If you have heard me speak at an event in the past, I would have mentioned that you should be a proactive, rather than a reactive real estate entrepreneur. But what does that mean? Especially when you are looking at different ways to make small improvements which increase the cash flow that you have in any particular rental property.
One thing I usually suggest to real estate investors with one or a few properties is to see if they can group policies together with one company and get a better deal. If you are bringing more than one property to an insurance company you may be able to get a better deal. I was renewing one of my insurance policies with an insurance broker where we have a few properties when I got a bit of sticker shock. The annual premium had gone up 12% for the year. Considering my rents could only go up a maximum of 1.6% for the year in rent controlled Ontario, I thought this was a little odd. So I contacted my insurance agent at the company where my premium had increased.
I was told that insurance premiums across the country were going up due to inflation and environmental events and after doing some digging I did find this to be the case for my particular property.
Dave Pereira, Agency Manager at the Whitby Allstate Insurance Agency, explains it this way “The recent large rate increases we’ve all been experiencing for some time now on our property policies is largely due to the unrelenting series of weather related claims the industry has suffered for many years now, often referred to as catastrophic claims.”
When comparing policies for my rental property my current insurer did have the lowest price, while providing me the coverage that I wanted.
One big tip when you are comparing insurance policies on a rental property, make sure that you are comparing apples to apples. As all policies do not offer the same type of coverage.
- Vacancy – How does the insurer handle a vacant property? Are you automatically covered for 120 days or do you need to inform the insurer that the property is vacant in order to keep your property insurance coverage? Do you have to visit the property every 3 days while it is vacant? Does the water need to be shut-off to the property?
- Fair Rental Value – If there is a fire or the property becomes inhabitable you will still have mortgage, tax and insurance payments. Will your insurance pay you the equivalent of your rents? What happens if the property is vacant at the time of the loss – will you still get rents?
- Liability – How much liability coverage is included – $2 million, $5 million? Does the insurer require your tenants to carry liability insurance? What if your tenants don’t have liability coverage in their policy?
- Tenant Vandalism – How much do they cover? How do you prove that this has happened? Is this something that you really want or need?
In addition to the above you would also want to see if there was water/sewer backup coverage, earthquake, natural disasters, building ordinance or by-law coverage, landlord contents, and guaranteed replacement cost. I’m sure there are a few more that were missed but you get the idea.
After checking out different insurers I looked back at my existing policy to see if everything was correct. And I thought I noticed a few things that didn’t seem to make sense. I asked a realtor to provide me with a listing of the property from the MLS, found a current MPAC report, and an electronic version of the property inspectors report. A few things that I missed when we picked up the insurance policy in the first place.
- Detached Structures (often fixed at 10% of the building limit)- This particular property does not have a garage on the property and has a little wooden shed made from scrap wood. I found that it was insured for $5,000. If it burnt down, I’d doubt I would even replace it.
- Square Footage – The actual square footage of the property type was incorrect. This property is a semi-detached house in a raised bungalow style and had a square footage 200 sq feet bigger in the policy than the actual square footage of the property.
- Construction Type(including style of home) – This semi-detached raised bungalow is a mostly brick property were as the policy had a mostly vinyl siding exterior finish.
- Flooring – We had the property as 100% laminate but in reality it was 80% laminate and 20% vinyl flooring.
Dave explained that “Your deductible is your share of the loss if one was to occur. For example, if you had a $2500 deductible for sewer back-up and you had a loss due to that peril that cost $12,500 in clean-up and repairs, you would be responsible for the first $2,500 and your insurer would pay the remaining $10,000. If you increase your deductible then your annual premium will go down relative to the amount of risk you took on, with that deductible, as the owner of the property.”
We kept our deductible where it was. If you are not sure what amount of deductible you should use, I suggest you pickup a great book by Margot Bai titled “Spend Smarter Save Bigger” (also in ebook Format) which gives a great explanation of what insurance is for and what type of deductible that you should have.
After making the appropriate changes to the policy we were able to save $244 a year going forward. Having owned this property for 3 years, I’m a little disappointed that I didn’t see this sooner. I could have used the extra $732 But being a proactive real estate entrepreneur I will be going over my existing policies to ensure that I haven’t made the same mistakes somewhere else. It is all part of growing and working on your real estate business.
Any small changes that you can make which help to streamline your real estate business add up when you have multiple properties or your look at different ways that you can spend money more efficiently.
(photo credit – David Hilowitz)