THIS IS ON A NEED-TO-KNOW BASIS
Oh good heavens those headlines have our brains spinning these days! Sometimes, it’s tempting to simply turn the world off for a while. One friend said she only turns on a short bit of news when it’s a “need-to-know” situation.
What a perfect strategy. So this one is for our real estate investor colleagues and friends. If that’s not you, keep flipping the channel and swiping up. But as real estate investors, there are a few pitfalls where what you don’t know won’t kill you, but it can definitely make a life miserable for a while.
For example, did you know that as a real estate investor you will need a house insurance policy specific to rental properties. Yes, almost every insurer these days wants to know if you own and live in a home, or if there is a tenant living there. And yes, it matters if you have a tenant downstairs—even if you’re living upstairs.
Why is this important? It’s all about risk reduction. Owning an asset worth $500,000 is very exciting when we’re talking cashflow, mortgage paydown and appreciation. On the other hand, protecting that asset produces yawns almost immediately! But I don’t personally have half a million bucks to just throw away, so safety-net it is!
What am I typically protecting against? The worst case scenarios: blow up, burn down, flood. Ironically, I’ve seen all 3 in my little community (true story: a house blew up due to a gas leak caused by a phone repair worker—the homeowner did nothing wrong in that situation).
What else am I protecting against? Well, that is up to you and your insurance provider. Did you know that you can get insurance to cover tenant damage? Everyone is a little afraid of the worst-tenant-ever stories. And did you know that there are also some good policies that can protect against loss of rental income. For example, after a fire, restoration or rebuild can take months. That’s months of carrying costs for your asset, with no rental income. As a smaller investor, that $2000 or more can create a pinch if it’s being paid out of pocket. In contrast, with insurance, there is a deductible, then rental income can be covered for a certain period of time.
As investors, there are a lot of policies out there to choose from. Then there are deductible amounts (your choice) and coverage amounts (your choice). It can become tedious, and almost overwhelming. In our quest for best practices as a real estate investor, we want to discipline ourselves and encourage others to resist the temptation to take the easy choice. Insuring your investment is a privilege with real estate – one that we don’t have with stocks and other investments; that insurance is worth a little time and research.
One more very important detail for investors is around replacement value. This one is tricky, and will quickly separate out the better insurance providers from, well …, the others. Let’s say I find a wicked deal for $350K. Some unexpected tragedy happens, and the house burns down. After the example fire, I don’t want to find out that the house costs $500K to rebuild, but I only had it insured for my $350K purchase price. We can’t know how inflation might continue to rise over the next few years, but we can make our best effort to insure our rental properties for a reasonable replacement rate. In some cases today, that means insuring a property that is assessed for $425K, for a replacement value of $475K or more. Your insurance broker can explain the details to you; the good ones will even help you figure out what a rebuild might cost at today’s construction values. This applies equally to multi-family and to single family (detached, duplex, condo, etc…).
The name of the “insurance game” for investors is to set your rental property up for success, and then maintain it for insurance success. What do we mean? Well, for goodness sake’s do those smoke detector checks/battery replacements at least twice a year and document them (with a client co-sign or picture), provide fire extinguishers, have a legal suite (illegal suites can cause a world of hurt if you ever needed an insurance claim). Do your inspections (biannual, quarterly, whatever your business policy is) AND then document any repairs. Even routine maintenance, like getting the gutters cleaned out, can help if you ever have water damage.
We don’t expect to be able to predict every possible risk or problem at each property. Nope. No guarantees, no crystal ball. But we do hold ourselves to a high standard for maintenance and prevention. To the best of our ability, we want to avoid that dreaded situation where the insurance company denies our claim. Our unwritten policy: don’t give them a reason to say “no.”
Now, to play devil’s advocate, we don’t always claim every issue. If a house problem is $3000 to $5000, and our deductible is $2000, well, we’re probably going to simply fix it ourselves. Yes, I am saying that you might choose to simply hire your own professionals, rather than submitting a claim. That’s a matter of personal choice and portfolio risk management. It’s also reflective of your reserve fund for that property. When the money is already in the bank for a rainy day, it can be an easier, lower stress choice. But that’s a topic for another day.
These days, everyone is drooling over appreciation in Alberta. And it’s comeback is absolutely something to celebrate! Strategic investors will hope for the best, while making back up plans for the worst. And how luxurious is it to be able to insure one of our biggest investments for full replacement value! Can’t do that with an RRSP or a stock! Insuring our rental properties takes a big chunk of risk out of our plans for our financial freedom.
