Ep #275 – J Darrin Gross – Everything you need to know about multifamily insurance
Here is some of what you will learn:
What to look for in an insurance broker
Understanding distribution models
When to engage an insurance broker
The 4 areas that insurance companies focus on
The importance of building inspectors
Understanding types of coverage
Understanding Agreed Amount Endorsement
The value of insuring portfolios vs single properties
How long to insure for Business Interruption
The value of Umbrella Liability coverage
To learn more about our guest, please click here
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J Darrin Gross – Everything you need to know about multifamily insurance (Ep #275)
Rod: Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. And I know you’re gonna get value from the gentlemen we’re interviewing today, in fact we’ve never had an insurance broker on the show before. His name is Darren Gross and he’s with the Leonard Adams Insurance out of Portland Oregon and he focuses on real estate insurance and so we’re gonna dig into what you should look for when you’re getting insurance, the questions you should ask a broker and things of that nature to help you with that piece of the business. So without further ado, Darren, welcome to the show buddy!
Darren: Hey Rod thanks for having me
Rod: Absolutely so I know you’ve got a portfolio as well you started in single-family but why don’t you talk about how you got in this business to start and then we’ll shift over to the insurance questions
Darren: Sure. so back in the day I started in insurance and you know at the time I knew no one. I grow back in Kansas so I was a transplant to Oregon and basically it was trying you know those trends to survive yeah and so you know write anything you could kind of thing and along the way answered the phone and it was a guy that was buying you know some distressed single-family properties and he called and then he called back and he called back and he called back and every time he called he had another property and so I was always out there you know taking pictures with my Polaroid camera trying to shade the light, just right so the underwriter wouldn’t see the moss on the roof or the tree growing out of the fireplace or you know whatever the problem was. And anyway over time I learned from him just the you know a little bit about real estate enough to make me curious and I think at the time I too was all I wanted was a new car. I wanted enough extra money for a new car payment and he was telling me about how he made $100 a month that this $100 a month that one you know and he just I was gone like wow that’s what I need is I need $100 a month here and there and there
Rod: When was this?
Darren: This is back in late 90s so because what ended up happening actually with this customer I was in the driveway of one I said I got to get into this you know and he goes you want you want to get in I’ll show you this one and I was like you know but this is a real turd I don’t want you know I don’t want this one and so when he made me an offer and I remember going home trying to run the numbers and could not make it work, couldn’t make it work but I remembered one thing and that was that he needed $10,000 to go to his next deal and I realized that if I took away the number he offered me and I focused on the $10,000 I could make work anyway I got into that property and it kind of opened my eyes to real estate and investing and since then I’ve tried to focus on working with real estate investors when we’ve accumulated, we’ve got you know six single families we bought a 12 unit apartment building here recently so
Rod: Okay well you basically solved a problem and guys those are you listening and you know that’s what this business is it’s problem-solving. And sometimes the solution is not the price sometimes the solution is in this case it was ten thousand dollars for you sometimes it’s timing they need to sell right away but you need to focus on solving the problem and when you become a problem solver you’ll be you’ll become successful in this business. So let’s shift gears over to insurance okay. In fact I just had one of my coaching clients ask me you know you know he’s ready to get insurance for a I don’t 50ish unit property in Atlanta, what sorts of questions should he be asking an insurance broker but actually let’s even go back a step. What should he look for in an insurance broker? what you know what are the sorts of questions that he might ask the broker about them to find the right broker?
Darren: Sure I think you know with a broker I think you’re looking for experience in the market that you’re working in you know if it’s a guy that only does manufacturing or he only does you know home and auto he may not fully understand you know the risk that you face. So I think I’d start with the you know looking for a broker that at least knows the risk and then also has access to markets
Rod: When you say knows the risk, knows the asset class that you’re trying to ensure
Rod: Okay right. So you want you want a broker that does multifamily bottom line
Darren: And then I think the other thing too you know there’s two types of insurance distribution models. One is your direct right which is like your farmers Allstate state farm where they represent one flavor and that’s the flavor. When you get into older you know C Class properties and stuff that may not be as good of a fit, that’s where a broker can be a lot more helpful. Brokers represent companies from names you’ve heard of – you know Lloyd’s of London and everything in between
Darren: And you know insurance is the insurance company’s not looking to buy a claim and so your properties are newer
Rod: What do you mean by that statement? Could you expand on that statement?
Darren: Well that’s, an underwriters job is to avoid buying a claim you know so when you present the information the underwriters gonna look at it and say,
Rod: Oh I see what you mean buy. I’m sorry I misunderstood you, buy a claim yeah they don’t want claims obviously okay got it
Darren: In business to collect premium, they do pay claims for the preferences just to collect premium right?
Darren: And so the things that I think that you know most of the investors I work with especially newer investors are probably starting off with C-class properties are looking for some sort of a value add play, I think knowing what an underwriters going to look at is probably a good thing to start with. And if you have
Rod: Let’s hold on-hold I want to come back to that I’m sorry I want to circle back to that for sure but back to evaluating the broker that you’re talking to, would you suggest that that you ask them if they’ve also underwritten or placed coverage on C-class properties? on older properties as it were? you mean if you’re looking at a C-class 30 year old property, wouldn’t it be a good idea to make sure that they’re familiar with writing coverage on a property like that?
Darren: Absolutely and it goes back like you first mentioned, solving the problem. I think in an insurance broker that solved problems and understands the problem that’s going to be answer that affirmatively and give you the confidence that they know what they’re doing. You know in depending in the market you’re in if you’re in some smaller market, the guy might write everything from A to Z and not have a specialty. But if you get into more of a metro area where there is more specialization I think you’re probably gonna find more likely to find a broker who has the experience so you ask him we know what their experience is with multifamily, ask him what carriers they represent, you know if they only list one company you might ask well aren’t you a broker or I mean I thought that was the whole idea of you know brokers have multiple companies to go to. You know and just kind of fill them out but I think that you start with and I would say basically experience is what you’re looking for.
Rod: Okay okay and I will tell you guys the best way to find any team member and really insurance broker as a team member, the best way to find any team member in this business that with this exciting business that we’re in, is through referrals, is you ask us real estate brokers you know who the insurance brokers you like, you ask property managers who the insurance brokers you like and that’s how you find the people particularly I mean obviously you’re gonna want to ask brokers that specialize in the in the type and size and class of property that you’re buying because they’re gonna know who the insurance brokers are cuz they’re doing closings in that type. You’re gonna ask property managers that manage that asset type of asset class if it’s a C-property you know find property managers that manage those kinds of properties and find out who they use. And that’s one of the best ways. So let’s talk about types of coverage. So actually let’s go back to your conversation about you were talking about start I think starting to talk about due diligence as you’re looking at an insurance, as you’re looking at a property as it relates to insurance so maybe you could expand on that a little bit
Darren: Sure well the first thing I would say is if you’re building your team out you know make sure you have the broker you’ve identified or maybe a couple of brokers to you know get a feel for it if it’s your first but do not wait to contact your broker when you’ve identified a property
Rod: Insurance broker guys we’re talking insurance now again we’re on insurance brokers
Darren: Thanks for the clarification yeah if you put in a letter of intent and it’s accepted that’s the time to get your insurance broker engaged ASAP because well you know many things you can get a quote on the day you speak with the insurance broker on, if it’s a more involved property and it has more of a story and there’s fewer underwriters that are willing to take a look at it there’s going to need to be a little bit more time there’s going to be some questions that need to be answered and so I would say first things first, give your insurance broker plenty of time
Darren: And then from there I think the four things that the insurance companies tend to focus on and I think these are you know universal, but I would say the four systems that are of most concern to insurance companies start with the roof, you know the age and condition of the roof, then they start looking at your plumbing age and condition of the plumbing, age and condition of the electrical system and then age and condition of the heating and ventilation and then from there it’s you know how well does it take a picture I mean is that there’s a picture it looked pretty scary or is it something because you know the thing that everybody has now on their desk is Google Earth you know and when they drive by and they look at it and it’s you know there’s trash everywhere and a bunch of brokedown cars and boarded up windows you’re not gonna get too far with an underwriter. So you know be aware of that when you’re doing your due diligence. Beyond that, I think if you you know when you’re walking the grounds and you understand the property is what’s the condition of the you know the walking surfaces? are the steps secure? are the railing secure? as they’re a bunch of cracks and then
Rod: You know you’ve got to look at liability sorry to interrupt. I just didn’t want to forget this as you know if you’ve got sidewalks that have heaved and you’ve got you know two or three inch lip from one slab to another slab that’s a tripping hazard and that’s a liability issue and that’s a you know a professional tenant when I say professional tenant of a professional litigating tenants you know wet dream you know is to have something like that that they can lay on the ground have somebody take a picture of them and say they fell and hurt themselves. So you know those are the kinds of things when you’re evaluating the property like you said a loose rail on a loose handrail, things like that that that that a professional tenant can capitalize. When I say professional, it’s a negative connotation in this regard but okay so you’re looking at safety issues as well. So you’re looking at the roof, you look in the plumbing, electrical, all the things you’re going to look at anyway HVAC, you know age and condition but of course you’re gonna look at the building structure. I’m gonna look and see if there’s any structural issues and guys do not do your due diligence without a building inspector ever ever ever. I’ve owned thousands of doors and I always bring a building inspector you know. If you’re a general contractor bill to bring a building inspector I would never try to do it yourself that but okay so you’re looking at these things
Darren: Yeah and then and then from there on the railings I think the you know there’s a lot of buzz about the horizontal railings as opposed to the vertical railings and how you know what’s the gap between the railings and there are some companies that are more forgiving on that but you know if you if you’re dealing with an older property to begin with just understand that the pool of companies that are wanting to write your risk is less than if you’re dealing with a newer property that’s only twenty years old okay where the systems aren’t worn out, you know and there’s just, in the insurance company’s mind there’s less chance of a claim on a newer property. Now that’s not necessarily always true you know there’s a big debate on whether or not fire suppression systems you know the sprinkler systems and the newer towers and stuff are more of a claim ready to you know happen or if they’re actually you know they’re clearly they’ll put the fire out but in the meantime if they go off you know accidentally or whatever they can cause a lot of water damage as well but that’s over
Rod: And when they go off they’re gonna cause a lot of water damage and maybe excessive relating to the fire as well yeah that’s a valid point. Okay so, we’ve talked about identifying a broker through experience in the asset class and type that you’re interested in and through referrals. We talked about the things you do when you look at the property or the things you think about. We talked about getting started right away. What others things are relative in this insurance conversation to someone that’s you know buying their first multi-family or any other things that we should be talking about?
Darren: Well I think just to again on the due diligence thing is just recognizing that you know and I’m sure you talk with your listeners and investors about this is that don’t use the sellers numbers your insurance you know there’s plenty of properties I’ve seen where that the sellers own the property forever their agent is just always renewed at the same limit they may be going without coverage you know they may have their like in Florida and have seen multiple older properties where the guys owned up for everything is not worried about wind yeah you know there’s a little thing called hurricanes down where you are so
Rod: Yeah we’ve heard about those
Darren: Yeah and when they happen they can cause a lot of damage and insurance companies know that and they charge for that you know a lot more than they do the other thing. So I think you know just to sum up that kind of due diligence thing is you know make sure you’re having a conversation and then you’re able to provide all the information you know the square footage of the building, the number of units, all of those things are going to go into the underwriting and the application that the insurance broker has to prepare,
Rod: Right, I know you’ve done portfolios as large as 2000 doors so you know I want to I didn’t speak to your credibility in this space and I should have right out of the gate so you know this is valuable advice. Now is there, do we need to have a conversation about types of coverage? Can we speak to that a little bit?
Darren: Yeah no I think that’s obviously you know it’s the reason you’re buying and I think you know the thing that I have cause remind myself is that you know it is many times it’s the bank that’s pushing the requirement you know if you’re gonna borrow money the banks gonna say who’s your insurance you know we require insurance. There’s still a risk to the investor and you are you know the broker the insurance broker is providing protection to both the investor and the bank and you know you’re buying it so that you can minimize or transfer potential loss to the insurance company. So the thing that I always like to start with is the valuation you know that when you’re focused on buying a property typically, find investors are focused on buy that for you know 20 or 30 a door or it’s always a door price kind of thing and I’ll caution you because if you get into a conversation with somebody that’s in a different part of the world and you’re buying a property in an area that they’re not from that that number doesn’t translate in insurance. Insurance is very regionalised you know where you’re at with the wind and the hurricanes, it’s going to be considerably more than where I’m at in the northwest where we have rain okay.
Rod: I’m not sure I’m tracking the conversation. Where’s the concern? Help me out here
Darren: Well understand in general when you, if you’re listening to a podcast, yeah and you know somebody’s talking about how much they pay per door for you know when they’re buying a property and so let’s say that the purchase price is a million for the property but when you do the replacement cost estimate which is what insurance is based on the contract says we’re gonna rebuild your property if these things happen okay. That’s based on what’s gonna cost to build back.
Darren: Market price does not always equal replacement cost
Rod: Okay that’s where you were going okay got it okay yeah sure no question. So you want replacement cost coverage, are there any other coverages that should be discussed and let’s have the deductible conversation as well
Darren: Sure well staying with just the valuation I always recommend that you have your insurance broker do a replacement cost estimate you know because it’s really easy to you know look at what the sellers numbers are, he’s got it insured for this amount, let’s just ensure for that amount, you know but the reality is, if you under insure it you’re gonna be disappointed when you have a claim because you’re not gonna get the amount
Rod: The bank’s not gonna allow you to under insure it too much anyway correct?
Darren: Typically, I mean typically. They you know, and again if you’re buying, if you’re getting a good deal and they’re only insuring or they’re only lending against that you know that purchase price at say 70% but the replacement cost of the of the property is twice what you’re paying for it mmm the bank is typically looking for I think the banks are getting better about this about making certain that that it’s insured for replacement cost but if you’re dealing with a less sophisticated bank you know they’re still looking for their loan to be covered
Rod: Okay so the content that, the bottom line here guises don’t under insure. It’s not that much more to get enough coverage that you need in case of a real problem and you know I’ve had numerous fires in my property some have been complete tear downs in the past and
Darren: But just on the valuation thing and I want to just beat a dead horse but there’s here are a couple things I’ll give your listeners to make sure that they’re asking for. So replacement cost we’ve already covered that. If they’ve got a large schedule they’re gonna be on they’re not gonna be on a business owner policy which is a kind of more of a smaller policy or smaller property policy but a larger one you want to make sure you’re getting agreed amount coverage and the reason why you want this is it eliminates any kind of a coinsurance penalty okay. Now the coinsurance is this dirty little phrase and insurance that basically says at the time of loss the insurance company takes a look at how much you insured the building for versus what the coinsurance clause on the policy required okay. So just in a simple simple example if you insured it for a million right and actually and your replacement cost estimate receive your replacement cost estimate exactly a two million dollar building you’ve only insured to fifty percent okay. And in the in the claim if you have a partial loss which is probably more likely on a on a million dollar building you won’t get the full amount, you’ll only get 50% of .. yeah yeah so that’s real and trust me, the more zeros there are on the check that the insurance company has to write, the more they’re going to look at the policy to determine how much
Rod: What do you want is agreed up,
Darren: It’s called an agreed amount endorsement and this waives the coinsurance penalty okay and it’s a annual endorsement and it’s basically it’s a requires a statement of value between you the buyer, the insurance buyer, and the insurance company where they both agree that this is the value so that the time of loss there’s no coinsurance penalty applicable
Rod: Okay so any other endorsements? Thank you for that any other endorsements that someone may want to consider in the multifamily space.
Darren: If you’ve got multiple buildings, multiple complexes, I would certainly encourage looking at a blanket limits if you you know depending on how you’re set up. We typically try and do a portfolio policy as opposed to a policy per property and if you do that, you can get a blanket limit for all the
Rod: And their big savings doing it that way correct?
Darren: I don’t know there’s big savings as much as you are protecting yourself from any downside if there was like you know out here in the northwest we have earthquakes I mean especially down there where you’re at with hurricanes. You have widespread loss and also the cost of materials and labor goes way up right
Darren: You could take from one of your, you could take from that blanket limit and apply it to whatever the damaged properties are as opposed to being limited to just the limit on that one building
Rod: Oh I see. It’s a bigger limit bottom line
Rod: Yeah okay all right
Darren: At least give you one other thing here quick on loss of rents, you know if you have a fire you’re not able to collect rent right. The policy comes with business interruption or loss of rents, on many policies they give you what they call actual loss sustained there’s usually a cap if you have that for 12 months based on the you know the phase where in right now where there’s lots of construction going on and labor shortage and whatever the permitting process can be
Rod: It could take a long time yeah
Darren: It could take a lot longer so certainly look for 18 to 24 months in some cases you can even get 36 months depending on how large your property is. So those are some just some simple things
Rod: Oh that’s huge that’s huge. So you’re asking for 24 to 36 months in really business interruption loss
Darren: If you can get it I just and I don’t think 12 months is long enough in in many cases and it’s more of just the supply and demand and then also the permitting you know you’ve got a sure to tear down what was damaged you got to go through the permitting process if they’re backed up because they’ve got a bunch of new construction going on, it could be you know three months before you get your permits and then you got to make sure that the construction crews are lined up to go when you’re ready to go and it goes
Rod: This is huge guys. Let me tell you why this is huge because you guys you know there’s something called mortgage payments and if you have your building halfway burned down and it takes longer than a year and you’ve only got business interruption coverage for a year, you could very easily lose the property and your investors lose their money or you lose all your money. So it’s a really big deal so that’s a good one okay
Darren: And then just to touch on we were talking about the trip and fall kind of thing I think umbrellas right now are you know something every investor should have
Rod: Umbrella liability coverage
Darren: Correct, it basically extends your you know most policies come with like a million dollar limit of liability for any bodily injury or property damage that you’re responsible for to others, you can buy umbrellas you know if I million dollars for really cheap right now and
Rod: It’s a no-brainer guys it’s a no-brainer. I mean as part of your asset protection strategy you know your property’s owned an individual LLC’s and you know and all the things along that conversation, an umbrella liability policy is a must have if you’re gonna be you know long-term successful it’s just, you’re crazy not to do it for the inexpensive amount of money that it costs. Okay let’s see we’ve talked about types of coverage, replacement, we’ve talked about the endorsements, we’ve talked about okay is there anything else insurance related that you might be able to chat about that they could add value to my multifamily investors?
Darren: You know other than fact that claims happen you know nobody, every policy I sell I hope you never have to use it right that’s not because it doesn’t work it’s just when you have it you’ve got deductibles I mean we talked a little bit about you know deductibles that’s even when you have a claim there’s coverage but you have the first at least on the property side of things the first dollars are out of your pocket. So whether you’ve got you know five thousand or ten thousand dollar deductible that’s going to come out of your pocket you know and we are seeing especially with the larger property schedules and syndications and that, people are going with higher deductibles and you know so in and if you’re in any kind of like a wind zone like you’re in, flood zone you know we’re out here where we’re at with earthquake, you have percentage deductibles and those are not you know fixed dollar amount they’re percentage of the limit so we got a million dollar building and you got a five percent limit you know you’ve got
Rod: Five percent deductible on that percentage and we have that here with wind and flood and it’s painful when it happens ask me how I know, I had you know three hundred and sixty damaged properties when Charlie hit in Port Charlotte, Florida here and you know a couple of hundred actually about a hundred were uninhabitable it was just it was insane time of my life but yeah and thank God I had good insurance and I and you know thank God I did even though I still ended up having to fight the insurance company
Darren: Well again the deductible I think a lot of times people look at it for a way to save money which it clearly the more risk you take on the more you can save but you know don’t be penny wise and pound foolish if you don’t have the resources to pay that deductible you probably be a little better off to transfer that risk and take the lower deductible
Rod: Yeah I couldn’t agree more. Okay well listen Darren, you’ve added a ton of value today that that again that we don’t normally cover and I know that you know you, I know you insure lots of different asset classes but as well as multifamily and but guys you know he’s giving you some great advice on this this part of the business that’s a critical part of the business to protect your assets. So thanks for being the show my friend
Darren: Thank you Rod
Rod: Absolutely all right we’ll talk again soon. I’m sure can actually you’re coming to visit so we’ll have lunch here soon. So looking forward to that
Darren: Looking forward too
Rod: All right thanks take care!
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