Author Topic: Drop homeowners insurance on rental houses?  (Read 6239 times)

Gordon32

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Drop homeowners insurance on rental houses?
« on: February 11, 2014, 07:56:31 PM »
Dear fellow Mustachians,
I could use some help on this topic.   It seems like it makes sense on paper, but I'm having a hard time breaking my old ways of thinking.

I currently own outright 6 rental properties with an estimated value of around $500,000.  That's a good thing.  I also pay about $4,500/year or $375/month on insurance.  That seems like a bad thing to me.   Over the past 15 years I've had 2 claims for a total of $4,000.  Yes, that's right, less than one year's premiums.  What if I take the $375/month I now spend on premiums and invest in an Index fund?   Make my own insurance.

Invest $375/month at 7% (using bankrate simple savings calculator)
Year 1:   $4,648
Year 2:   $9,631
Year 3:   $14,975
Year 4:   $20,704
Year 5:   $26,848
Year 10: $64,909
Year 15: $118,864
Year 20: $195,351

And so on, so on.    Of course, I would use this money for any "claims" I might have against my properties, therefore the estimate may not be so large.   I currently have a $1,000 deductible.  I recently asked for a higher deductible and was told $2,500 was as high as I could go.  That would save me less than 10%. 

My questions:
1.  How would I protect myself against liability?  Someone falls...injury....
2.  Is there something I'm missing?
3.  Am I crazy to do this?

I appreciate any insights and knowledge any of you can give me.

Thank you,
Gordon in Iowa

Milspecstache

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Re: Drop homeowners insurance on rental houses?
« Reply #1 on: February 11, 2014, 11:39:39 PM »
I self-insure on my primary home.  I think it makes great sense, however, I would look into personal liability insurance.  Other than that your logic makes a lot of sense to me.

Also do you have an LLC to separate your assets?

AlexK

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Re: Drop homeowners insurance on rental houses?
« Reply #2 on: February 12, 2014, 12:02:39 AM »
I also self insure on my primary home but have insurance on my rental properties, mainly to protect against lawsuits. What I really hate is one house I bought for $53k and it's worth about $85k now.
State Farm makes me insure it for $165k because they say that's how much it would cost to rebuild it.

Why would State Farm pay $165k to rebuild a house when you could buy two houses in the same neighborhood for that much? BTW that argument got me nowhere with State Farm.

rusty

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Re: Drop homeowners insurance on rental houses?
« Reply #3 on: February 12, 2014, 02:08:19 AM »
As a former home/auto insurance broker, the insurance contract requires the company to replace your property.  If it has a total loss (fire, tornado, hurricane, etc); the insurance company has to make you "whole" again.  The only way they can value it is what it costs to rebuild/replace it.

As far as self insuring, I doubt I would ever do that no matter what financial shape I was in.  I have clients take that risk and lose.  You also have to remember that the property insurance can replace contents (if it has replacement coverage and not actual cash value), give you a place to live while it's being repaired, pay for other structures that may have been damaged, liability coverage on the premises, vandalism, and many other perils (insurance term for risks). 

If you want to save some money, increase your deductible to your company's max.  If that's not a big saving, look for another company with a higher deductible.  In your example above, you are assuming 7% return year over year for 25-30 years and you will have to go 25-30 years to break even.   

I worked with an home/auto company for 9 years, the first 7 were pretty quite claim wise.   Year 8 and 9 were a series of two tornadoes, 2 ice storms, and 3 hurricanes.  Cost the company 1/4 of it's reserves ($270 million). 

It sounds good on paper until life happens.  To me the risk is not worth the reward.  Either way, good luck and good job on the real estate portfolio.

warfreak2

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Re: Drop homeowners insurance on rental houses?
« Reply #4 on: February 12, 2014, 02:50:36 AM »
Would an extra $170,000 be worth twice as much to you as an extra $85,000?

Insurance can be a profitable gamble if you measure utility rather than $. When your utility function is sufficiently curved over the range of outcomes, the dollars you might lose are "worth more to you" than the dollars you might save. Unless you have a lot of cash available (like an insurance company does), an instant and unpredictable loss of $85k+ is probably a respectable proportion of your 'stash, and the convexity of your utility function is likely to make more of a difference than the (likely small) administrative costs of your insurance company.

soccerluvof4

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Re: Drop homeowners insurance on rental houses?
« Reply #5 on: February 12, 2014, 05:13:05 AM »
I also self insure on my primary home but have insurance on my rental properties, mainly to protect against lawsuits. What I really hate is one house I bought for $53k and it's worth about $85k now.
State Farm makes me insure it for $165k because they say that's how much it would cost to rebuild it.

Why would State Farm pay $165k to rebuild a house when you could buy two houses in the same neighborhood for that much? BTW that argument got me nowhere with State Farm.
I self-insure on my primary home.  I think it makes great sense, however, I would look into personal liability insurance.  Other than that your logic makes a lot of sense to me.

for some reason my question didnt first appear on here. Maybe i didnt hit save!
Anyhow a few of you mentioned you are self insured on your primary property. Can you tell me how you went about this/savings and or links to something on this? I would like to look into if this makes sense for me or not.

Thanks!

When you say you self insure on your own house can you give me some particulars on that and how you go about doing that/savings etc.?

Thanks

Also do you have an LLC to separate your assets?
« Last Edit: February 12, 2014, 11:09:45 AM by soccerluvof4 »

Gordon32

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Re: Drop homeowners insurance on rental houses?
« Reply #6 on: February 12, 2014, 06:44:38 AM »
Thank you all for the insights.   

Yes, we do have the properties in an LLC.  How do I go about getting liability coverage on the rental properties if I drop all other coverage.   My understanding is I can't carry an umbrella if I don't have a "normal" policy to attach it too.  Is this right? 

Does anyone know any companies that offer more of a "catastrophic" insurance or just the liability?   Saving less than 10% to raise the deductible to $2,500 doesn't seem too appealing.

With 6 different properties, I feel as if I am diversified and eliminating some risk as if something serious (expensive) happens to one property, I still have the others to fall back on. To me, it is taking a calculated risk. 

I found a statistic on fire claims stating 0.2% of homes will have a claim due to fire damage.   Does anyone in the business have any statistics on probablity of loss?  Fire, tornado....?

Gordon



GrayGhost

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Re: Drop homeowners insurance on rental houses?
« Reply #7 on: February 12, 2014, 07:40:20 AM »
Does anyone in the business have any statistics on probablity of loss?  Fire, tornado....?

Gordon

The insurance companies do, or at least they think they do, and their actuaries are, on average, correct. (Or else they'd lose money in the long run.)

Anyway, MMM is pretty clear on this issue: you buy insurance if you can't afford the consequences of not having it.

OP, you should definitely shop around and look for higher deductibles, but life is not going to wait for you to have the cash on hand to self-insure. Your rentals could burn down next year, not a decade or more down othe line, and if that happens, you're well sunk.

You'll probably lose money in the long run with insurance, but since you cannot afford to go without it, it's a loss you'll just have to take for the moment.

arebelspy

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Re: Drop homeowners insurance on rental houses?
« Reply #8 on: February 12, 2014, 07:55:22 AM »
I also would love to get rid of it, but want it for the liability protection (and the fact that yes, umbrella policy requires having insurance first so they are a last resort).  I don't worry about getting sued, but it's not a risk I'm going to take (based on GrayGhost's quote of "if you can't afford the consequences of not having it").  I could afford the consequences of a fire, as that affects one property.  A lawsuit can affect multiple (unless you do separate LLCs, etc. etc., the cost and hassle of which isn't worth it at the level my properties are worth - it could very well end up costing more than the insurance).

So while I don't plan on ever making a claim (my deductible is 5,000 and making a claim would raise all my rates - likely not worth it), it lets me sleep at night having the liability protection and umbrella policy.

I also self insure on my primary home but have insurance on my rental properties, mainly to protect against lawsuits. What I really hate is one house I bought for $53k and it's worth about $85k now.
State Farm makes me insure it for $165k because they say that's how much it would cost to rebuild it.

Why would State Farm pay $165k to rebuild a house when you could buy two houses in the same neighborhood for that much? BTW that argument got me nowhere with State Farm.

Pick an insurance company that lets you name the amount you want to insure it for?
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soccerluvof4

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Re: Drop homeowners insurance on rental houses?
« Reply #9 on: February 12, 2014, 11:13:25 AM »
 To arebelspy's point I was able through Secura reduce my premium by 200k seeing as the dirt would still be there. In the end with a few other things i knocked off shave 600$ a year.

Gordon32

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Re: Drop homeowners insurance on rental houses?
« Reply #10 on: February 12, 2014, 11:34:34 AM »
As Mr. MM states and some of you  "If you can't afford the consequences, don't do it."   
 
So riddle me this.   What are the chances I'm going to have a total loss on all 6 of my rental homes at the same time?  They are in the same town, but not next to each other.   Chance of fire?  Doesn't seem likely.  Chance of hail damage?  Sure.   But I could afford to replace all roofs if necessary.  I could afford a partial loss (up to 100,000) but not a total.  It just seems with 6 different properties, it takes some of that risk away as opposed to having only one house worth 500,000.

The only thing I could foresee causing a total loss would be a tornado.  All the houses are within a 10 mile radius of each other.  But reallistically, what are the chances of even that happening?  Is that just FEAR taking root?   Do I allow "fear" to rule or "statistics?"   

I completely understand the liability portion of insurance due to our "sue" crazy society (seems like a more calculated risk/reward), but I'm still having a hard time spending that kind of money for what appears to be such a slight risk.

Gordon


FYI:  I will certainly look into "Secura" insurance.  Thanks.

arebelspy

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Re: Drop homeowners insurance on rental houses?
« Reply #11 on: February 12, 2014, 01:06:06 PM »
As I said, a fire affects only one.  A lawsuit can affect multiple.

If I could get liability only insurance, no fire, etc., I would.  I'd self-insure all else.

Unfortunately I've not found a product like that, so I have the max deductible I can (5k) and plan to never make a claim, and pay what I have to in order to get the liability protection.  Slight as the risk is, it would be devastating to ER.
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Numbers Man

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Re: Drop homeowners insurance on rental houses?
« Reply #12 on: February 12, 2014, 02:11:51 PM »
You're paying $750 a year per rental house for insurance. Seems like a small amount of money to pass on to the tenants.

I would just love to have a $750 insurance payment just on my house; Last time that happened was when Clinton was in office.

rusty

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Re: Drop homeowners insurance on rental houses?
« Reply #13 on: February 12, 2014, 03:55:07 PM »
Again, guys you are looking at the obvious losses.  Fire, tornado, etc.  Ice storms can cause considerable damage.  Ever had a second story pipe burst when your tenant is out of town for the weekend and it floods the entire house?  What if your tenant leaves the crock pot on.  It shorts and burns down the house (good luck getting $85,000 out of your tenant).  If you are willing to rebuild that property, go for it.  However, understand your risks and understand what your insurance policy will coverage.  You may be surprised by what it does cover and how helps protect you.   

You buy insurance to spread that risk of loss.  Consider the worst case scenario; total loss on all your property.  Is it likely; no, but could you stand it?  If you cannot or don't like the thought of actually writing that check, you should keep the insurance.  Many people say they can take that risk, but when the loss happens it's another feeling to write that check.  Same thing with risk in the market.  People love to say "yeah I want to invest in the higher risk stuff and don't mind the possible down turns."  When they lose 20% one year, it's another story.  Imagine writing that check and think about how you would feel.

Shop around or increase deductible.  Increase your rent.     

SIDE NOTE:  if you have a nice rental property, consider getting replacement cost coverage on your houses.  Actual cash value (ACV) may leave you with a less than desired pay out if you have a loss.  Replacement costs is what is costs to replace the house.  ACV is replacement cost less depreciation.  THe older the house, the more it gets depreciated.

I had several clients who owned many rental properties free and clear (30+ properties).  Each client had some type of property insurance and liability insurance.  None of them self insured.  They all were wealthy and had decades of experience in the rental business.  Again, just my opinion.  Good luck with either way you decide to go.
« Last Edit: February 12, 2014, 03:58:41 PM by rusty »

Argyle

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Re: Drop homeowners insurance on rental houses?
« Reply #14 on: February 12, 2014, 05:00:21 PM »
What about earthquakes?  That could damage all the properties at once.

And tornadoes definitely.

It's a big gamble.  I wouldn't take it.

Milspecstache

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Re: Drop homeowners insurance on rental houses?
« Reply #15 on: February 12, 2014, 11:02:55 PM »
Great discussion here.  Although what I am hearing is that if the rentals were further apart (ie different states) then perhaps you could rule out a common natural disaster.

Additionally, large assets might benefit from being in independent LLC's.

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Re: Drop homeowners insurance on rental houses?
« Reply #16 on: February 13, 2014, 04:22:19 AM »
On this matter..Self insuring your primary residence. How do you go about it/ savings/ links. I would be interested to see if this is something that would even save me more.

arebelspy

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Re: Drop homeowners insurance on rental houses?
« Reply #17 on: February 13, 2014, 07:30:18 AM »
On this matter..Self insuring your primary residence. How do you go about it/ savings/ links. I would be interested to see if this is something that would even save me more.

You cancel your insurance.  Save up in case something happens.

You can't do this if you have a mortgage, as a lender will want insurance to protect their interest.  But if you own it free and clear, and are okay with a catastrophic loss, it really is that simple.
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