Drop damage insurance on rental properties?

[stephenson]

Hi All,

So, am looking for some feedback regarding the reasonableness of terminating the insurance on our rental properties ...

All are paid for, all are valued at around $275-300K/each, all are 3 br/2 bath, single story, single family detached, slab on grade with car attached garages, all are vinyl siding construction, all have hurricane enhanced garage doors, and attic bracing, all are located about 16 miles from the Gulf of Mexico in northwest Florida, none are located in a flood zone, none have ever flooded, the most significant hurricane damage (have had one Cat 4 direct hit, and several 3-4 close hits) has been a couple of roof shingles and a few bits of aluminum cladding on the facia.

Insurance continues to increase and is now approaching $4,000 per house, which is beginning to irritate me ... especially given a new roof on them is about $15,000.

I have a $3M umbrella policy and each house has $300,000 liability coverage, in addition to the damage components.

The complete loss of half of them would not affect our lifestyle, nor financial stability.

Would appreciate your thoughts!

 

[COcheesehead]

Why not just sell the rentals? You don’t have to pay insurance any longer and at least you’ll have something to show for it. At today’s fixed income yields you might make more anyway reinvesting the proceeds.

 

[Montecfo]

When you say "damage insurance" what do you mean?

What risks are covered?

It sounds like this is for property insurance on the houses?

If so I would not roll the dice. Looks. The rate is about 1.5% of value. That does not seem crazy all things considered.

I assume you have shopped it and are looking at the highest deductibles?

 

[Sunset]

Sell them if you don't want them. Besides it's a LOT easier to own stock and bonds than a rental.

Removing insurance would be a poor decision, as first of all it's a deductible cost, so it really costs you about $3K per unit.

They are probably all in the same area, so sure you could go another 10 years with no claims, but then you get whacked and your savings evaporates as each one sustains $100K+ costs.

I have a rental and will be selling it as it's profitable and a PIA, stocks would be MORE profitable and zero PIA.

 

[calmloki]

When we owned all the places outright it was really tempting to drop the insurance. Especially when I thought about what the years of premiums added up too and that insurance companies make money and have employees and big fancy buildings and pay for agent commissions and advertising and such - why not self insure, as Ma Bell did with her fleet of phone trucks?

Partner and honey put the kibosh on that plan. Still haven't had a rental burn down or filed any claims on the rentals yet.

 

[euro]

In my opinion, self-insurance could be entirely feasible in your case. I have considered it many times for my rental portfolio (which seems similar to yours). The only problem is liability coverage. In order for your umbrella policy to kick in, you have to have the individual policy (often the 300k you currently have, but sometimes it can be higher or lower). If you suffer a total loss from fire/hurricanes, etc, then the amount you lose is capped to whatever your property is worth (the land will still retain value). However, a liability case is potentially open-ended - can go into millions. For this reason, I would never drop liability insurance. Sadly, I'm not aware of any insurance companies that write "liability only" policies. If they do exist, I would love to know as I would seriously consider it.

 

[pb4uski]

I recently heard that one might be able to buy liability only from Lloyds of London. Not sure if it is true or not.

 

[stephenson]

As always, thanks for great inputs!

Given these properties have increased in value by 2.5X in eight years, selling seems a bit shortsighted - was going to leave them for kids and avoid the tax bite.

My question has a bit of probabilistic "what if?" Obviously hindsight.

So, looking for ways to lower the insurance bite: increase deductible? Anything else? Insurance companies won't all us to set value - or, at least, haven't to date.

 

[LateToFIRE]

If a 50% loss of total value would not affect your lifestyle or financial flexibility, then surely insurance costs are not really impacting you either. That said, my vote would be to keep the insurance but go with raising the deductibles to fairly high levels (what I did) to reflect your significant financial resources.. Also, as other noted you might need the damage coverage to get the 1st loss liability coverage, which you definitely need.

P.S. I'm also wondering if 50% of your properties were wiped out, would you have the wherewithal to repair/rehab them? If not, that's another reason to maintain the property insurance.

 

[stephenson]

LateToFIRE,

Loss of 50% would be bad, but could recover without affecting lifestyle or financial stability.

As with insurance the question is how would it be possible to lose 50% ... sure, to a geographical wide and overwhelming fire but low probability where we live. Hurricane loss of 50% would require a really unusual Cat 5, traveling at fast rate of advance. Tornado - yeah, but we don't have them here.

 

[NgineER]

Hi All,

So, am looking for some feedback regarding the reasonableness of terminating the insurance on our rental properties ...

Insurance continues to increase and is now approaching $4,000 per house, which is beginning to irritate me ... especially given a new roof on them is about $15,000.

As always, thanks for great inputs!

Given these properties have increased in value by 2.5X in eight years, selling seems a bit shortsighted - was going to leave them for kids and avoid the tax bite.

If leaving for legacy and you've seen such nice appreciation since 2015, the reduced cash flow is likely worth it in order to pass that wealth with reduced risk IMO. I assume the insurance rates reflect the risk of hurricanes and flooding.

 

[Sunset]

...

Given these properties have increased in value by 2.5X in eight years, selling seems a bit shortsighted .......

Or maybe they have already done the big increase and going forward will increase at a slower rate or even go down in value (again).

...
.......... was going to leave them for kids and avoid the tax bite.
......

This is the problem with rental properties, seems all great at first but since it's one thing, selling means taking all the LTCG at one time (plus depreciation recapture) and it just gets worse the longer it's delayed.

Unlike stocks that can literally be sold 1 stock at a time if desired to have smaller LTCG.

 

[Montecfo]

As always, thanks for great inputs!



Given these properties have increased in value by 2.5X in eight years, selling seems a bit shortsighted - was going to leave them for kids and avoid the tax bite.



My question has a bit of probabilistic "what if?" Obviously hindsight.



So, looking for ways to lower the insurance bite: increase deductible? Anything else? Insurance companies won't all us to set value - or, at least, haven't to date.

Shop the insurance with an independent agent.

 

[stephenson]

Sunset,

It is still great - outstanding income, wonderful appreciation since purchased and very few problems, mainly because we replaced every outlet, switch, electrical no plumbing fixture, countertops (granite), and try to keep appliances updated. We also build in landscaping into the rent to ensure they always look good (better than most of the on site owners' property around them).

BTW, we do have a management company, but I try to personally respond to each issue - I want the renters to be happy and stay! They don't stay, but we have been fortunate they rent quickly following a move out.

So, I like owning them as investments, but the increase in insurance - and, the increasing and oft times illiogical invasiveness of the insurance companies irks me - like "How old is your water heater?" If too old the rate goes up - and, when you explain it is in the garage with drainage to the outside - they don't care. Same with roofs - regardless of the quality of the roofing material, they don't care.

 

[ncbill]

In my opinion, self-insurance could be entirely feasible in your case. I have considered it many times for my rental portfolio (which seems similar to yours). The only problem is liability coverage. In order for your umbrella policy to kick in, you have to have the individual policy (often the 300k you currently have, but sometimes it can be higher or lower). If you suffer a total loss from fire/hurricanes, etc, then the amount you lose is capped to whatever your property is worth (the land will still retain value). However, a liability case is potentially open-ended - can go into millions. For this reason, I would never drop liability insurance. Sadly, I'm not aware of any insurance companies that write "liability only" policies. If they do exist, I would love to know as I would seriously consider it.

Standalone umbrella insurers like RLI don't care about the value of your rental property.

But instead the liability limit of your home or auto policy since that determines their exposure to a claim above those coverage limits & thus the premium for umbrella.

PERSONAL UMBRELLA INSURANCE