Real estate investing moves fast. Especially in today’s market with rising interest rates, and supply chain issues, you don’t have time to waste. If you find a deal, you need to close—yesterday.
Understanding the ins and outs of investment real estate insurance is one way you can avoid delays and costly mistakes. Yes, insurance is boring—at least until something goes wrong. When that happens, your insurance broker can become your best friend or worst enemy, depending on decisions you made at the start of your project.
How to Choose Your Insurance Broker
Before buying properties and lining up renters, you want to find an insurance broker to partner with for your investment insurance needs. An insurance broker can help you because a broker has broader access to underwriters, giving you more options and choices. With so many insurance brokers on listed on the internet, how do you choose the right one for you?
Be prepared to ask a few direct questions.
First, does the broker have a sound understanding of the habitational risk marketplace? In other words, do they write policies for real estate investors for all types of properties? Are they familiar with fix and flips, rentals, and investment property liability policies? If they approach insurance from the standard home ownership perspective, they will likely present you with policy options that do not work for the nuances of real estate investing. Every investor is different, and so are their needs. From the way you set up your business to the types of properties you invest in, your insurance broker should understand your unique needs and be able to build policies to suit them.
Second, can the broker write policies for all types of properties, wherever they are located? Sometimes referred to as a “one-stop shop,” this type of broker can write policies across the country and for very different types of units or locations. It is important for you to realize that writing policies in hurricane zones is different from writing in snowbelts. A great broker can do both.
Finally, many investors are inclined to choose the minimum coverage, yet somehow believe they are getting maximum protection for their asset. Remember, you always get what you pay for. Taking the time to talk to a broker about your specific needs and your coverage expectations may mean you spend a little more upfront, but you get the very best coverage for your situation. A great broker will also uncover bundling options and packages that can expand your coverage and maximize protection—without breaking the bank.
Reducing Your Risk in the Landlord-Tenant Relationship
Given the many pitfalls of real estate investing, there are a few simple steps—in addition to obtaining the proper insurance coverage—you can take to better protect yourself, your company, and your properties.
First, run a background check every time, for every tenant. Identity theft is rampant. Make sure you are renting to someone who is who they say they are. The cost of a background check is minimal, and running a check can help give you peace of mind.
Next, require a certificate of renters insurance for every tenant, every time. Just because someone says they have coverage does not mean they do. By requiring a certificate of insurance, particularly for multi-family buildings, you assure your tenants you want responsible people residing in the buildings you rent.
Additionally, we strongly encourage you to have signed leases for all tenants, even if they are a friend or relative. Signed leases are legal documents that outline the responsibilities of both parties in clear language. If something occurs, there is no “he said, she said” battle. All terms are spelled out in the written, signed document.
Finally, make sure you have appropriate security and safety devices installed in the unit and that they are checked as suggested by local fire and police authorities. This includes locks, theft prevention systems, and smoke and carbon monoxide detectors.
Avoiding Common Investor Mistakes with Common Sense
Besides what we have covered previously, there are a few more common mistakes to avoid as a residential real estate investor.
We live in a litigious society, so obtaining the right type and amount of liability coverage could mean the success or failure of your business. Especially if you are just starting out, do not skimp on liability insurance thinking you can skate by without it for a while. Accidents happen and people sue. Discussion liability thoroughly with your broker. It’s worth spending a few dollars upfront so you still have a business at the end of the day.
It is also common not to insure business property inside the investment property. Always be sure to cover appliances and other internal property that belongs to the business. When working on rehabs, make sure your contractors and subs carry insurance and that anything stored to be installed is covered as well.
You will benefit greatly from a fundamental understanding of deductibles. Deductibles and insurance payments are like bonds and interest rates in that their relationship is inverse. The larger the deductible, in general, the smaller your payment and vice versa. So, if you are willing to risk not having to pay any claims, you might carry a larger deductible and save money short term. But accidents happen, so choosing the largest deductible to try to save a small amount of money in the short term might not make any sense at all because you risk paying that large deductible if something happens.
Finally, the real estate mantra “location, location, location” is just as true when it comes to insurance costs. What you pay is related to the property’s appraised value and location. What works in one geographic market may not work in a different part of the country. And, if you move from one market to another, expect differences in insurance costs and coverage.
All in all, with the right insurance broker as a partner, real estate investing can be an incredibly rewarding experience, financially and professionally. As you can see, there are many ways in which real estate investing can go wrong. You do not want them to involve insurance, because an insurance mistake can cost you in a big way. But with a little common sense and a well-written insurance policy from an experienced broker, you can set your business on a firm footing from the start.
Andy Matz has been active in the insurance industry for more than 10 years. As a broker agent for Constructive Insurance, he works extensively with real estate investors. Constructive Insurance is an independent insurance broker that offers residential real estate investment and landlord insurance from some of the nation’s top carriers. You can reach Matz at amatz@getconstructive.com or (312) 429-2693.
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