Rental properties - insurance question

[stephenson]

Hi All,

We have a few single family houses in the same area in northwest Florida. No mortgages.

They are all about 10 miles inland from the Gulf of Mexico, all were built in 1995-1997, all are brick/vinyl, slab on grade with attached garage and composite/fiberglas shingles. There are no trees around them, and they are all “imbedded” in neighborhoods of like size and construction.

None have ever sustained more damage in a major hurricane event than the loss of a piece of aluminum facia covering. None have ever flooded - and, there have been 100 year flood events at least twice. When I say major, think 100 mph with the eye wall going over the neighborhoods.

I do my own work on the houses (painting, repairs, etc), and they are managed by a professional company that inspects and photographs, inside and out, the houses every six months. We drive by and keep and eye on them relatively often.

I have noted over the years, the cost of full insurance for each has increased - substantially - with the insurance companies becoming increasingly invasive about the age of everything they might be required to cover. The hurricane deductibles alone are approaching 30% of the cost of a new roof.

We also maintain a $3M umbrella policy.

So, I am at the point where I would consider other options which entail greater property risk, but maintain good liability coverage. I have bids from a couple of insurance companies for liability only coverage on the properties - for $1M on each, the cost is $100 per property - the current full coverage is approaching $2000 per year. I have reviewed options with competitor companies and some are much higher than the $2000. Liability only coverage is about the same.

I recognize the risk of loss of property, but the damage insurance cost factors are getting out of control.

Thoughts and advice?

 

[Sunset]

Same issue, insurance cost is now equal to 1.6 months rent.

8 yrs ago, the same insurance was almost 1.1 months rent and it had some useless coverage options that I had removed over the years.

I'm getting to the point of wanting to sell and get out of the rental business (it is work after all).

For your situation, I would be aware how close are all your properties ? if they are within a few miles of each other, one hurricane/tornado could literally wipe you out.

I don't get why you have a management company since you do the repairs, and they just do inspections, I hope they are very cheap for the lack of effort they do.

 

[stephenson]

Well, the reason we have a management company is they keep the houses full of quality tenants, they are the go to interface for all transactions, provide aggressive oversight of payments, provide tax statements, and are needed in case I am not available for repairs.

The properties are very close to one another, but my point about hurricanes is that they are pretty far back from the coast, have held up really well in multiple previous significant events with Cat 3-5 hurricanes (including Sally and Ivan), have never flooded, and don't have trees to fall on them - so, in theory, they can't be wiped out by anything other than a fire. Roof damage is the most likely wind event concern.

 

[Starsky]

I'm not sure I'd want to go completely naked. The weather patterns are changing a lot, and past performance is no indication of future results.

The way you described it, it sounds like you have the full boat of coverages. You could just get coverage for a total loss with a high deductible, keep your liability coverage, and anything less is uncovered.

I've been raising my rents to keep up with market rates this year - about 15% increase! - and my increased costs have been more than covered (for a change).

 

[CDRE]

Perhaps a Wind Mitigation inspection (~$75) will lower the cost and the inspection is good for 5 years. Florida law mandates insurance companies to consider a wind mit if presented with results.

 

[stephenson]

CDRE, good point - we have completed mods to the houses and they have stipulations for wind mitigation.

 

[pdxgal]

+1 to seriously consider selling and switching to a different investment class. You could probably find similar (if not better) returns with less risk and hassle. Also, with natural disasters increasing and costs mounting, wouldn't surprise me if some insurers end up bailing after the nth disaster and leaving customers scr**ed. It's happening with health insurance, like the way GM suddenly stopped paying healthcare coverage for retirees, despite having contractual agreements. I'd keep an eye out on what's happening in CA after several disastrous wildfire seasons. It's not looking good for homeowners...

 

[pdxgal]

Though if you need to stay in RE to minimize capital gains, that does complicate things. Maybe do a 1031 into a different type of property, or part of the country.

 

[Bamaman]

We live 5 miles from Tennessee but still in Alabama. Our homeowners insurance premiums are based on losses sustained in our state even though the Gulf Coast is 400 miles to the south. We pay more even though we have about zero risk of having damage from hurricanes. And then, the state may only see a major hurricane every 10-15 years so the insurance companies collect plenty of premiums and can well afford a hit.

My other homeowners pet peeve is Replacement Value coverage. I got my renewal this week and the premium went from $2000 to $2900 because of the increased cost of rebuilding homes. Premiums are charged "by the $1000", and my house alone is now insured for $150K more than I paid for the whole place 18 mos. ago. If my house burned to the ground and I didn't rebuild, I would receive a "depreciated" value of the structure that might be $200-250K less than the value I'm paying premiums on. I don't like it.

I still wonder if purchasing stated value homeowners insurance would be the way to go? We have no mortgages, and homeowners insurance on 2 houses and insurance on three cars is our biggest expense in retirement.

 

[euro]

I know many people are leery of this, but with your numbers, I would seriously consider taking the “liability only” deal and self-insure the rest. I already carry a high deductible, so other than for an extreme event, I would not file a claim anyhow and extreme events, while possible, are rare. Unless the loss of one one or more rental properties wipes you out completely (financially), I think considering the barebones approach makes sense. If you have 5 properties, you save $9500 a year - that’s a lot! $100 a pop for liability is a great deal - you do need to keep that because those losses can be open-ended.

 

[BeachOrCity]

I have friends in Florida who self insure for "Wind". The flood is still reasonable as is the fire policy (which includes liability and is required if you have umbrella).

I suspect your liability only MAY include fire? There certainly are policies that do.

A good agent should be able to run thru this all w/ you; but be forewarned, their commissions are percentage based and a bad agent I had was trying to get me to pay $4000 a year for flood because of a minor technical issue I corrected for $150. I had to go directly to FEMA to figure it out.

My instincts tell me that dropping wind is the most cost effective, unless your home is below base flood elevation in which case flood is really high as well.

 

[CDRE]

Check your umbrella policy for its requirements for the underlying policy. Maybe the umbrella requirements may force you to maintain some levels because they are rental properties?

 

[TexasPE]

What about tornados?

Hi All,

They are all about 10 miles inland from the Gulf of Mexico

None have ever sustained more damage in a major hurricane event than the loss of a piece of aluminum facia covering.

Thoughts and advice?

I also live about 10 miles from the Gulf in SE Texas. My concern would be tornados that are spawned as part of a hurricane. I have seen rows of utility poles snapped off at a 6' level due to these tornados. One landed less than a mile from a relative's house. Something to consider...

 

[OldShooter]

... The properties are very close to one another, but my point about hurricanes is that they are pretty far back from the coast ...

I also live about 10 miles from the Gulf in SE Texas. ...

I dunno. I would self-insure against hurricanes and other weather disasters by selling or exchanging the properties. No one knows the future, but I think the consensus is that weather disasters are becoming more frequent.

I deployed with Red Cross for Hurricane Michael. The damage was stunning, with "catastrophic" reaching more than 30 miles inland and "severe" maybe twice that. https://www.researchgate.net/figure...37-copyrights-of-image-authors_fig2_337585381

 

[Sunset]

I find insurance annoying because even for my home I spend over $1,000 to insure it, and I rarely get any value out of it, except for the warm fuzzy feeling of being insured.

However, when I look at the rare event of tornado/fire/hurricane and realize it would destroy my property. A loss of $250K, the cost of the insurance seems small.

On a per house situation, OP's case, OP could save $2K and if OP doesn't lose the house in 100 years, then OP would have won the bet of self insurance.
I find that a very long payback timeframe and simply not worth it.

 

[ExFlyBoy5]

I dunno. I would self-insure against hurricanes and other weather disasters by selling or exchanging the properties. No one knows the future, but I think the consensus is that weather disasters are becoming more frequent.

I deployed with Red Cross for Hurricane Michael. The damage was stunning, with "catastrophic" reaching more than 30 miles inland and "severe" maybe twice that. https://www.researchgate.net/figure...37-copyrights-of-image-authors_fig2_337585381

It's not only destructive, it is VERY, VERY expensive. One of the short law contracts I took involved reviewing loan packages from FEMA/SBA. It was hard to reconcile how some minimal "looking" damage could cost many, MANY thousands of dollars to repair. Some of the packages I reviewed had previous/multiple loans from multiple storms in the same year (Louisiana). There is NO WAY I would want to self insure for a hurricane.

Of course, since my DW deals with rentals as her j*b, I get to hear all sorts of reasons why we will not be in the rental market anytime soon.

 

[stephenson]

Sorry about delay in getting back to everyone.

First, thank you for your thoughtful comments ...

Second, wish I was any closer to deciding ... I am going to meet with a (somewhat) trusted independent insurance fellow to evaluate going down the liability-only path.

Just paid the annuals on three of the houses - nearly $2K from a low rated company - would be 1.5-2X that for major, somewhat trusted company.

All the companies are becoming aggressive in their demands for new roofs, new water heaters, etc ... I am growing tired of playing that game.

Will status!

 

[tryan]

I believe your umbrella policy holder will drop you if you self insure. The cheap umbrella rates rely on other layers of insurance.

FWIW I self insure every flip until it hits the market .... construction insurance policy costs are prohibitive. The lapse in insurance is it's own problem ... the insurace company doesn't want to give liability in the event of a lapse. They say "too much risk of a forthcoming unknown claim". Travelers doesn't seem to care so I go with them.

 

[stephenson]

Tryan,

I would certainly maintain individual liability on each of the properties … so, the liability umbrella would remain.

 

[SecondAttempt]

I think you are confusing a couple of perils you face.

One peril is your liability both personally and as a landlord. Protecting that is fairly cheap and I would not skimp on it. I used to have a rental and when we bought it there was no increase in our personal liability premium but we had to maintain about $300,000 in liability on the rental which was pretty cheap ($10s per year).

Your other peril is loss of the property to a storm or flood. This is more of a personal call. If you want to risk losing the properties in a storm or flood that's really a personal decision. You probably know your risks better than anyone. If you are not dependent on the rental income but your net worth might take a hit from a total loss of a rental house, that might be completely acceptable to you.

That said, insurance companies are experts at evaluating and pricing risk. I live in a hurricane zone (Hawaii) but my hurricane insurance is $280 per year based on my specific location on a ~$1,000,000 property. So it you are being quoted high rates for hurricane insurance that probably should be sobering. I'm not saying you should buy it, just that you should reassess your low-risk belief and how a total loss would impact you.

For the record I am also in a volcano zone and not insured for that so I have done the no-coverage assessment and accepted the risk knowing that an eruption could result in a complete uncovered loss.

 

[stephenson]

Yep, copy all that.

My issue with insurance cost is not only the hurricane upper, it is the continuing increases to offset additional risk - by the insurance companies.

To your point, the income from the properties is not necessary in any way for lifestyle or income.

I’m trying to be logical

 

[JakeinChina]

I had 6 single family home rentals in South Florida for the last 10 years and I'm currently in the process of selling them all and buying homes to rent out in PA, which is where I reside now. The insurance rates were one of the major reasons for me selling out of Florida, along with the weather eating at my homes, and the fact that I want to manage all of my properties instead of hiring a prop manager. A prop manager will never care for your rentals like you will.

Also, tenants down in Florida can be rather shifty. I've found it much easier to manage tenants in PA compared to Florida. Florida really does attract some interesting characters. These rentals rent rates range from 1800 to 2500 per month so it's not like it's inner city slums.

I pay on average $600 per year on landlord insurance for each home here in PA. The value of the homes are around $500k.

Do they even have Landlord insurance down in Florida? When I inquired about it last year, my property manager said no, which is why I just carried liability ins policies and I also have an umbrella policy for 1 mill.

 

[stephenson]

Jake,

So a bit similar circumstances - I am still close to my rentals, but would certainly trade them via Starker if I relocated.

You maintained only liability then while in Florida? Again, a like circumstance.

I have $3M umbrella now from USAA, but have not yet checked if they will continue this with only liability on each of the properties.

 

[JakeinChina]

Jake,

So a bit similar circumstances - I am still close to my rentals, but would certainly trade them via Starker if I relocated.

You maintained only liability then while in Florida? Again, a like circumstance.

I have $3M umbrella now from USAA, but have not yet checked if they will continue this with only liability on each of the properties.

Yeah I only had liability and an umbrella for total coverage on the rental properties, and I still was nervous haha. If I resided in Florida like you, I honestly don't know what I'd do. Obviously a law suit was my biggest fear, so I thought thru the process of getting sued, and what layers would a tenant have to go thru to get to my assets. You may already know all of this, but their attorney will first hit up your insurance company, which I felt offered a good enough shield. Maybe you can speak with a local attorney who is trustworthy and experienced in asset protection.

I spoke with an attorney my wife met thru church, and he was satisfied with my landlord insurance on each home and 1 mill umbrella policy here in PA. I sold a number of my Florida homes and did a 1031 swap with him, but not with all of the homes.

It sucks. The insurance down in Florida really eats at your income stream. Maybe raise rent if possible as I now hearing from tenants that finding SF homes in South Florida is really tough for one year leases. Many have turned them into Airbnb's if their neighborhood allows it.

50 bucks increase in rents per unit is already $600 per year which might help pay for that expensive insurance coverage. Just a thought.

 

[stephenson]

I tend to try and increase rent every two years - but, may change that to account for the insurance environment.

I have a $3M personal umbrella, so that will activate USAA's attorneys first. I would also get a liability policy with each property.

Just off phone with USAA - they tell me they don't cover individual single family homes as no matter the number, they don't consider them commercial, but pushed me off to another company named "Bolt" that USAA would, of course get a fee from referral. USAA rep also noted the onus is on the individual property liability insurer to make certain their insurance fills in under USAA's umbrella. Further, Bolt would cover only if the properties were put into a legal entity structure like an LLC.

So, will go to see a local independent rep and have discussion.

I long for the USAA of yore.