As you go through the acquisition process, you will surely encounter the need for insurance on the property. I can tell you that not all policies are created equal. If you sign up for the wrong policy and you experience a problem, it could become a major problem for you and your investors.
As real estate investors, our main objective is to maximize cashflow possible. Since cashlow is a function of expenses and income, we focus on decreasing expense and increasing income as best we can. There are expenses that are out of our hands or are obligated to, such as taxes and our mortgage, but with insurance, we may have some flexibility depending on what and where we are buying.
On just about every deal I have done so far, I’ve been able to get some savings on my insurance coverage. This was because I ran the property through two or three different insurance brokers. Of course, I always did an apples-to-apples comparison between the brokers. However, it’s important to note that price is only one lever. I compare them because there are differences in the policies and you need to get the right coverage for the price as not all policies are created equally.
For example, I received 2 proposals from 2 brokers. I’ve worked with each of them before and they were always very competitive. However, Stephanie’s quote was 55% more than John’s! From there, I performed a comparison between the two policies to spot the difference. On the surface, they may look similar. A closer look will tell you that John quoted a basic form policy and Stephanie quoted a special form policy. As you can expect, a basic form policy is typically 35% less than a special form policy. So, the next thing to consider is what does each policy have, and do we need those features.
A special form insurance policy offers the greatest protection. Unless there are specific exclusions that are listed on your policy, you are covered is if you experience a loss. Typically, it will cover any type of sudden and accidental loss unless it is specifically excluded, such as sewer and drain, earthquakes and equipment breakdown, mold, or intentional tenant damage. So, if 3 of your HVAC units were stolen, they would be covered.
On the other hand, a basic form policy will cover the minimum of the property. Things like wind, hail, explosion, fire, lightning, damage by aircraft or vehicles, riot, vandalism, sprinkler leakage, and volcanic action. If someone walked away with those HVAC units I just mentioned, you would have to handle it on your own.
With that said, deciding between both policies, theft is the major driver. You need to consider what is the probability for theft at the property. The same way you perform your own crime check during due diligence, the insurance company does the same thing. They score the property and they compare it against other properties in the area and against the national average. They also look at other demographic information such as income, vacancy rate, occupancy, and income. If the location is solid and the chances of theft are slim, basic form insurance may be fine. Such a property will have low vacancy, good rent, and probably even owner-occupied. But, if the property is in an area that has a lot of theft and other crime activity, would be better served with a special form policy – this is if the insurance company even wants to cover the property.
It’s really all about risk and what you are comfortable with doing. Like I said earlier, not all insurance policies are created equal. Some offer full replacement value of the property, loss of rents, and equipment coverage. All these things will impact the cost of insurance. Spend the time to learn and understand in depth what you are getting. I would say that if you do not know what is in your insurance policy today, give your agent a call and ask them. From there, call another agent as ask them what they would insure the property for. Further, if you made improvements, such as cameras, upgrades to the electrical system to get rid of the old fuse panels, or the city improved the property, you will want to have your property re-quoted.
So, what do you guys think? Have you experienced a scenario where having better insurance saved you? Please let me know in the comments. If you are you an agent, leave your contact info so others can reach out.