Hey! Look here!! That’s right, I’m talking to you. Look here and read this article. It’s boring but oh so important. Think of it like a vitamin.
If you haven’t read the “About Us” section, you may not know that I worked in the property and casualty industry for several years. I was a product manager at Safeco, headquartered right here in Seattle… that is, until Liberty Mutual acquired Safeco in 2008.
Moss and algae on steps pose falling hazard during the wet months
What does this mean besides my credibility to say something about insurance in real estate investing? As a previous industry insider, I get to call it boring if I want to.
Truthfully, it was not the best fit for me, but it’s been incredibly helpful as we spun up our real estate investing business!
As a real estate investor, you need to understand insurance more than the average Joe. A competent agent can definitely educate you a lot and guide you, but if you haven’t asked them yet, then this article gets you started.
Property insurance on your investment property is a must. It doesn’t matter if it is a fixer to resell or a rental of ANY size. If you’re getting financing, it’s mandatory. If you have lots of cash, you can self-insure of course. But most of us in the earlier years are better served with insurance policies.
Property insurance protects your structures and your contents as well as liability claims against you if someone is hurt by or on your property. There are other coverages, but these are the two big items. When purchasing property insurance, make sure you buy the coverage most suitable for your situation such as types of losses you want covered and amount of deductible. You can choose to be covered for specific causes of loss such as fire (cheaper). Next level, you can get a longer list of causes of loss (broad form, costs a little more). Best coverage is special form where there are very few exclusions (cost a little more). Flood and earthquake are insured separately.
Personal Lines Landlord Protector Policies
Causes can be hard to predict. Get adequate coverage
If you are starting out and buying residential properties (single family up to 4-plex), you can buy coverage from many insurance companies offered by their personal lines division, which sells home, auto, boats, etc. Properties of 5 dwelling units or greater are insured through commercial policies. In the insurance industry, company employees and insurance agents often specialize in one or the other, sometimes both. Commercial insurance is more complex, so you will want a commercial agent helping you. If you are starting out with residential, your current agent who is most likely a personal lines agent may be able to help you – but check they are licensed to sell insurance in the state(s) where your investment properties are located because insurance is regulated at the state level including licensing.
The major downsides with personal lines landlord protector policies are their administrative hassle and inflexibility.
- One policy per property (that translates to ¼ inch of papers per property to store and retrieve. Total pain when you need to retrieve information from each policy, say for financing documentation)
- Many will only insure private individuals only and not the LLC in which you own the real estate
- Property managers you hire may require that you add them as additional interests on this policy. Sometimes you can do this on a personal lines policy; other times you can’t.
- Some property managers require you to give them a waiver of subrogation. Personal lines can’t or won’t handle that either. (By giving a waiver of subrogation, your insurance company waives their right to come after the property manager after the insurance company pays a claim for which the property manager might have been liable. Waivers of subro are common in the commercial world).
- Personal umbrella policy will cover if you are personally sued but not if the LLC was sued (say by a tenant).
- Each policy incepts and renews at a different date, so you have to manage and track payments for each one. Not a big deal for a couple of rentals but it starts to gnaw at you when you have even 4-5 properties.
- Many won’t cover a flip due to the risks associated with a vacant and oftentimes distressed property.
Commercial Master Policy
It is worth exploring a commercial master policy. You can do it from the get go with the investment property, or you can do it once you have a couple rentals and decide you are going to load up on rental properties. The concept of a commercial master policy is very similar to a personal auto policy. You have one policy with a property schedule to which you can add or delete properties as you buy them or sell them off. This means you have one dec page, one payment schedule, one renewal date and about ¼ to 1/2 inch of papers total. Your LLC can be the named insured and you, lender, property manager can be additional interests. Depending on the insurance company and your situation, you could even put other LLCs you own or jointly own with other partners on the same policy. On a master policy, you can choose a larger liability aggregate limit (say $3-5 million) that you can tap for all your properties instead of paying for $2million aggregate on each and every policy per property. Commercial master policies for residential-size properties are not easy to find because these properties fall into the personal lines definition, but they do exist. We were fortunate that we found a reasonably rated carrier for the western U.S. But we haven’t quite found one to the east at reasonable premiums. For now, we have found a commercial policy for one property that will handle all the demands we have, except that we don’t have the aggregate limit benefit and each creates ¼” stack of papers per property. (Yep! I’m not keen on storing bundles of policies especially when 95% is the same content!)
Umbrellas (even if you’re not coming to Seattle or visiting Kuai)
If your LLCs are insureds on these policies and you’re interested in extra protection via an umbrella policy, make sure you get a commercial umbrella policy. Personal umbrella policies cover individuals only. Note too that depending on the limits of your property policies, you may be able to get the level of protection by increasing liability limits of your property policies.
Now that you are ready to shop for insurance, ask
- Is the agent specializing in personal lines or commercial?
- Have them work up quotes for you if you are shopping around
- Ask for premium difference of a higher and lower deductible. Keep in mind if you file a claim, they will pay but the claim will go into your loss history and could factor into premium increases in the future. Balance your deducible choice based on your financial situation, how many properties you have and premium savings
- What states are they licensed in? (insurance is regulated at the state level)
- Confirm they are insuring your property knowing the current condition, occupancy, and intended investment use (flip or hold)
Protect ALL your assets! Stocks, bank accounts, house, car, motorcycle, rentals, family heirloom pocket watch