbors, I’m rebuilding that house.” Then I recommend we should probably insure it for 100% replacement cost. But most people I talk to, especially the way the market is now, most people are like, “I’m just going to take the insurance money and go.” Then in that case, I say, “Let’s go ahead and insure it at the 80% because the likelihood of you having a total loss, especially in a city, an urban area with the fire protection class, with how good the fire response is, the likelihood of you having a total loss is pretty slim. You’re going to save money but you also still have that replacement cost settlement. Whenever you do have a claim which is a partial loss claim, you’re going to get what it costs to replace that. You’re not going to get any kind of depreciated value on that.
When it comes to real estate investors, 99.9% of the time, new investors aren’t going to rebuild that house. You’re insuring it for what she purchased it for, maybe a little bit more. More than likely you’re just going to take that settlement, you’re not going to rebuild that house. Because in order to rebuild that house, it’s probably going to be quite a bit more than what you purchased it for. Because like we talked about earlier, market value and replacement cost are two very separate things and I know market value, with this country has gone down and been leveled, slowly getting back up there, labor, material and equipment have kept going up. People need to also think about, when that house was originally built, it was built by a contractor or builder who probably built multiple houses in that area so that makes it a lot cheaper. Obviously, shipping in bulk everything to build those houses. When you’re building one particular house in one area after a total loss, the price is pretty high in all that. It’s something you just have to think about when it comes to the replacement cost.
I think it’s also important to note for our listeners that if you’re going to have coverage, you want to make sure that if there is a worst case scenario, that your coverage covers any debt, in other words, mortgage financing you have on the property because you’re still liable for that. You want to cover the debt or the loans that you have on the property. Then if you need extra coverage on top of that to recoup any costs that you’ve come out of pocket, that would probably be the minimum that you need coverage for, right?
Yes, exactly. You also want to think about the deductible too. You buy a house for $100,000 and you’ve got a $5,000 deductible to keep premium down. You want to consider that $5,000 deductible in it. Maybe you purchased it for $100,000 but maybe we need to insure it for just a little bit more, like what you were saying, to make sure that if there is a total loss, you’re not taking a financial hit. Pay a little more, 20 bucks more a year and insure it $5,000, $2,000 more to make sure if there is a total loss, you’re going to come out ahead.
Now, related to that, is it possible to over-insure? You said you want to have enough coverage so you can get extra coverage, but at what point are you over-insuring your needs?
I guess it’s a case by case basis. If you’re an investor and you’re buying a house, if there is a total loss, which most investors are going to do, they’re not going to rebuild that house. If you feel that there’s been a lot of upgrades to that house where there won’t be much of a hit when it comes to the actual cash value settlement, that’s what you want to do.
Here’s what I was thinking with that question, just to give you some context. Some of our clients are buying houses. I’ll use the $100,000 example again. They’re purchasing an income producing property for $100,000 but the replacement cost to rebuild that property might be $130,000, $140,000 because the cost of bricks and concrete and lumber and all the labor that goes into it is more than what they purchased it for. They could insure it for the $130,000 to replace it if they wanted to keep. I might be answering my own question here. Or they can insure it for what they’re into it for which would be potentially the $80,000 loan plus $5,000 in closing costs and their deductible.
They need coverage for $85,000 to walk away. I guess maybe I’m answering my own question in this way. If that property is a keeper, in other words, it burned completely to the ground and they wanted to keep it and have it rebuilt because it was a cash cow, maybe they do need the $130,000 coverage. Back to your question that you ask investors, if it was to burn down to the ground, what would they do? If the answer is they’re going to walk away from the property, then maybe the insurance amount that they need coverage for is the $100,000 or the $85,000, $90,000.
Or if they are comfortable or uncomfortable with the actual cash value thing, I mean, if they did buy it for $100,000 and their replacement was maybe $130,000, then 80% of that, you’re looking at about $104,000. That’s not really much away from what you purchased it for so it might actually make sense in that case. If the replacement cost is not much more than what you purchased it for, fitting into that 80% equation that I’m using, most companies do use this but not everyone. That’s something you need to address a professional with. 80% of $130,000 is $104,000. If it was me, if I bought the house for $100,000 and it will only take me $80,000 or like $85,000 into it and it’s only going to cost $104,000, I have to insure it for $104,000 to get that replacement cost settlement, I may shoot for the replacement cost just looking at the difference in the premium.
That’s something that your professional can show you. He can show you the quote for, if we just did the actual cash value, this is the premium. It might be only $40, $50 more a year to insure the $104,000 for a replacement cost. If there was a partial loss and instead of getting that depreciated value for whatever is lost, you’re going to get what it costs to replace. My thing is a lot of times I see houses with the way the market is, there are great buyers out there. This is definitely a buyer’s market. But whenever you think about rebuilding that house, it’s sometimes double, even sometimes triple what the purchase price is. When you get into something like that, then it’s not probably going to make sense to do that replacement cost. Not only that, some companies probably won’t even allow that. If you buy a property for $100,000 and it costs $300,000 to replace it and you want to insure it for $300,000, that means the insurance company is on the hook for $300,000 when you only purchased it for $100,000. Now, it just depends on the company.
Some companies like my company, that’s something underwriters probably wouldn’t allow because that’s a huge gap from purchase price to what we’re insuring it for. Because we insure it for $300,000, there’s a total loss, we’re paying out $300,000. People need to also understand insurance is a business. You want to have a good insurance company that writes good business because that means that they don’t have as many claims or when they do have claims they’re not paying out as much. Because if the company is paying a lot of claims and paying a ton of claims because of agents not knowing what they’re doing or not doing their job, then that means premiums go up and you have rate increases. There’s all kinds of scenarios. When it comes to replacement cost being pretty close to what you’re purchasing it for, then you may need to lean towards that replacement cost because to be honest it probably won’t cost you that much.
Just to keep things in perspective here because the listeners are listening to all these worst case scenarios, everything burning to the ground. The statistic I heard is that 99% of the claims that are made with property insurance are partial losses. They’re not complete burned to the ground scenarios.
I read an article, this was a few years back, and this is talking about urban areas, a city with a good fire response. They basically say you have a better chance of being struck by lightning than having a total loss in an urban area when it comes to fire on your house. That helps put that in perspective too. Coming back from what I mentioned earlier, there’s no difference when there’s a total loss. There’s no difference on actual cash value or replacement cost. It only comes into play when there’s a partial loss, which majority of claims, like we just talked about, are partial losses. That’s why it’s good to understand, have a good grasp on actual cash value versus replacement cost value.
The number two question I think that investors ask themselves is, what should my deductible be? I’ve seen $1,000, I’ve seen $2,500, I’ve seen $5,000 deductible amounts on policies. I know it’s really maybe a subjective question because it’s what the comfort level is of the investor so there’s no magic formula or right answer for everybody. But what are your thoughts on that?
Like you said, it’s totally subjective. I’ve got hundreds of clients and some of them have the higher deductibles because they have quite a bit of properties and they’re just insuring that investment. I have other clients who just maybe have one or two properties and they want to have a lower deductible so they’re not hit that much if they do have a claim. It’s just basically something that you need to talk with your insurance professional with. There should be no reason why that professional can’t send you a few quotes with multiple deductibles. $1,000 is a basis these days. A lot of companies even going to percentage deductibles, whether it be like one or two percent deductibles, which I really don’t like. It depends on the investor. It depends on how many properties they have, it depends on what are they comfortable with out of pocket.
It’s another thing you need to understand, whenever there is an insurance claim, you are not supposed to be ahead or you’re not supposed to be under financially. You’re supposed to be where you were at financially before the claim even happened. That’s proper insurance. If you feel comfortable with the higher deductible, $5,000 because I’m not going to make little claims or $7,500, then that’s fine. But if you have a couple of properties and you don’t have how much money to throw at a deductible, then you need to stick with $1,000, maybe $1500 or $2,500. There’s so many different variables. You want to also think about you don’t want to be that person that has a bunch of claims that are small because that’s also going to affect your premium. In the long run, you could possibly pay more money than you are getting from your claim. You don’t want to be that person that has small, like a $500 or $600 claim. In my opinion, my professional opinion, you want to have a deductible that you’re comfortable with that’s a little high, that’s going to keep you from having those little claims because those could come back and cost you even more money in the long run.
Is that similar to the concept of self-insuring, where you still have an insurance policy but you have a higher deductible because you’re going to cover anything and everything up to a certain dollar amount, whether it’s $5,000 or more, is that the same thing?
Yes, it’s the same thing. The difference goes along with that. You’re self-insuring up to $5,000, say the house is in between a lease and someone comes in and vandalizes it, rips up the carpet. If you’re comfortable with something like that, “I can throw a new carpet on this house for three grand and that’s something I feel comfortable with doing so I’m going to up my deductible maybe to $5,000.” Obviously the higher your deductible, the more you’re going to save on that premium. It’s just something that you have to talk with your insurance professional with and figure out what works best for you. You don’t have to keep that deductible. Say one year, you’re just starting out in the business and you don’t have much capital to work with so you’re just going to say, “I’m going to keep it a lower deductible, maybe we’ll do $1,000 deductible.” Maybe next year, you have a couple more houses under your belt, you had some good investments, you’re doing well with those and you got a little more capital to work with. You can just call your guy and say, “I got these houses with you, let’s up these to $2,500 this year.” This is something that you can adjust as you go along in this venture.
I heard a general rule of thumb as far as setting your deductible amount and what you’re willing to self-insure, and it’s basically this: Take that number that you’re comfortable with spending if there is something that needs to be paid for that you don’t want to file a claim for. Let’s call it $2,500. If you’re comfortable with the $2,500, double that number, which will be $5,000, and that would be your deductible amount. Have you heard that before?
Actually no, I haven’t. I think that’s a pretty good rule.
There you go, you learned something today. Next question. Protection class. I am not familiar with that concept. What is it and how does it affect the insurance rate?
I think I’ve mentioned that a couple of times. The protection class is just basically the grade that the fire response has. It basically equates how many miles the fire station is from your house and also the quality of the fire departments in that area. That’s called a fire protection class. That’s a good factor in the insurance business. If you have a house and it’s 10 miles away from the nearest fire station, then you’re going to have a higher protection class which is going to reflect a higher premium. But talking to you, with investors here, most investors are buying properties in urban areas, working class areas. It’s going to be a good protection class in those areas. There’s going to be a fire response, all fire stations in the Kansas City metro area, every house, residential house in this area, almost every house is within five miles from a fire department and have a good protection class.
This is for investors, if you’re looking at more rural communities, you’re saying, “This doesn’t equate because I’m insuring a house in Kansas City for $80,000 and this is the premium,” say it’s $600 a year and I’m insuring the house in rural Missouri for the same amount but it’s $1,200. The reason for that is, a big factor is the protection class. Maybe that fire department is seven miles away, not three miles away or one mile away as it was in the city. That is a good factor and something good to know about the insurance on your in investments and helps you maybe stick with urban areas, the working class urban areas to get you a good rate.
That makes me think of some markets like Detroit, just to pick on one city, that is officially bankrupt. I would imagine that insurance premiums for properties within the city or at least within many parts of that city are very high because there are many communities within the city of Detroit that doesn’t have police or fire response. If you have an issue, you’re on your own. You’re not going to see anybody for a half hour, an hour or not at all. The protection class must be through the roof there.
Yes. The rating you get is one through ten. Just to give you an idea, Kansas City, protection class there’s some areas where it’s two, some areas where it’s three, which is great. You have good protection class in this area. Other cities, I’m not sure, especially Detroit, what you were telling me, I’m sure they have shut down some of the public facilities like fire stations and police stations. That’s probably going to be a big factor in premiums in a city like Detroit or other cities like that.
Those are the core things. There’s two other items that I have on my policies that we should touch on. That’s liability insurance and rental loss coverage. What about liability insurance? The stories are someone trips and falls on your property and all of a sudden you get a letter from their attorney saying that you’re liable for their injury.
I’m going to be pretty vague on personal liability because there is a lot of gray. I’ve got a wife who’s in law school too so I’m learning a little more and more here. Basically, you want to make sure you have a good amount of personal liability on these properties that you own because obviously you want to cover your assets. If there’s an accident on that property, on that lot, and the accident, whoever was involved, felt that it was due to your negligence then they can sue you, whether it be falling on some stairs or whatnot. But what I won’t add to that is, something that you also need to talk about with your property management company if you have one, is ask them if they have some a blanket policy too. Because there needs to something worked up between you as the owner and the property management company because they may have a blanket policy too. Because obviously especially if you’re buying a property that’s out of state, you can’t be there. You don’t have the tenant calling you up when there’s an issue.
You need to have a good understanding and knowledge about property management, that maybe they even might have a blanket policy. Say a hand trail is loose and they notify them, they need to come out and fix that because that hand rail that’s loose could come off when, playing devil’s advocate here, maybe they have their elderly mother or grandmother over and she’s putting a lot of that weight on that hand rail and the hand rail breaks, gives and she falls and she breaks a hip. That’s a pretty bad case scenario but it happens. You need to have enough personal liability coverage to basically cover the assets. Talk with your property management company as well to see if they have something that covers you too. Because in a case like that, they possibly are liable but I’m not saying you’re not liable too. It’s something good to know. Because it’s their responsibility to maintain and upkeep that property where it’s livable and to protect the client, the tenant and also the landlord, the investor as well.
Very good point. Plus, you could always get an umbrella policy on top of that to backstop anything your liability insurance doesn’t cover with a company like yours. It’s pretty easy and pretty cheap to cover yourself from a liability perspective.
To up liability on your individual policies is really not that much. With my company, we have a strict policy when it comes to our umbrellas. We’re very strict when it comes to underwriting in our policy and stuff. Like I mentioned earlier, that’s a good thing because we are a good company and we want to write good business and that helps keeps premiums and rating in helping us not have rate increases. But there are companies out there that you can get an umbrella policy. With us, we have to actually insure the property for us to do the umbrella. But there are companies out there that will do a blanket umbrella policy. The cost is pretty minimal, especially when it’s covering your assets, what you’ve worked your whole life to build. It doesn’t matter where you’re insuring the individual properties with, you could throw all those locations on that umbrella and give you that proper coverage to protect your lifelong assets.
Briefly cover the rent loss coverage. Because some investors think that that cover’s a tenant turnover or a vacancy, but that’s really not what it’s for.
The only time that loss of rent will come into play is when there is a claim that is covered on that property. You have a Level 3 special form coverage. Let’s say a tornado comes and maybe takes out the south side of a house. Obviously, the house is open, it’s not livable. You have a claim on that structure obviously to get that repaired. That’s when your extra expense or loss of use or loss of rent comes into play. Obviously if it’s not livable, you can’t have a tenant there, you’re not collecting that rent. The company will not only give you the coverage to fix the structure but it will also give you the coverage that you’re losing on the rent. That’s when it comes into play.
There may be some companies out there that have endorsements, where if someone breaks the lease or something, maybe there’s some coverage. I don’t know. We don’t have anything like that. I don’t know if there’s anything out there, but there possibly could be. It’s just a matter of asking the insurance professional to get more information. Because you’re buying these investment properties for the sole purpose of that rental income. You obviously want to make sure if something happens to that house and it’s not livable, you still maintain that rent while the house is being repaired.
In tying all this together, what can real estate investors do or what steps can they take to help reduce their insurance premiums without putting themselves in a position where they’re going to be under-insured?
There’s a lot to that. Just knowledge and having documentation. A lot of insurance companies, mine included, we have discounts that you could qualify for when it comes to renovations. However, most companies, mine included, want some proof that those renovations were done. In the insurance world, when it comes to plumbing, electrical, insulation of a house, HVAC, the roof, those are huge components when it comes to insuring a property. If you’re buying a property and all those have been totally replaced, it would be nice whenever you purchase that when you tell the seller, “I want documentation or some kind of invoice showing that this was done by a licensed professional.” Because having all those, all that documents, being able to fill that to an agent, it’s only going to help. A lot of insurance companies, but not every insurance company, a big factor in the rating of a house is the age of a house. If you think about it, houses, the turn of the century weren’t insulated, they have the knob and tube wiring, the plumbing was clay, there’s been a lot of upgrades to the house when it comes to those things.
I don’t want to get into structure because structurally, those houses, the turn of the century, were built a lot better. Those components that build up a house, those are factors that could cost major claims down the road. If you can get documentation when you’re buying a house, if it’s been totally renovated, a lot of these have cosmetic updates which are great too, which only helps. To get those discounts, for renovation discounts on those older homes, a lot of times, those companies, those underwriters or those insurance companies will require something like that. Having that is only going to help you out.
Is the scope of work from the contractor sufficient or does it need to be actual receipts? Because I think a lot of contractors, or at least general contractors won’t release that information.
I guess it’s a case by case. I worked for one specific company. I brokerage out through other companies so I have a feel for their underwriting as well. Some companies, if you write on an application that the electrical was done, that’s going to suffice. However, some companies, they want to make sure that it was fully replaced. Where I’m getting at is we have a lot of beautiful homes here in Kansas City that are storage homes. Some homes are like $500,000, $700,000 homes, huge houses. These are owner-occupied homes I’m talking about. Most of these homes really aren’t rentals. During the inspection of the house, they could still find knob and tube wiring in those houses. When it comes to the smaller houses, the houses that are more prone to investment purposes, you could go in there and it looks like it’s been totally upgraded but there could be still some knob and tube in there or still be some clay plumbing throughout that house where it affects the risk. That comes into play.
The only thing I could say if you can’t get that document is just, me being who I am because I know how I do my business, when I go, I like to inspect all my properties. When it comes to a property that has been totally renovated and they can’t get the documentation, that’s one of those where I will go to the house and I will take a ton of photos. Under the sinks, in the basement, to show the pex plumbing or the copper plumbing, the electrical box, show the wiring, just take a ton of pictures to show. Sometimes when I can’t get all those forms, I could still, with the relationship I have with my underwriters and knowing me as an insurance professional, they can see those photos, listen to what I’m saying and still give those renovation discounts. Having those, it’s just basically saying, just get as much information on that house, as much documentation, inspection reports before renovation, maybe after renovation. That can only help.
Another thing I’ll bring up too is the structure of the house. If you’re looking at a house and it’s a brick house, that’s a plus because a brick house over a wood frame house obviously is not going to have the risk of the fire like the wood frame house. You get a little deduction for having a brick house, whether it be a solid brick house, if it was built before the 1940s, most of those were solid brick houses. After that, we have the brick veneer houses. You still get a deduction on that. I tell investors that, especially a lot of them are still in the market, wanting to buy more properties. I say, “If you find a property that’s less than six years old and it’s a brick house, you might want to jump on that because it’s a good investment obviously for you. With the insurance in mind, that’s going to save you some premium as well.”
That’s all great advice. Before we wrap up, Joshua, anything else you want to share with our listeners?
Make sure you have an insurance professional that whenever you ask questions will give you the answers. If they don’t have the answers, actually tell you that they don’t 100% know but they will find out before they give you some answer that’s maybe not correct. The only reason why I’m saying this is because this actually just happened not long ago. I have a new client and he was very upset. He purchased multiple properties and was told by his previous agent that if we throw all these properties on one policy, he’ll just be subject to one deductible if there is a loss on multiple structures and within this policy. That ended up not being true. He bought a bunch of houses that were all together in basically one block and a big significant hailstorm came. Come claim time, he thought he had the one deductible. Because he had a higher deductible. He did a higher deductible because he was thinking he has all the properties in one policy, one deductible but it ended up not being true even though the agent told him that. Instead of having one $5,000 deductible for I think it was seven houses, he ended up having a $5,000 deductible per house.
That’s what they refer to as a per-location occurrence as opposed to a per-incident occurrence.
Yes. I hear that a lot. A lot of people tell me, “I have this policy, it has all my houses on it, it’s just one deductible.” Make sure that is accurate. You just want to make sure you understand what the person is saying, you feel that he’s credible and not just being a yes man. If you have something not right or he’s not getting back with you or not really answering your question, then it may be time to maybe call someone else and get their opinion or get a quote from them. That’s basically all I’m saying. People have a lot going on in their lives. These are very important, you need to make sure you insure them properly and that you know the coverage.
Great advice. This has been great. Lots of good, helpful information. I know the listeners are going to appreciate this information. Tell our listeners how they can get a hold of you, where can they find you if they want to contact you for insurance or quotes or whatever else?
Like you said earlier, I work for Missouri Farm Bureau Insurance in the Kansas City Metro Area. My office is actually an independent since it’s a suburb of Kansas City. I have an office line. It’s 816-833-4440. I got a handful of secretaries, you just basically mention my name and they can forward any information to me or transfer you to me if I’m available. I do have an email address, work great through email, it’s just my name [email protected]. I do have a website. Probably the simplest thing is just maybe Google me, Joshua DuPree and Missouri Farm Bureau Insurance. That will pop right up and give you a link and you can access my email or show you my office number and also my cell, you can give me a call.
I’ll put that in the show notes too. Perfect. Joshua, I appreciate your time today. The information’s been great and I want to thank you.
No problem. I can talk about insurance anytime.
Sounds good. All right, Joshua. We’ll talk to you soon.
All right, bye.
I hope insurance is not the mystery it was about 40 minutes. There was a lot of good and useful information on today’s show so hopefully you can take that information and apply it to your own real estate investing and be able to have the coverage you need at the lowest possible premium. Download our free report if you haven’t done so, the Ultimate Guide to Passive Real Estate Investing at our website, PassiveRealEstateInvesting.com. Remember to subscribe if you’re a first-time listener. Once again, to tell you about our ethical bribe, we have these really cool new coffee mugs. They are what I just refer to as “Keep Calm and Invest On,” there is an image of those mugs on our real estate website at NoradaRealEstate.com. All you have to do is leave us a rating and review on iTunes and then just shoot an email over to [email protected] and I will drop one of those mugs in the mail for you. I appreciate the ratings and reviews. The feedback has been fantastic. Thank you for that. Once again, thanks for listening, we love having you here and we will see you on the next episode.