The Biggest Rental Property Risk You (Probably) Never Think About

this is real estate rookie episode 307. if you build 50 to 100 or 150 a month whatever it ends up being into your pro forma it's never going to be an issue as you build out your portfolio we see this with a lot of people we insure right versus if you build out 10 15 20 properties and then all of a sudden you realize you've had sort of a back alley agent or whatever it is now you have this additional expense to your business that you really weren't calculating for from the beginning my name is Ashley care and I'm here twice a week bring you the inspiration motivation and stories you need to hear to kick start your investing journey and today we are talking about something that is both um exceptionally educational but as equally uh terrifying and we're talking about insurance for your rental properties and today we have on two guests um and both of these guys have just like a tremendous amount of experience and knowledge when it comes to the short-term rental space but they're actually kind of coming from two different perspectives um so we have Christian who actually in addition to being an insurance broker also runs the one Brokers with David green and then we have and we also have Darren who runs proper insurance which is a an insurance company dedicated to short-term rentals so we bring them on to talk about all things rental insurance and a couple things just want to call out that jumped out at me we talked about why you may not need an LLC and how your liability protection through your insurance policies might be able to be able to protect you even better than an LLC can we talk about price shopping versus getting the right coverage we talk about questions that your agent should be asking you and then Darren gives this really cool breakdown of the three parts of an insurance policy and what those three parts are and why they're important yeah you also heard Darren in the intro too after the episode number kind of giving a disclaimer and as to like you know a lot of people try to cheap out on insurance so that you know their numbers work better and just like any expense you have for your real estate deal is to make sure that it works in your numbers it's not a deal if it doesn't work and don't try to give up some kind of coverage make your insurance cheaper so that the deal actually does work so we put that in the intro because we really wanted you guys to listen to that first before you go into this episode and hear all of the nightmare things and the expenses and then Insurance May cost um based on different things so we you know it's impossible to cover everything about insurance events but we hope this is a quick guide for you guys as you get a basic knowledge of your insurance policy what kind of coverage you should have and more specifically based on the real estate strategy you are doing so Tony had brought up this idea on episode 296 and here we are making it happen so thanks to you rookies for uh listening to us we're able to get things done and bring you guys some more expert guests along with having our favorite rookie investors on here so head over to YouTube and search Real Estate rookie and let us know on this video what are some other experts you want to have on the rookie podcast leave a comment below and let us know and of course make sure you are subscribed yeah I'd love to get like an appraiser maybe if you guys are interested in that someone from a title company an escrow company just all the different kind of services that you end up using as you build out your real estate business so that you rookies can understand from a service providers perspective what's important what are things you should be looking out for what's the sign of a good versus bad service provider so you can make sure you're building out your team the right way so before we keep going I just want to give a quick shout out to someone that love to say five star review on Apple podcast this person goes by the username of Jeremiah johnson1 and Jeremiah says I love all the information it's great content I'm on my second property with three doors total I'm house hacking slash midterm renting for traveling nurses I've been studying for over two years and I've read over 20 books uh many from Bigger Pockets and I've read multi-family millionaire as well and I love my BP family so Jeremiah we appreciate you and kudos to you on your success and for all of you that are listening if you haven't yet left us a rating a review on Apple podcast Spotify wherever it is you're listening please please please take a few minutes out of your day to do that the reviews really do help the podcast grow and reach more folks and ultimately the more folks you can reach the more folks are able to impact and help which is what we're all about here at the rookie podcast Darren and Christian Welcome to the show thank you so much for joining us Darren let's get started with you uh tell us a little bit about yourself thanks Ashley Darren Pettyjohn here we co-founded proper insurance I'm the co-founder back in 2014 and basically we saw a need for a specialty Insurance product for the short-term rental industry so we would Define that as the Airbnb or verbo Market basically properties that are rented for 30 days or less and it was slow going in the beginning like any entrepreneur and then we started to pick up some steam and we earned an exclusive endorsement from verbo about five or six years ago which really helped kick off the program and I would say to date as of now we're we're most likely the largest insurer of short-term rental properties in the United States we ensure in all 50 states and it's been the big successive of my business life was meeting two guys and and starting proper Insurance congratulations that's amazing what an accomplishment we're really excited to have you guys here to really talk about insurance and not even just short-term rental insurance uh Christian what about you tell us a little back story absolutely yeah um a little bit different but similar uh similar line entrepreneurship um obviously those who recognize me from the other podcast um I co-stared the one brokerage with David Green who's the host of the BiggerPockets real estate podcast um I also am an insurance broker I've been an All-State exclusive agent a farmer's exclusive agent a State Farm Reserve agent and now I'm an independent broker so I work with a variety of companies now um and Darren I can speak firsthand um proper there's a reason why they're probably the largest insurer of uh short-term rentals they uh they got a policy that that knows the right things that airbnbs just have those man those fine-tuned things that for those of you listening to this who uh who are potentially looking to get into the short-term rental market there's so much you don't know get with the right people listening to this is a great start um get the right people in your network because the smallest thing of not getting insured right could make a big difference and that's the exact reason we wanted to do this podcast uh so we're going to talk off talk about some stuff in general about insurance policies and insurance you should have in place and then towards the end of the episode we'll kind of Niche down as to what are some things you need to know based on your investment strategy so let's kick off with what are some common mistakes rookies make with insurance so uh first of all are they even going to the right insurance agent or broker and how do they know that yeah I mean right off the bat it's it's you know I don't want to say just don't go get the cheapest price because obviously price is important but it's Price shopping and prioritizing saving 20 30 bucks on your annual insurance policy versus getting the right coverage right I'd say that's absolutely number one whether it's you know not insuring yourself for the right liability or the right use that you're using the property for we spoke a little bit about short-term rentals but there's midterm rentals there's you know rent by the room and house sharing there's you know whatever you're doing with the property you got to make you know some people have mixed use right where they have a business operating downstairs right um all of that is specific insurance you know Insurance specifics that the carrier is going to care about and they're going to rate you effectively um and that's gonna obviously impact your premium but it's going to impact your coverage as well um what do you think about that there no that was great and I think an overarching issue is insurance is a product that you don't use um when you go to buy tennis shoes on Amazon you use them right and insurance is sort of an afterthought and unfortunately a lot of people just focus on price they shop the internet they shop agents and they almost think of it as something they have to have versus something they need and should understand so the average property owner in the United States will file an insurance claim every nine years so that's the equivalent of going and buying a really nice suit and then putting in your closet and nine years later pulling it out so it's understandable where a lot of confusion comes into the market and really it's a price driven market we've all seen the Geico commercials the State Farm All-State Nationwide USAA Liberty Mutual whatever commercial you see it seems like they'll all save you money and we actually make a joke where if you switch carriers enough eventually they will pay you because you're saving so much money along the way and obviously proper insurance is different we focus on coverage and we really look at it from a risk management perspective because if you go all the way back to the founding of insurance which was actually the 1600s in Lloyds of London when people were shipping coffee and tobacco and gold from the new world the United States over to Great Britain they would lose their gold to Pirates or to bad weather and so the concept of insurance of transferring that risk onto an insurance carrier was born in the 1600s and that concept still holds true today that's what you're doing when you buy insurance you're taking your risk you're paying a premium and you're transferring that risk over to an insurance carrier So when you buy a home or an investment or a business or whatever it might be you don't really think of the claim you think of how much does this cost because again it's just a product that you don't use Darren so you're you're telling me that uh insurance policies found their origin because of pirates pirates in bad weather yes and that is lock it up um that the concept of insurance was was actually a coffee shop in London it was the Lloyd's coffee shop and there were a bunch of uh pretty well to do folks sitting around and uh they they basically decided to uh put their money in a pool and ensure these ships that were coming from America over to Great Britain but there was a catch the catch was if the ship made it and there was no pirate or bad weather and your gold and tobacco made it you didn't get your premium back the insurance carrier got to keep the premium and and that concept still holds true today wow crazy I learned something new on almost every episode that's wild um Christian I want to go back to you for this next question then Dan will hear from you afterwards but you said one of the the challenges or I guess mistakes that rookies make when it comes to insurance is putting price uh or prioritizing price over getting the right coverage Define right coverage if I'm a first-time real estate investor how do I even know what right coverage means for me can you walk us through what what things we should be looking for great question yeah and I I it just goes to show that it's not people's fault while they do this why they do this think of the last insurance commercial you saw what was it about 15 minutes saves you 15 or more 100 it wasn't about inch it wasn't about insurance right it was just about saving money that's what every insurance company is commercials are about and to answer your question going to your your insurance broker your insurance agent proper whoever it is and giving the true story about what the use case of the property is or what your intentions with the property are is how you start that conversation now that doesn't mean your insurance provider is good because Darren and I had some off-air talks about how other companies are not doing it right right now but for instance there's a there's a question on most insurance applications to say is one more than one tenant going to be occupying the property per year if your midterm rental short-term Rental rent by the room the answer to that is yes I can't tell you how many times I've seen even on policies that I've gotten myself I'll go to my insurance broker they won't ask me that question I just say this is going to be a rental they say okay we're getting you a landlord's policy right and I know what I'm doing so I say well hold on right like I stopped them but if that was not me doing that that person gets a 110 in a year landlord's policy and if the if the carrier ends up finding out that there were people every three days in that thing because it's in the Smoky Mountains Tennessee and it burns down because the tenant did something stupid with the electrical potentially denied coverage right there right just because that question wasn't asked right and the carrier was not aware that it was insured correctly they weren't insuring it as you know 50 tenants a year they were insuring it as one right so all you can do is start the conversation and if you get an idea that you're not being asked the right questions it's very possibly you're not partnered with the right person that's the same with anything I mean you guys all the time I'm sure interview Realtors and lenders you can you can tell when you're talking to a good one a lot of times right they're they're taking an advisory kind of council position with you they're walking you through the stages they're letting you know what to look out for that's the sign that hey I might be in the right room with the right people now right um but you won't even get to that point if you're not asking the questions and that's the mistake most people make they just go to their they just go say I want an insurance policy or I want a loan or I want to buy a house and there's nothing more than shared so it doesn't actually allow the advisor to advise right so Christian what I'm hearing you say is that like you also have to not only ask questions but you have to give them all the information too as to you have to be open and honest about what is going on in the property to actually get the correct coverage for yourself um one question I do have real quick as far as like asking your agent or your broker these questions is to is there like one key question that you can ask and like a way to phrase it so for example with real estate agents we've had the someone recommend to us like instead of asking an agent do you work with Real Estate Investors ask them how many deals have they closed with Real Estate Investors or you know wording questions differently like that as to being able to get a specific answer um so is there anything any questions like that that you can think of to word differently to get a more accurate response rather than oh yeah I do everything yes of course I can take care of your short-term rental policy yeah no I love that um I mean I'd say first and foremost I mean what and maybe the skills as you you know continue your journey right this is the question I asked now but um you know I'd go and ask hey if I give you everything that I own could you do you know could you analyze my net worth and insure me properly right because not everybody needs mountains and mountains of insurance right but like myself if I went I mean you guys if we went and got a policy from State Farm Geico whoever and they didn't quote one of us an umbrella policy on top of our landlords they're doing you a massive disservice because like we have a lot to lose right it if somebody builds up a portfolio of five six seven houses and you're not insured and umbrellas are cheap I mean it's like you're paying can you just explain what an umbrella policy is real quick yeah thank you so on on a homeowners on on car on you guys think of anything that can be insured typically there's a portion of it that is liability coverage and all liability means is that if you cause harm or some sort of you know pain and suffering to somebody uh they can be re you know they can be compensated for that whether it's through a lawsuit you know anything like that right this is hitting somebody with a car and costing personal uh personal injury this is somebody um you know being injured on your property due to some amount of negligence by yourself you know maybe you didn't repair the stairs on your Airbnb and your guests trip down because there was a safety hazard and you neglected it all these things could be picked up under general liability coverage the same thing goes with business right there's liability coverage when you own a business um however your home policy is not really meant to be a liability policy right and what I mean by that is that the homes primary purpose is to insure the home right if it burns down if there's a storm if you know all the if there's a pipe burst in your house floods you know all things like that are why it's really there the liability coverage is just kind of like a little extra perk like oh by the way if somebody trips and falls in your house you can be covered what an umbrella policy does is that you have your car insurance your business insurance your home insurance but none of them's purpose is really liability an umbrella takes a a global stance on everything going on in your life and adds blanket coverage that's what we call it that's why it's called an umbrella it's meant to cover everything you have but strictly for liability so this is if somebody were to sue me over and above what any of my individual policies cover typically a home is a hundred to three hundred thousand dollars what if you get sued for a million your home will cover you for a hundred grand does that mean I'm on the hook for the next nine hundred thousand dollars yes and that's if that's one of us happening that means they're taking a house or a lawyer's coming after your business or they're coming after this podcast or they're coming after me and David with the one brokerage right that's that's what would happen if you didn't have the proper insurance proper Insurance huh yeah buddy no pun intended there right yeah right um that's a great name you get people accidentally saying that all the time um but no I mean that all jokes aside instead of me being liable for that 900 000 in the event I get sued for a million and my home covers me for a hundred you can get an umbrella policy up to a million dollars right and now your insurance policies are completely covering everything and there's no situation that would lead you know to you having to sell your business sell your home and and you know go go backwards on all these hard things that you work to accomplish right Christian a lot of good information I want to pull a couple more threads in the umbrella policy but before I do you mentioned earlier on about the right coverage about making sure that the broker is asking you the right questions so Darren I want to point this question to you first and then Christian will hear from you but uh Darren when you're when you're writing a policy up for someone what are the questions that you're asking that person to make sure you're getting the right information and the reason why why I want to know is because I want our rookies who are listening to understand if I'm not hearing these questions from my broker then maybe I should be concerned so what are some usual questions you ask someone when they come to you for a policy yeah our application process is is fairly intense right and as far as short-term rentals are concerned it's your online listing and that's the beauty of the short-term rental business is these properties are advertised online so you have a snapshot into the business right if you were running a coffee shop or a grocery store or any other business um your website and and your business itself would be underwritten those would be the questions that you're asking so my advice is at least for the short-term rental segment if if that's what you're doing you need to be very upfront with your real with your insurance agent and actually send them the online listing unfortunately and thanks to podcasts like this and and getting the awareness out is we actually do hear a lot of people say oh I don't want to do that because then my my insurance carrier will cancel me and it's just misinformation again it goes back where the the the property owner just isn't quite getting getting the idea that look you're buying Insurance to protect you right so the online listing is the key um that shows that it's a business it also shows the amenities if you have a swimming pool or bicycles or canoes or kayaks whether you have a ring video doorbell in the front of your property because we've actually started to run into quite a few invasion of privacy lawsuits one that came up recently actually it's kind of funny but the um the gentleman was smoking in front of the property and then the host called them and said look this is a no smoking property and the gentleman said well how do you know know I'm smoking and then realized that he had been being watched by the by the ring video doorbell and the in the front and filed an invasion of privacy lawsuit so we do run into those um from time to time but again maybe I'm getting a little off track here but the online listing is is the key for the the short-term rental aspect got it and then Christian just you know if you can just rattle off like what do you feel there's some important questions on your side um as a broker that if I'm a customer I should expect to be asked to make sure I'm good in the right coverage yeah I mean not to broken record it but I always ask for a net worth analysis you know what else do you own to make sure I'm protecting you correctly um you know obviously bundling comes into play when you're a broker because I want to make sure that we have the proper coverage on car auto home so um typically it's a string right I ask what's your net worth what is that comp you know what is that comprised of you know what can we ensure in that net worth analysis and then breaking down more specifically to individual products you know for real estate use case absolutely how many tenants you know what's uh what I would actually really like to focus on is difference between replacement and actual cost I've seen so many policies with actual cost value a lot and I'll explain what that is um basically when you insurance companies have found so many different ways to be kind of tricky on how they ensure stuff like what the actual dollar amount is that they that they reimburse you for and there's pretty much two that the industry has decided on there's replacement costs and actual and what that means is that let's say your house burns down right your roof has a value right um some roof policies are on actual cost which means what's the actual value of that roof when it burned down after depreciation after wear and tear after everything else right and maybe that roof that as of right now would have costed 25 30 000 to put back up they're gonna give you like eight grand for it right that's that because they're replacing the actual cost they're not insuring you for the replacement value the replacement value is how much does it take right now to put it back right and that's not including depreciation because you're not ensuring the actual thing right um You can do the same thing with you know your dwelling if you have a guest house right this is so common oh my gosh if you have a guest house or an Adu on the property I'm in California this is getting so common I don't know if where everybody's from here but if if if you have an Adu and you have just a standard homeowners or landlord's policy there's just a tiny bit of coverage for other structures but it's not really built to be a dwelling coverage right so there's a lot of exclusions that that other structures coverage has same thing make sure I would make sure that I'm asking that hey what's your plan for this Adu right I always when I'm ensuring property I pull up the Google Maps view of it I try to do the satellite the top down as well as the the front facing from the yard what's going on on the property do you have a horse stable oh do we need some Farm Insurance do we need some some animal insurance right um so I mean I you guys can see the kind of string that I go down but it could it could expand based on those answers right you're right so it's just like the you you want someone that's going to ask a lot of questions I think this is just that we're getting at here that's what I'm getting at yeah if you reach out to someone and you know they say hey give me the address here's here's a quote then maybe that that's not the right policy that you're looking for um and and I appreciate that because that's what I want rookies to understand is like hey what's the level of of curiosity that we should see from these Insurance folks we're having those conversations um the next question I have and it kind of ties into what we've already been talking about is the umbrella policy versus the LLC a a big uh not misconception but maybe like an obstacle that new investors feel they have to get over before they can get started investing is hey I need an LLC I need an LLC for tax purposes which you don't technically I need an LLC for liability protection which maybe you do maybe you don't so where do you stand on the debate and um Darren I think I'll go with you first and Christian will jump back to you but if I'm a new investor and I'm just getting started do I necessarily need an LLC for liability protection or can I get pretty good liability protection through something like an umbrella policy or something that that I can get from my insurance company yeah so filing the LLC the the concept on that right is that they can't penetrate through the business to your personal assets right the the issue with that is unless the house is in the LLC unless the loan was actually under the LLC it's pretty easy to to penetrate through those and to go after somebody's personal assets it's I wouldn't hang my hat on it I mean from a liability perspective you have to think what's your biggest liability in life without a question hands down is driving your car if you're texting and you're driving or you're just driving in general there's a high likelihood at some point you might hit somebody with your car and at that point they're going to come back to you for their bodily injury maybe their family sues you worst case scenario whatever it is you have liability limits on your auto policy once those limits are exhausted then your umbrella policy would kick in above and beyond that the same thing goes for short-term rental properties so if you think well okay driving a car it's essentially a weapon what's your second biggest exposure in life and what we tell people is it's your short-term rental business because you have people from all over the world coming to stay at a property that they've never been to you're competing against Hilton and Marriott and you're subject to the same Hospitality laws what that means is you have a legal duty to provide a safe premises to those people a lot of people do not understand that and so it's a business but you have to realize a if you have personal liability and a personal umbrella on a investment property that personal umbrella is not going to kick in above and beyond because it excludes business activity so there's the personal world there's the business world so the only way to do it accurately is have an underlying business policy on your short-term rental and then if those limits are exhausted a commercial umbrella above and beyond those limits there's a commercial umbrella there's a personal umbrella the personal umbrella will go over your car your home your auto all the things that your boat your ATVs your motorcycle all of the personal items you have in life if you own a business you have business insurance and a separate commercial umbrella above and beyond that business so my advice would be it's not a bad idea to put your property under an LLC but what typically happens is people Finance the house under themselves personally because the business has no assets the business would never qualify for the loan anyway so then they they do the financing personally and then they go out and they create an LLC for 25 bucks and they try and quick deed the property over to the LLC or whatever it might be and I'm telling you right now we we have paid million dollar lawsuits for drownings and swimming pools carbon monoxide poisoning invasion of privacy decks collapsing on and on and on and when someone gets seriously injured at your property they're coming after you and their ability to penetrate that LLC is is very high so do not solely rely on the LLC so your solution to that is to get your usual coverage on the property but also have the commercial umbrella policy over it depends I mean for our program specific our minimum liability is one million dollars so we kind of joke and say look a million dollars isn't what it used to be but in the event of a of a death suit if somebody was to die at your property it's always policy limits it's always a million bucks it's it's just the way it goes and usually what will happen is the plaintiff will accept that right they'll accept the settlement of a million dollars and the family will will move on with life and it is what it is but we do have a two million dollar option that's built in where people can do a 2 million per occurrence limit uh some people feel more comfortable with that and then if you were a very high net worth and individual and you wanted to go above a 2 million occurrence limit you could buy a five or ten million dollar commercial umbrella which again we always have to tell people buy as much insurance as you can afford because we do get some folks who just go look you know I I want to I want as much as I can get basically but most people are comfortable with a million dollar occurrence limit and it's not very expensive is it I mean I think of my umbrella policy it's maybe I mean it's less than 200 a year yeah a core concept too that uh really we didn't touch on earlier is the less expensive and your insurance costs the less coverage you have so again when you're dealing with an insurance agent I I would phrase the question is if they're saving you money um what coverage are you giving up right because we insured tens of thousands of properties we've written over you know 100 150 000 policies and our risk is spread out at the end of the day which our goal is to collect more premium than we pay out in claims but that margin is pretty small right we don't need a 40 margin but at the end of the day if if you're getting less if your insurance is less expensive then you're giving up coverage right so a great example would be you switch car insurance and the agent says oh hey I saved you forty dollars well then you need to ask well what coverage am I giving up why is this so inexpensive and they say well let me do a coverage comparison and oh actually what you gave up was windshield coverage so you no longer have wind chill coverage but I saved you forty dollars a year so again a concept you just have to understand is if you're getting the least expensive or cheapest Insurance then then you're getting the least amount of coverage possible so ask your agent what am I giving up by buying such inexpensive Insurance Darren when we you get a policy quote sent To Us by an insurance agent how much of that information is actually useful to us without seeing the whole policy and is that something we should be requesting is how do we find out what is actually covered in the policy should we be comparing it ourselves or should we be relying on the agents kind of walk us through once we get the quote what we should be looking at and even how to read the quote what is what information do we see on there right and what you're referring to most times is what's called a deck page a declarations page where our insurance contract for example is I believe 95 to 100 Pages depending on the state but yet the proposal that we deliver is only a few pages long so it's a summary to your point but you can get most of the crucial information from that summary as Christian pointed out earlier whether it's replacement cost valuation or actual cash value on your building your contents and then obviously you have business income or lost rental income from uh from a rental perspective but you just need to ask your agent to walk it through I mean that's their that's their Duty they have a fiduciary duty as a professional to walk you through and explain what that proposal means and you just need to ask questions we get it a lot ours is actually much more detailed than most of our competitors and we have people call in all the time and say hey look I want you to walk me through this what is business income versus loss of rent do you have actual cash value on your roof do you have a water uh water limit water damage limitation and all of these details so just have them walk walk you through it and then you'll you'll be more comfortable but fundamentally you just have to understand there's two parts and in the rental business three parts to any insurance policy there's property coverage that's an exposure you own that asset and you need to protect that asset so what do you need to protect it from fire wind hail damage water damage vandalism theft so on and so forth but it's the asset that you can touch and feel I own this asset I need to protect this asset the second piece of the policy is what's called liability then that's any bodily injury or property damage that you could be held liable for a lot of people forget that but in the liability component of an insurance policy there's the liability for property damage so let's say you own a short-term rental it's Fourth of July and the renters burn your neighbor's house down well that's property damage that you are now liable for and then the third component would be the income generating component of a rental property it obviously generates an income you need to protect that income in the event of a loss and you need to dig into the details uh from the income side of things but again core concept here that's it there's nothing else to talk about there's property coverage there's liability coverage and then there's income coverage is anyone else terrified yet to have a short-term rental oh all these horrific scenarios you're throwing at us Darren yeah it's like I need to go back and like uh like re-read through all of my insurance policies right it's only once every 10 years though guys that's the that's the good news Insurance once every 10 years it's just when when does it happen but I will tell you if you're in this business long enough again we've written hundreds of thousands of short-term rental properties we have seen everything um eventually if you're in the business long enough something will happen at your property it's it's like any property though you just have to have good insurance and and uh move on with life and uh you know it's a great industry to be in it's a it's a very profitable industry so yeah let me let me ask a question because it kind of ties into the three parts you talked about you talked about property coverage liability and then income coverage um and Christian I'll point this one to to you when you think about those like three layers on an insurance policy what are some things that maybe people assume are included in most policies but that actually aren't like if you've seen someone like maybe get you know uh surprised by oh my gosh I thought this was covered because why isn't it when in reality it probably isn't in most policies absolutely um you know it's the same thing with like your car insurance your tires aren't covered right anything that has to do with wear and tear so like your fixtures your faucets like oh my my shower head's leaking that's not an insurance claim right you guys be surprised I had questions about it all the time um floods named storms hurricanes fires in California so big natural disasters are typically structured as separate policies where your standard homeowners insurance those of you in California I'm sure most people are aware earthquake's not covered right big major storms in uh Florida right named hurricanes typically aren't covered on your standards homeowners insurance policy right you need to go get hurricane coverage um typically these big large events are not you know those are exclusions um thinking of other exclusions uh acts of War right I mean that's not really super common in in America but but that is interesting to call out there that something like like I'm in California and I actually didn't even realize that like earthquake coverage isn't included in my policy so like the house that I'm sitting in right now you're saying if there's an earthquake in my house toppled over uh I would be homeless you're either you're either uh paying for it out of pocket or hoping that FEMA comes in and saves the day I mean that's basically your options at that point and Tony that's actually happened where there was an earthquake while we were recording before yeah literally there was an earthquake I mean luckily it was a small one but yeah there was definitely an earthquake while we're recording um so so yeah natural disasters things of that nature um fire I guess something else and I'm curious your take on this um I was reading an article about um actually two separate articles one about California where I think it was State Farm is no longer insuring properties in California I read a separate article um about a lot of insurance since providers pulling out of parts of Florida due to hurricanes and things of that nature what is an investor supposed to do like like say take Florida for example like if all of the insurance providers pull out of a specific area um what what am I supposed to do as an investor to to cover my property yeah this is a really good question something that current event-wise is so important um I think I might have said fires are in exclusion California I was talking to earthquake so I may have missed both there so the fires are a coverage of your policy if your aspirin's down but um no going back to your question though um this this is a really big thing it's kind of shaking up the industry right now specifically California and Florida there's a couple more more happenings of this across the country but California Florida two talking points for sure um Florida there's there's a state and state offered Insurance called citizens right it's something through the actual State of Florida um and it's historically it's been the insurance of Last Resort and what that means when State Farm denies you when all state denies you and proper denies you when Geico denied whoever it is you can't get a policy somewhere else so you go to the states and there's a state state fund that's not really ran to be a for-profit entity just to be the insurance of Last Resort the problem is now it's gotten to the point where almost like your first choice has to be citizens and even they're getting a little picky with some things now so I know a lot of people who are literally like there's there's not a company who will pick up this this house for me right maybe the roof's old you know in Florida like like your roofs are everything right I mean there's these things called four point inspections in Florida and when mitigation reports and Ford is a different breed animal for sure um but I mean the equivalent to that in California and to add a little you know understanding behind why this happened with Allstate and State Farm basically exiting the state altogether is you can you can apply every year for for rate increases right so when you're operating at a loss in a certain State you go to the Department of Insurance and that state and you start you know lobbying for a rate increase hey we need to charge more to remain profitable the California Department of Insurance is notorious for being one of the most picky and the most nightmarish to work with in terms of rate increases or policy adjustments or whatever the case is right and these companies aren't able to get a whole lot through I remember this being such a big deal when I was an Allstate agent we would have these Market meetings with our with our You Know Field sales leader that all the time they were just like we're fighting with the state we're fighting with the state we're fighting with the state and it was leading to them just denying policies in the time being right and now we've reached the absolute Pinnacle of that as they're just saying okay then we're out screw the state right which is wild um the the reasoning behind it is that if you're in California and you're in assuring a car what's the likelihood somebody hits a Tesla like pretty high right that's a number of the drivers in California what's the likelihood of a car if a house burns down it's worth 1.5 million dollars pretty high right so the the issue now becomes these Insurance like like Darren was sharing white runs every 10 years well driving cars probably once every three or four years you know somebody's getting an accident that requires a claim the cost of living in California has become so extraordinarily High then how can you remain profitable right if every 10 years you're replacing a million dollar house and every three years you're replacing a two hundred thousand dollar car right it's just very difficult it's a difficult environment to operate in if you're trying to be a you know for-profit business um and this is something man I I don't know what the answer is going to be maybe it just ends up being State subsidized insurance I don't know but um there needs to be a really smart guy to come along and rework how the department of insurance is in these states work and rework how we quote properly which is why you know I'd I'd dare to be on with us I mean this is like they're one of the few they're like I love there and I didn't even know what you said we we require a million dollar liability why doesn't everybody do that like what are what are what is bodily harm worse nowadays right like why don't you just require a certain set of liability to be covered and then the person's gonna come and say oh but I want to save the 50 bucks a year no like if you get sued let's have the coverage right um you know there's a lot of insurance brokers admittingly I'm one of them in California you know and and and so many of them I mean I know a lot of my my KOA you know co-brokers whatever I can call them in California um you know a lot of them were writing policies just to just to live to put food on the table right to make money and you know you don't get paid if the policy doesn't bind so like you know they start cutting coverages and then they're starting like improperly quoting just to get the client and just to get the referral business and just to get the car when you can buy in the home and like it just leads to this domino effect of oh he got me a policy you know like if I got somebody policy and I referred Darren Tony and Ashley and I gave him a really good recommendation now that person gets you know three referrals but now he's motivated to give you all bad policies because he already gave me one right and it becomes just almost like this pandemic of like everybody's chronically underinsured and like the absolute Pinnacle of this was when Paradise burned down in California I don't know if anybody's familiar with that story you guys know what happened the whole town burned down right yeah this is this is a great just bringing this all together and then really you know uh uh tying it to a real life happening this happened guys so for all the listeners Paradise was a retirement community in Northern California very nice multi-million dollar houses right all these people all this wealth moved into this town beautiful structures beautiful houses everything was perfect a fire ravaged the entire town of paradise and this is I've never I've never thought of something like this but the fire got so hot that it burned the asphalt on the roads you guys realize how how hot it needs to be for the road to burn like that's how bad the fire was right you couldn't even drive through the road people's tires were popping as they were driving they were trying to get out of the town and their tires were popping right it was like it was like hell it was literally hell on Earth right all of that to say the people come back after the fire is gone and they try to start rebuilding their lives I'd say probably 95 percent of the town was improperly insured and you can still go drive through paradise and there's probably 60 70 of the houses that are not rebuilt so that town is gone like we'll never be back to where it was because they were in California and they didn't have annual insurance reviews and their broker their broker or insurance agent weren't advising them correctly and they weren't reinsuring the properties for what they're actually worth and when these three three and a half four million dollar houses burned down they were insured for like eight hundred thousand dollars in dwelling and you couldn't rebuild that house for eight hundred thousand dollars you just couldn't right and that was a travesty I mean these people who saved their entire lives to build up to own their retirement home either had to rebuild it in cash which is like I hope you got enough or they just had to take a little percentage of what their house was worth and go somewhere else which is like an absolute devastating tragedy to these people who like saved up their whole lives you know so that that's that's a real life situation of in Mass what could happen when improper quoting improper guidance happens on a mass scale in a small area Christian I want to kind of take this towards a landlord aspect so for your example it was you know probably mostly homeowners of people that were owning this retirement community but what about a landlord that has a tenant in place why should we request a tenant to have a landlord or a tenant policy in place like what are the benefits to yeah renters policy so what are some of the benefits to me as the landlord of requiring my tenants in case there is something that happens and maybe you can give us a scenario as if it's a tenant's fault like they actually start the fire or if it's something you know that's not their fault yeah it always helps out at having a little extra liability coverage um breaking down the actual differences between landlords and tenants you know obligation is something that I would have the conversation with with an insurance provider because that could vary provided a provider however you know like if the tenant owns a dog right it'd be probably good to have a dog Rider on your on your entrance application um also the tenant's personal property right your your policy does not cover it so if you're renting something unfurnished and they're coming in and Furnishing and the house burns down like it'd be kind of nice for the tenant to get reimbursed for all their Furniture right they're fifteen twenty thousand dollars in furniture they moved in um they're closed their personal property if somebody steals something of theirs right like their tenant policy could potentially cover against theft of their personal property um your landlord's policy isn't going to cover that right not for the tenant it may cover something that's stolen of yours so it's just not only is it good advice tenant policies are like seven dollars a month they're like real they're like seven I think the most expensive tenant policy I've ever seen is like 25 bucks a month like they're really cheap and I mean I'll share a little bit about my own I rent my primary residence which everybody thinks is super funny um I don't think it's that funny but um on on my policy on my house where I rent uh you know I have rentals obviously but on my house that I rent um my car actually just got broken up broken into up in Berkeley I was hanging out in my old zombie grounds I went to UC Berkeley for college and my car had a break-in right and they stole a laptop my renter's policy that I paid seven dollars a month for reimbursed me for a stolen laptop when I was not home pretty cool right and that let's let's really go down the chain here of that laptop and impaired my ability to work maybe that would have impaired my ability to pay rent maybe that would have impaired my landlord's happiness with me so now by having that renters policy I've saved all this chain of events happening where now my landlord and me have a better relationship because I could continue working and I wasn't financially impaired from losing my work laptop so if you're a landlord that's even more motivation right keep the person's stuff protected just a quick side note the same thing happened to my cousin she was actually overseas in Europe and someone stole her cell phone while she was in Europe and her homeowner's insurance paid to replace her cell phone which was crazy I was like I never would have thought had I lost my cell phone overseas at my uh my insurance company would have paid for it all right so uh moving on here I want to talk a little bit about working with the broker versus going with an agent and maybe what are the the pros and cons to each approach so Darren Christian whichever you kind of feels like more inspired here I'm just curious like if I'm a new investor which approach maybe makes more sense for me going with a particular company or trying to find an insurance broker I can start off I mean I I what I can say is that there's not a hundred percent you know like you're going to work with a good person percentages on either of those options right there's bad Brokers there's bad agents there's bad direct carriers there's there's good and bad of everything um if there's a company that provides what you're looking for and they specialize in that and you feel like you're getting good advice you're probably in good hands whether that's a broker or a direct carrier the benefit with DirectX carriers is you go direct and they may know their products a little bit better right Darren knows more about proper Insurance than I could ever know right that's that's his baby that's everything he's got right that's as he knows every fine working of every claim they've had in every right all the the fine details so he would probably be able to advise on a proper policy better than I can as a broker I have access to a hundred carriers right so I know a little bit about Farmers a little bit about Allstate I know who's good at what I know a little bit about you know whoever right and I I it's kind of the shotgun approach right I go out and I get as much information so you bring it back you interpret it right and then I can kind of disperse that information right in a way that makes sense to the client so I'm kind of like a filter when you're a broker right instead of the borrower having to go to 15 different carriers they come to me and I can kind of tell them which is the best for them uh but you lose a little bit of that expertise on each individual provider yeah your perspective right is like the actual company thoughts on broker versus going straight yeah it's a good question and in life you need an insurance agent you need a insurance broker so we're not necessarily a broker we're the managing General agent it's a term most people don't don't know MGA which means we underwrite issue and do everything right a broker and an agent could could almost be the same thing right but you need one for your home uh for your car uh for your businesses that you own and different things everyone should find an insurance agent they trust with proper insurance we do it both ways we do work with insurance agents we we refer to them as retail agents or Brokers and they do sell our product uh to the market it's not our primary focus but with good agents and I know I'm talking with Christian about working together which is which is exciting um but we also sell direct it's just sort of the the modern way right Progressive Sales Direct but they also sell through retail agents as well but bottom line is is you need a good insurance agent Just For Life um as your kids grow up and need car insurance and as you get personal umbrellas and possibly life insurance and other things like you've got to have an agent you trust something you need to do in life Darren I have one last question for you before we wrap up what is the difference between getting your property coverage for a short-term rental versus what air coverage offers you on Airbnb can you kind of go through some of the differences in why you need short-term rental coverage and air coverage yeah good question so in order to get a loan from A bank you need fire insurance and if you're in Florida you need fire and wind Insurance because at the end of the day we all like to think of the fact that we own the property but we don't especially in the beginning the the bank loans US money and they own the property and they need to protect that asset we talked about that earlier right and the biggest exposure they have is if that property burns down they need to know that that property is going to be rebuilt so everyone who owns a short-term rental property or long-term or midterm for that matter you you typically need insurance unless you own it outright if you have no outstanding balance No loan on the property you could technically self-insure that property and say I don't want home insurance but no matter what that that's a that's something that you need to have now if I know the story of air cover very well and if we go years back Airbnb was was obviously trying to get hosts on their platform to grow the business and one of the the friction points was insurance and so they came out with the host guarantee which is a property coverage and then the the host liability which is host protection which was the liability they've obviously rebranded that now as air cover and it's all combined but it worked extremely well right list your property on Airbnb but don't worry about all the insurance components because we've got you covered um we work with Airbnb quite a bit I mean again I I won't say that they've never paid out we've been involved in multi-million dollar lawsuits with them where we've been the insurer and they've stepped up and there's been other ones where maybe they haven't done such a good job but at the end of the day your name is not on air cover it's their insurance policy they decide to provide to you guys but as hosts but this is the core concept is and and this is a huge fundamental mistake in the industry is I don't want to tell my homeowner's insurance carrier that I'm short-term renting my property and I'm going to solely rely on air cover so let's think this through you invest you buy a short-term rental property you buy some type of landlord or homeowner's policy it's fairly inexpensive and you have that on your property you have supplemental coverage through Airbnb assuming that all your bookings are through Airbnb and you don't you have no direct bookings so you're solely relying on air cover for any type of that protection and then a big tree falls on your house and damages your house causes a hundred thousand dollars in damage what was the cause of lost wind wind caused the tree to fall in your house so you call your insurance company and you file a hundred thousand dollar claim for roof damage what if that carrier finds out that you're running a short-term rental property they can rightfully deny that claim they can say you're a short-term rental you wrote this policy as a as a long-term rental landlord or as a um as a primary residence there's simply no coverage and people sometimes don't believe that they say Really they can just void my coverage altogether yes on our website we have case after case after case and the one that I always tell people because it's so cut and dries just go to Google and search Emily richer versus Travelers Insurance public domain it's on the internet sack scenario that I just told you she had listed her Airbnb property for two weeks she got like three bookings hundred thousand dollar tree claim denied she came back and sued Travelers in California and said this is bogus they have a right to defend me they need to pay that's one example of so many lawsuits that are out there so thinking of air cover as a backup plan fantastic if 60 70 80 of your bookings are run through Airbnb and it gives you a warm and fuzzy and you feel pretty good about having that extra layer of protection there if something goes wrong great but at the end of the day you need to have insurance specifically designed for what you're doing at your rental property otherwise you'll have no coverage in 95 of property damage claims are fire wind and water damage none of those have anything to do with a short-term rental property fire wind water damage that's what you're paying for and so you've got to have your own Standalone policy and look at air cover as a nice backup all right that's a both enlightening and scary I just looked up uh Emily Richter's uh case here and uh see what you're talking about here um last last question for you uh before we wrap things up here if you guys can just each give me maybe like hey here's the one thing for this Niche that you need to make sure is included in your insurance policy kind of what your thoughts are so Christian for you I'd say we already talked a little bit about long-term rentals we didn't talk about flipping as much but if I'm flipping just quickly what's one thing I need to make sure I have in that insurance policy to protect myself I'd say for flipping I'd say the company doing the flip should have general liability that way if one of the workers gets hurt at a construction site is is it you know obviously a danger um need to have some commercial general liability because if it's just you and your buddy flipping and you know a part of the roof collapses on your buddy like you know buddy may not be your buddy anymore he's gonna try to go get his medical bills paid for right um so it like you guys can see anything that you asked me I immediately jumped to liability because like you can rebuild the property right you can you can you can fix a leak you can fix you know a blown off roof but you can't fix somebody getting injured a lot of times right there's there's a loss of income there there's a loss of value of Life whatever the case is that's where these big lawsuits really tend to happen it's always about liability right those those are the the massive ones so that's I would say just talk with your internet provider make sure you have the liability during the bill gotcha okay liability for the actual construction site and then Darren like if there's one thing that someone who today maybe already has insurance for you know what they think is good insurance for their short-term rental what's one thing they should add to really make sure that they're covered as well well I'm gonna hit two things just because I want to focus on property and then focus on liability so from a property perspective if we think it through of this beautiful property and I'm entrusting that property to short-term rental guests on a regular basis what is my biggest concern what is my biggest exposure and your biggest biggest exposure is damage to that property caused by a guest you may end up having 500 wonderful bookings and then eventually you get the Airbnb nightmare which again is very rare this doesn't happen all the time and they destroy and really trash your property you really want to have no limit on damage caused by a guest so no matter what if you get that terrible guest and they trash your property you have no limit on damage caused by a guest which you're only going to find at one place so that was a little self-promoting there the second would be a minimum of a million dollars in in liability coverage and and Christian touched on this a lot is 100 300 500 000 is is a good start but really you need a base layer of a minimum of a million dollars in liability coverage uh on your short-term rental property with your name on it if I could add one more for free too if anybody is driving with the state minimums on your auto insurance policy you are committing a crime get get off of State minimums and state minimums just means in California it's 15 30. you you can drive around California with 15 000 in coverage fifteen thousand dollars doesn't buy a tire anymore it feels like right um have a review with your engine there's no point in ensuring you're home for millions of dollars if you're driving around your car with your biggest risk factor at fifteen thousand dollars in coverage I get it you're trying to save money but in the event you hit somebody especially if you're driving around in a high cost of living area the chances of you hitting a Tesla or a Lambo or a Range Rover is is fairly high right get insured so you don't have to take 15 Steps back if God forbid something does happen right knock on wood but that'll be one I throw in for free not real estate related but please please get off of State minimums well Christian and Darren thank you guys so much for joining us uh really enlightening episode uh put a little fear I think into all of us uh but good that that we can um go and take a look at all of our policies and make any corrections and also going forward making sure that we are properly covered um Darren can you let everyone know where they can reach out to you and find out some more information about you yeah proper is www if I remember correctly that's the World Wide Web uh proper dot insurer so www.proper.insure there's no.com so proper dot Insurance you can get a quote in three to five minutes online and uh we we really do think of ourselves as the education company from a short-term rental insurance perspective so get connected with one of our agents and we love coverage comparisons uh on your current insurance or whether you're shopping insurance or renewing Insurance that's how we built the brand so our average call is about 45 minutes believe it or not because once you get into that property liability business income that the questions just start to come and and that's how we've built our brand and our trust in the industry so and Christian yeah for me um I feel like all over Bigger Pockets but the one broker on social medias um if you want to get in contact with me I'm Christian at theonbrokerage.com um is it easy find um and I'll put some links down down here and whatnot but um appreciate you guys having us it's been fun good uh kind of bringing bringing the scary reality to the Forefront and making sure people are advised and guided the right ways yeah thank you guys so much for joining us so we really appreciate it I'm Ashley at wealth from rentals and he is Tony at Tony J Robinson and we'll be back with another episode see you guys next time [Music]

Channel: Real Estate Rookie

Views: 6,971

Keywords: rental property, rental property insurance, landlord insurance, short term rental, short term rental investing, invest in short term rentals, airbnb, aircover, rental insurance, renters insurance, real estate portfolio umbrella coverage, llc vs umbrella, umbrella vs llc, asset protection, real estate investing, invest in real estate, airbnb business, home insurance, insurance, vrbo, income property, biggerpockets, real estate rookie, real estate rookie podcast, podcast

Id: 1P22bzctf8Q

Length: 62min 47sec (3767 seconds)

Published: Wed Jul 26 2023