In this episode we continue our discussion about rental property insurance. This is a supplement to the last episode on insurance.
Our guest is Ed Babtkis — the founder of Ross Diversified Insurance Services. They are licensed in 49 states and insure thousands of properties around the United States. They’re property owners themselves, so they fully recognize the need for customized insurance for real estate investors.
One of the unique things about Ross Diversified is their ability to cover rental property insurance on a nationwide basis.
Ed Babtkis can be reached at www.RossDiv.com or call them at (800) 210-7677.
If you missed our last episode, be sure to listen to Rental Crisis in the US.
Enjoy the show!
– – – – – – –
Download your FREE copy of:
The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See all our available Turnkey Investment Properties.
Please give us a RATING & REVIEW (Thank you!)
SUBSCRIBE on iTunes | Stitcher | Podcast Feed
[spp-player]
Nationwide Rental Property Insurance
Today’s show is about property insurance. It’s not like the last episode we had about property insurance. I wanted to bring on a new provider that I have found just recently that provides nationwide property insurance. They’re one of the few, in fact I only know of two, that provide property insurance for investors on a nationwide basis. I thought I’d bring him on, not to rehash what we covered in a previous episode with someone else about property insurance, but to supplement that episode because this is another option. I wanted to get Ed’s perspective on a few things related to coverages, replacement costs versus actual cash value, some gotchas, how the policy actually works. It’s a short episode. I think you’ll enjoy it and hopefully it’ll just add to your knowledge about property insurance and what you should have, what you shouldn’t have, and how much to cover.
It’s my pleasure to welcome Ed Babtkis to the show. Ed is the founder of Ross Diversified Insurance Services. They are licensed in 49 states. They insure thousands of properties around the United States. They’re property owners themselves so they fully recognize the need for customized insurance. Ed, welcome to the show.
Good afternoon and thank you. It’s good to be here.
It’s my pleasure having you on. You’re located here in my backyard in Orange County, California. Correct?
We are. Our programs are nationwide but the office is homebased in Orange.
The reason I wanted to get you on the show is because you have a rather unique approach to insurance. You are one of only two nationwide insurance companies that I know of. The first one, there’s a little bit of some sketchiness that I’m watching right now in terms of how they perform and whether they pay on their policies or not. I’ve heard good things about your company and I’m surprised that I didn’t know about you sooner because I’ve been doing this for over twelve years. I’m glad to have you on the show. I want to, in a good way, expose you and your services to our listeners and our clients. I figure I’d ask you some basic questions and get into your program.
There’s lots of reasons why perhaps you haven’t heard of us before. With the recent entrance of places like Blackstone and Colony taking the single-family dwelling business into a national spotlight, if you will, more insurance carriers have become a little bit more interested in getting involved in serving this community.
That’s an interesting comment because this space, what a lot of people refer to as the “mom and pop” investment space where it’s mostly just individual and smalltime investors that invest in real estate, it really is a fragmented industry. There really is very few, if any, true nationwide companies whether it be property management or insurance or construction or you name it. We can take advantage of this fragmentation. You’re setting this big footprint, which is great because it provides a convenience for investors where they can have a one-stop shop for all their investment properties in different states.
The fragmentation has been a challenge for lots of different vendors or providers or product to get into the space. As those providers find aggregators, which my agency has become, those providers, and I say providers meaning insurance companies, if they can find an aggregator to say, “How do we take this cottage community and bring it all into one basket where it makes sense?” Then they get involved in how they want to insure it. We’re fortunate that we’ve been chosen to be one of those aggregators.
As an aggregator, you’re really a brokerage. You’re not the underwriter, you’re not issuing your own policies.
That is correct. Ross Diversified is a national insurance agency. We look for insurance companies, A-Rated or better, to provide these products in a way that makes sense to the investor and in a way that makes sense to the insurance carrier.
Let’s start with a very basic question that we’ve covered on a previous episode. Let’s take your spin on this. What should real estate investors be insuring? In other words, what should they have in place in terms of deductibles, coverage, liabilities, rent loss, whatever else you want to add to that list?
The reality is, each investor has their own take. To have a program with options is going to be important to them. There’s a few different scenarios. Someone who is buying a cash deal, let’s say on a low entrance point area, we’ll say Cleveland, where they go into something and they see that they can buy it for $30,000, put a quick $20,000 into it and their minds are in at $50,000 and they have a cashflow property. However, from an insurance company’s eyes, they see maybe $100 a square foot and it’s 1,000 square foot home. They’ll maybe want to insure it for $100,000. Depending if that investor’s getting institutional financing, he may be required to have $100,000 of coverage or that investor may say, “I just want to simply cover it for what I’m in for.”
Each investor is going to have their own take, their own certain circumstances. Regarding deductibles, similar, again this is if you’re taking out institutional financing on your property, most institutions don’t want to see a deductible greater than $5,000. However, we’ve done business with investors that are buying properties in bulk who want to keep the premiums down and they gravitate to a $10,000 deductible. We have a person who may only own one house and they perceive it as similar to their own home and they want a deductible as little as $1,000. It isn’t a one size fits all, which makes the aggregation a little bit tough but we have some options built in there to try to accommodate.
I was going to ask you this question later but let me ask it now. Regarding deductibles, do you have a recommendation for what an investor should have in place as a deductible amount? I’m referring to investors that are buying one to four-unit residential property.
It depends on the volume of properties and the location. For example, if I’m an investor and I have 30 or 40 properties, I may want a $5,000 deductible. The reasons being quite simply is I don’t want to call the insurance company every time my hot water heater breaks and I have some dry wall damage in the garage that maybe also got water damage on to the carpets taking my claim up to maybe $3,000 or $4,000. I try to reduce my premium and I try to reduce the nuisance claims, if you will, while still being able to go and get institutional financing on my investment package. If I have a house or two or three, maybe I’m comfortable taking a $2,500 hit in the event something happens, but I really don’t want to extend myself beyond that $2,500 range. We probably see $2,500 as the most common deductible. This way, if there’s a leak under the kitchen sink, again, you’re not raising your insurance premiums by calling the insurance company on what we would call a nuisance claim. But you truly have a claim worthwhile filing, the amount would be over $2,500 and that’s why that $2,500 deductible seems to resonate.
I see most investors doing $2,500 to $5,000 just to lower their premium. For me, my comfort level’s $2,500. That’s my rule of thumb, I go with it. The number one question that we often get asked here between myself and our investment counselors is, what’s the difference between replacement cost and actual cash value? On our previous episode, we did cover this to some degree. But even after that episode came out and people had told me they had listened to it, there were still some level of confusion. Maybe where the confusion comes in is that properties that they’re purchasing from us are in like new condition. Maybe you can argue this with me here. It’s been recommended that they go with the actual cash value only because the premium is lower. Since the property has been newly renovated and it’s in like new condition, there’s very little to no depreciation on that property. Should there be a claim over the next few years from when they purchased that property, the difference in the payout between replacement cost and actual cash value are going to be virtually the same but they’re saving on the annual premium. Hopefully, I didn’t confuse anybody, but does that make sense? If not, why?
There’s a couple different perspectives on that question. It’s an interesting question. For example, you have this property that was built, we’ll say in the 1970s, and you just put a new roof on it, you just did cosmetic changes in the inside where you painted the walls, maybe you did some dry wall repair, perhaps you redid the plumbing, perhaps you redid the electrical. For those items, the house is in new condition as you suggest. The framing of the house, however, is still the year that the house was built. When people are renovating homes, usually it doesn’t require moving a wall, you’re not replacing studs. The framing is in fact the original age of the property. Now that insurance company goes out there and they see the house burnt down and they say, “We’ll give you replacement cost for the kitchen and we’ll give you replacement cost for the carpet that you put in, and maybe the roof. However, the wood, the timber that was used in this house is 60 or 70 years old, so we’re going to depreciate what we’re going to pay you.” Actual cash value means the cost of the claim less depreciation, similar to a car depreciating, if you will. They’re not going to give you replacement cost value for the framing cost. They’re not going to give you replacement cost value for the foundation cost if there’s a foundation expense. If it’s a complete loss, there could be a very large amount of shortfall in the event of the claim being paid out. If it’s a cosmetic loss, maybe a small kitchen fire, then the difference between replacement cost and actual cash value will be very light.
In practice, in reality, how much of a difference does that really make? An old frame compared to a new frame doesn’t have much of a functional difference.
The insurance company is going to look at the loss and their job is to pay out as little as they can. Let’s just be blunt. When you go with an actual cash value policy, you’re giving them a little bit of an arguable or a negotiable position. Again, depending on the loss, if it’s done primarily cosmetically inside of the house and it’s small, very, very little difference between actual cash value and replacement cost. Without trying to be redundant, if you’re going to give them a way out on the foundation expense or you’re going to give them a way out on framing, then you’re going to be taking your own chances as to what that variable may or may not cost you.
What’s your recommendation in most cases or is it really case-by-case?
My recommendation, quite honestly, is look at the premium differential. If you’re talking about $100 or $150, why even play with it? Just get a replacement cost policy. It’s not worth the aggravation when you have a claim. As I tell many of the people that I worked with or that come to us, I would rather deal with your awkwardness of the premium on a $100 than deal with the awkwardness of why your claim is $10,000 or $15,000 less than what you thought it would be.
Regarding insurance rates, just give us a quick education on what those rates are based on. Again, this is one of those questions where there seems to be either confusion or an absolute black void as to understanding what insurance companies and underwriters base those policies on. What are they based on? Maybe tell us what investors can do to help reduce those premiums, if there’s anything at all.
The rates are a function of coverage amount. Naturally, a $50,000 policy will be less expensive than a $200,000 policy. A policy with $1,000 deductible will be more expensive than a policy with a $5,000 deductible. Then it gets into the nitty-gritty of underwriting, which is traditionally done on a zip code by zip code basis. Finally, you have the condition of the property itself. A zip code that is prone to crime is going to be more expensive than a zip code that isn’t. A zip code that is in a brush area, that’s miles away from the closest fire hydrant is going to be more expensive than a property that isn’t. The desire of making your premiums cheaper is going to be subject to that. You can say “Don’t buy a home in Dade County in Miami,” to make the example clear, maybe a little silly but clear, because now you’re dealing with hurricane and wind risk. In Florida, premiums are naturally two to three times higher than anywhere else in the country as a result of that risk. Somewhere along the coast in the Carolinas and somewhere along the Gulf States. If you want to mitigate the cost, the easiest thing to say is don’t buy in those areas. It’s really more of having awareness prior to making the purchase of what that premium is going to be.
In that case, does it make sense for someone to call you or call their insurance agent to ask them what an insurance policy would cost them if they purchase that property, prior to actually committing to that property?
They can get a ballpark. The agents really don’t want to quote until they know a deal is going to fund because quite honestly, the activity of getting insurance carriers to underwrite, to come back with quotes, they may not want to clog their pipeline, if you will, with just simply quotes. They’re dealing with so many closings, that’s obviously where they focus their attention.
So much of it comes down to the zip code level, which could literally be a big difference in the insurance. Do you ever see that?
I’ll be honest with you, Marco and the listening audience. The real driver as far as major expense, I’m not talking about a $50 bill or even a $150 bill, is a property in what we call a Tier 1, which is high wind or hurricane risk area. That’s why I mentioned the coastal Carolinas, the gulf in Texas, Louisiana, and of course, Florida. If you’re in a Tier 1 area, that’s something you should ask and you should ask the realtor right off the bat because that’s a crucial piece of information and that policy will be expensive.
I want to ask you about rent loss coverage. It’s a two-part question. Do you advice having rent loss coverage? A lot of policies automatically include them but maybe that’s assumptive. Second is, I used to work with a company, I’m sure you’ve heard of them, AON, they were underwritten by Manchester United. This goes back a couple of years. They used to have a rental loss coverage type of insurance but it wasn’t the same as what you normally think of with policies like what you offer. What they covered were evictions, tenant issues. In other words, they were going to cover you for up to six months of vacancy, starting from the month after the eviction. They would cover you for up to six months for lost rent. I haven’t seen that type of policy anywhere ever since. Do you know anything about that? Does it exist? Have you heard about it?
I’m aware of programs like that that usually quite frankly come and go because the loss ratio gets rather high. The policies are driven by the premium. If the carrier doesn’t get enough premium, they cancel the program. I’m familiar with AON. They do a good job of many different types of programs. What you mentioned really is what I would call a “come and go” program. We’ve seen similar programs. An example would be unemployment insurance for your renter, if your renter becomes unemployed, that you can have a policy that you would sell your renter to make the payments for you. As a whole, my agency has stayed away from those programs because we just don’t see them sustainable. When claims are denied, there are a lot of misunderstandings about what the intent of what that program is designed to do. We just have stayed out of that marketplace.
As far as basic rental loss coverage where there’s a fire or some catastrophe at the property and the tenant has to vacate for repairs to be done, you do provide that kind of rent loss coverage?
Yes, loss of rents, six months, twelve months, twenty-four months. Our program happens to cover twenty-four months loss of rent. It’s definitely something that the premium is so nominal it’s just built into the policy. It gives a comfort level that if a tenant has to evict because of an unfortunate situation like a major fire loss, that income that that owner is used to receiving after 30 days that they can continue to receive that income until the property is rebuilt to where it’s inhabitable again. Also, you’ll see that being required more and more, again, when you go to get institutional financing, should that be something that you do on your property.
What about liability? I know a lot of agents will include liability coverage half a million, $1 million, I’ve even seen $2 million policies. What do you include? What do you recommend in terms of liability?
Liability is a policy that you need to pay attention to, not only in the amounts of coverage but also the exclusions so that you know what your policy truly covers. Liability policies have a lot of variances to them. As far as coverage amount, most lenders want to see $1 million or $2 million per location. That’s what the lenders feel comfortable about. I look at someone’s net worth and I would let my net worth dictate that. I would not want to be in a position where if I had masked a great amount of wealth that I would want to have it at risk. Each investor has to make their own decisions. We’re fortunate that one of the programs that we offer here actually comes with a $10 million, which is overkill, but it’s nice to have and it’s not expensive, a $10 million umbrella liability policy per location. That seems to get everybody’s mind at ease.
That’s in addition to the existing liability coverage that’s on a per-property basis?
The underlying insurance would be $1 million or $2 million, and then this umbrella would be an overlay to that coverage.
That’s not a bad thing but it is pretty high coverage.
It’s a lot of coverage. It’s written by an A-Rated carrier. We’re happy to have that program. We feel pretty proud with it.
On policies, I know that some carriers will have a per-incident claim. Maybe you could help me out in explaining this. There’s either a per-incident or per-property type of claim. Are there any limitations or any gotchas or things to watch out for when it comes to that?
The only thing that’s going through my mind is you could run into a situation with multiple deductibles. For example, if you have a water damage coming through the roof and you do nothing about it, and you end up with this big gaping hole in the roof and then you have water damage obviously on the flooring, perhaps up the dry wall, they may hit you for one deductible for the roof, a separate deductible for the ensuing water damage if they can show that it happened at two different occurrences. It doesn’t happen often but it can happen that multiple deductible. We just throw out that word of caution that whenever you’re able to make changes to protect a property from being damaged further to please do it immediately, even if it’s a simple tarp on the roof.
I’m assuming if we have a client who has ten or twenty properties, they come to you to get coverage on their portfolio, are they going to have ten or twenty policies, meaning one policy per property or is it a blanket coverage where they include under one larger umbrella all their properties inside one policy?
Yes. The answer is that there would be one blanket policy that would cover all their properties inside of their own blanket, if you will. They would have a memorandum of insurance for each property that would show the address, would show the amount of coverage, would show the deductible. That’s what we show lenders, when lenders are saying for evidence of insurance to substantiate the coverage.
This is a good segue. Tell us a little bit about your nationwide insurance program. How does that differ from me going to my agent in Missouri and my agent in Florida and my other agent? How would I have a different experience with you? What would the program look like in working with you versus having independent agents in each state?
The independent agents serve a great service. If you live in Seattle, by way of example, and you have one rental property in Seattle and the property’s close to your own zip code and you have your home owners with a Safeco or a Farmers, not that I’m talking myself out of any business, but we would suggest that you use your local agent for that one rental property. It makes your life a lot easier. You can add it to your personal umbrella liability policy, should you have one, and quote would be very reasonable. When you start expanding to three or four or five homes or you start expanding out of state, your local agent may have an answer for you but it may not be the best answer. We’ve seen time and time again with the state farms and the farmers, they prefer not to have LLCs, prefer not to have family trust. They’re not truly looking for right portfolios and rental programs.
If you’re out of state, then certainly to have an agent in Iowa and an agent in Massachusetts and an agent in Atlanta, and now you’re trying to keep track of which policy has what deductible, which policy has which coverage, there’s no uniformity to it. It can complicate things a little bit even if you’re paying attention to detail, it could still be a nuisance. With our program, you have the blanket. The coverage is going to be the same for all of your properties. The deductible is going to be the same for all of your properties. A nice feature is that the expiration date is going to be the same for all your properties. If you put a policy on January 1st and that’s your first policy or your first property on the program and then you add a property in June, the time of period between June and the ensuing January is six months, that’s all you’re going to be build for because again, your properties are all going to expire on the same date, making your life a little bit easier to manage your insurance.
Everything’s prorated. If you’re buying one property per month over the course of a year, you’re going to have a different proration for each property on each month. You mentioned LLCs. Our clients are often buying in their name and transferring a title to a trust or an LLC and actually in some cases, our international buyers are buying directly within an entity like an LLC or an S Corp or whatever it is. Can they get the policy to cover them regardless whether it’s in their name or an LLC or a trust, etc.?
Absolutely. Again, this program is written by A-Rated carriers that understand the marketplace. LLCs are common. There are no problems with LLCs, trust, or your own individual name.
This is a broad and deep topic talking about investment property insurance. We covered some basics here and we’ve expanded on your program and how it works on a nationwide basis. Let me ask you this, are there any other questions that I didn’t ask you or maybe tips and pieces of advice you can share with our listeners?
Know your coverage. Try not to fall asleep reading the policy insurances, anything but exciting. As I have found in many explanations, it’s hard to stay focused. Everyone understands and grasps replacement cost pretty well. Everyone understands and grasps actual cash value, meaning once again that the insurance company is going to depreciate the property, adjusting the claim in making their payout. A liability is sticky. If your policy excludes dog breeds, and our policy excludes certain dog breeds, then pay attention to it. Make sure your property managers are not renting to people who do have dogs because of those particular breeds. Because if there is an ensuing claim, you’ll find out that you don’t have coverage. The exclusions are what to focus in on when reading your policy as much as what’s actually covered because it’s the exclusions, as you mentioned earlier, the gotchas. Those are the things you have to watch out for.
Ed, tell our listeners how they can find you, where they could reach you, your website, email, whatever you want to provide. We’ll just leave it to them to see if they want to discuss this further with you or maybe get some quotes on their property.
I appreciate that very much. 1800-210-7677 is the best way to get a hold of us. Our website is RossDiv.com. We’d love to hear from you.
Ed, I appreciate you taking the time today. I know I’ve been trying to keep it brief here because we’ve done an episode on insurance already and I just wanted to supplement that initial episode with what other options our investors and listeners could look into.
The one last safety tip or helpful tip for the investors is we are hitting the crux of winter here. If your properties are vacant and you’re in a cold part of the country, you have to winterize your property. Winterize meaning turn off the water, flush the water pipes so that they don’t have a way of bursting or freezing because those claims will be denied.
Ed, again, thank you so much. I appreciate you being on. I’ll be talking to you about some quotes and policies myself.
Looking forward to it. Thank you very much.
Thanks, Ed.
– – – – – – –
Download your FREE copy of:
The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See all our available Turnkey Investment Properties.
Please give us a RATING & REVIEW (Thank you!)