Ashley:
Today we’re tackling one of the biggest questions in real estate right now. Why are insurance premiums rising so fast and what can rookie landlords actually do about it?

Tony:
Whether it’s fire risk in California, floods in the Gulf, or insurers pulling out of entire states, rookie investors are facing a whole new kind of deal breaker. So we brought in someone who’s not just watching the industry shift, he’s actually building it.

Ashley:
Darren Nix is the CEO of Steadily, a landlord-focused insurance platform and a real estate investor himself. Today, he’s here to break down what’s happening, what’s coming, and how rookies can protect themselves in this volatile new landscape. This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson, and let’s give a big warm welcome to Darren. Darren, thanks for joining us today, brother. Glad to be here. Thank you all.

Ashley:
Darren, I want to start off with why are insurance premiums rising so fast? And is there anything that rookie landlords can do about it?

Darren:
One word, hailstorms. So over the last 10 years, the frequency of hailstorms has increased across the US, and the rate at which folks are filing roof claims has increased even faster than the number of storms. And the insurance industry took quite a while to catch up, but now they have. And as a result, we as real estate investors are seeing very rapidly rising insurance rates, in some cases, 25, 50% year over year.

Ashley:
Darren, does this have anything to do with … I’ve seen the social media videos of roofers who are actively going out and basically showing homeowners how to submit a claim to get their roof replaced so then they make the sale on it.

Darren:
Yes, that’s about 80% of it. And the reality is there’s no such thing as a free lunch. So if the number of roofs being replaced is going up, then insurance premiums are going up too, because at the end of the day, the dollars are moving from one bank account to another, and it’s ultimately the insurance policyholder that’s going to be paying.

Tony:
Darren, how much of the … You said that’s 80% of it, so the other maybe 20%. Is that just climate related or do you think it’s landlord mismanagement or they’re not doing enough preventative maintenance? What else is driving this aside from maybe some of the bad actors in the industry?

Darren:
The other 20% is actual increase in hail frequency. So if you look at storm data, you have it going back 60, 70 years, and there has been an increase, but it’s fairly small. And so that’s the 20%. The 80% is people’s behaviors have changed. And by behavior change, I mean, there’s a lot more people knocking on doors saying, “Hey, there was a storm last week. Would you like to get a new roof?” And that’s what’s driving up insurance claims. And so what that leads to is the answer to the second part of your question, which is what can you as a rookie do to reduce your cost of insurance? There’s good and bad news. The bad news is that this year there’s nothing you can do. Your price is already baked in, but next year and the year after that, the single biggest factor that will drive your insurance premium up is having had a claim at any point in the last 10 years.
And so the thing that a rookies can do is to set themselves up so that they’re going to have fewer claims across all of their properties. And over their lifetime as an investor, that’s going to save them a ton on insurance because this gets to a point that is going to underline everything we talk about. If you over your lifetime get paid, let’s say $100,000 in insurance, you’ve probably paid $140,000 for those claims. Let me put it differently. For every dollar of claim payout that an insurance company makes, they have to collect about $1.40 in premium to cover the cost of adjusting the claims, litigation, claims adjusters, support reps, et cetera. And so for us as investors, the single thing that we can do to reduce our cost of insurance is just to buy less of it. And in order to buy less of it, we have to set ourselves up so that we can cover the small things that happen to our properties out of pocket and run higher deductibles so that we’re not having to buy horrendous amounts of insurance at a very high cost, but it takes time to get there.

Tony:
Darren, what does it mean when a market becomes uninsurable? For example, I’m in Southern California. I’m maybe 50 miles east of where the Palisades Fire and the Eden Fire were, and my insurance router for my primary residence left the state and we had a really hard time shopping around trying to find someone new. So what does it mean when a market becomes uninsurable?

Darren:
It means one of two things. It means that the prices have gotten so high that no one is willing to pay those prices anymore or that the regulatory market has gotten so difficult in that state that no insurance company wants to operate there. And it’s usually number two. There’s a saying in insurance that there’s no such thing as bad risk, there’s just bad rates. And what they mean by that is if you approached an insurance company and pointed to a building that was on fire and said, “What would it cost to insure that property?” There is a number at which it would make sense to insure that building. It’s probably something close to 90% of the value of the property, but there is a number, but no one would pay it. And so if prices get so crazy high in a market, you might see insurance companies stop offering coverage because nobody wants to buy it at that price, but that’s pretty rare.
Specifically in California, what you’re talking about is the California regulatory environment is set up in such a way that there are very strict controls among how much insurance companies can charge for insurance, and that tends to hold down prices for insurance, which is nice as an investor. It keeps a lid on our prices. But the problem is that over time, if the actual losses get totally out of whack with how much premium the insurance company is bringing in, then they’re losing money every year. And at some point they’ll go back to the state and say, “Hey, I need to raise rates because I’m losing money every year.” And if the state says no, then the only option that the insurance company has is to pull out. And that’s what happened in California. For three years, there was a moratorium on any price increases for insurance, and meanwhile, inflation was going through the roof.
So most of the admitted insurance companies in California, especially those that were riding in wildfire areas, have lost so much money on California, and so their response was to full out.

Tony:
Darren, one follow-up to that. You talk about inflation, and obviously that’s impacted everyone, right? Investors, non-investors, just people living their everyday lives. How has inflation, whether it be labor, raw materials, is that also maybe a driving factor in what’s happening with insurance premiums? Lumber has gone up, labor has gone up. How big of an impact is that on insurance premiums right now as well?

Darren:
The price of insurance historically has tracked almost exactly to the price of inflation as long as other behaviors are changing. So if you see that inflation last year was 5%, you should also expect that your insurance is going to go up 5%. It’s only when things get really out of whack like during COVID where the cost of construction materials and the cost of construction labor was much more inflated than the overall inflation rate for the country, and that in turn did impact the price of insurance. One of the good news though is that that has cooled off a lot. And in some states, insurance rates have started to come down. So some folks in California and Iowa, for example, are actually seeing rate decreases year over year.

Ashley:
How can investors accurately underwrite a deal with insurance costs? Are there things that maybe investors may be doing wrong or some tips that you have to get an accurate number when you are trying to analyze a deal?

Darren:
What I’ll typically do when I’m looking at a new deal is go and find one of the calculators where all I have to do is enter in the address and the year built to the property and come up with a ballpark number, and that’s generally going to be plus or minus 25% of the real number. So that allows me to compare a lot of properties. I know that BiggerPockets, for example, Three Steadily has that feature built into the website, and that’s great. It saves a ton of time. Once I get down to two or three properties that I’m serious about, I’ll typically call up my agent and say, these are the three properties. I want an actual quote for these. I’m not ready to buy yet, but tell me what it’s going to cost. So then in case there’s a surprise, I will know about it.
And the things that are going to drive surprises on the price of insurance are going to be the year built of the property and the roof condition and how much active work is going on on the property. If a property is currently vacant and it’s getting rehabbed, that’s going to be a substantially more risky property from an insurance company’s perspective than one that’s rented long-term and has consistent tenants.

Tony:
Darren, I’m also curious, because there’s a lot of people who are holding properties right now. How can we stress test our current portfolio? Put another way, how do I make sure that my market, or at least how do I identify whether or not my market is at risk of insurers pulling out? Are there certain queues that I should be looking for to know if I’m maybe at a greater risk of my insurance provider leaving?

Darren:
It’s pretty stable year to year across different geographies. So for example, if you own properties in Arizona, Indiana, Illinois, nobody’s pulling out of those markets and you should be in good shape. If you’re in California, Florida or Texas, maybe even Washington state, those are states that have a lot of weird dynamics going on from a loss perspective, and that’s going to trickle into weird insurance behavior.

Ashley:
Coming up, we’re going to break down the difference between a homeowner and landlord insurance and how misunderstanding this could actually cost you thousands. We’ll be right back after this short break. Okay. Welcome back. We are here with Darren from Steadily. Darren, for someone brand new, getting started in real estate investing, what should they look for first when they get an insurance quote?

Darren:
They need to make sure that the policy specifically speaks to the fact that they don’t live in it. So where homeowners sometimes get themselves into trouble is where they bought a homeowner’s policy on a property, and then they keep that policy in place, but they move out and they buy another property and move somewhere else, but they keep that dwelling on a homeowner’s policy. Now you’re in a weird situation because one, you might have some vacancy that the policy never contemplated. Two, that insurance policy that you had on your home was underwritten, assuming that you live in it, you were underwriting you to live there. And as soon as you bring in tenants, now the types of losses that you’re going to experience on that property are going to change, and your policy is likely written so that it doesn’t cover that. And so the overall rule that applies to every scenario is you can generally let insurance ride without checking on it for years at a time, as long as nothing’s changed.
But when something changes, like you move from a long-term rental to a short-term rental, you decide to do a bunch of work on the property, you add an ADU or something big like you actually move out of the property, that’s when you need to call your insurance company and say, “This thing happened. I want to make sure that my policy is going to cover this scenario.” Something that’s made my life a lot easier as an investor is back in the day, if I really, really was worried about something, every once in a while I would go and actually find my policy and go look at that specific section and see how many days of vacancy am I covered for, for example. But now with ChatGPT, it’s super easy. So when I have a question, I just take the policy, upload it to ChatGPT and just ask the question, and it’s so good at finding the thing and says, “Yep, you’re covered for 45 or 60 days or what have you.
” And that difference from homeowners versus landlord insurance that you’re asking about, what it really goes to is what are the different scenarios that it’s going to cover because the landlord policy contemplates tenants, whereas the homeowner’s policy does not.

Tony:
I love the use of ChatGPT for these big dense contracts that we get because oftentimes we don’t read the fine print, but using those tools I think is a great way to understand all those nuances. And I guess along that same line, if we even maybe take a step back before we get the actual policy, usually as an investor, we get a quote from different insurance providers. Can you break down the anatomy of an insurance quote and what are the things that are typically included and what do each of those different categories usually represent? What do they stand for?

Darren:
The three things that you should look for in your policy that matter the most are number one, the replacement cost methodology. We’ll come back to that. Number two is your dwelling limit, which is what it sounds like. And number three is your all perils deductible. So this is the, in most cases, what is your deductible going to be? The first one is a gotcha, and it bit me on my very first rental property. I bought a three-unit walk up in Chicago, and when I was talking to my insurance agent, the very first quote that I got was for $6,000 a year for it, and my care was just blown back. I was like, “That’s more than I’m going to make in rent in a month on this property. This is crazy.” And so I went back to my agent and said, “I want the cheapest policy you can get me.
” That’s literally what I said. And so a week later, he came back with a policy where that was 2,700 a year. And I said, “Great, I bought it. ” And two years later-

Tony:
I can tell this story is about to get much worse after. Oh yeah.

Darren:
Oh yeah. Two years later, I looked at the policy and I noticed this term on it that said ACV. It’s like ACV. What is ACV? So I call him up and I’m like, “What is this ACV thing?” And he says, “Oh, that’s actual cash value.” I’m like, “I don’t understand. Explain it to me. ” And he’s like, “Well, there’s replacement cost, which is what you think it is. ” And then there’s actual cash value. And he’s like, “So for example, if you have a 20-year-old roof, the actual cash value of that $30,000 roof is like 2,000 bucks. So if your roof gets damaged, the insurance and insurance policy is going to pay $2,000 for that roof because that’s the actual cash value.” And so that was an eye-opening moment for me because I realized two things. One, I didn’t actually want literally the cheapest policy.
I wanted the most affordable policy that would get me replacement cost. And two, I needed to be very mindful of when a thing happens, what is it that I want my insurance to do? So for example, a limit that a lot of people ignores their liability limit. Liability limits might be 300,000 is kind of the lowest that you see. Half a million is pretty typical, and they can go up to a million or two million. And what that covers are the events that happen about once in a hundred years to most investors. You’ll probably go your entire career as an investor without them happening, but when they do happen, they’re fatal. They will bankrupt you. So for example, we have 110,000 customers across the country, so if it can happen, it has happened to us. We’ve seen it all. And we’ve had multiple customers that unfortunately have had homicides happen on their properties, and it’s not a big number.
It’s like less than 10 people out of our 100,000. But when it happens, those are lawsuits that are going to be five to 30 million. And so any assets that the investor has are likely going to end up getting paid in those claims. And that’s when folks are wishing that they had a million or even an umbrella policy with two to $5 million in coverage to cover their legal defenses and to cover settlements and things like that. And so if I was going to add a fourth thing to look at when you’re looking at an insurance policy, we’ve got what’s the valuation method? Is it ACV or is it replacement cost? We’ve got your coverage limit on the property, your deductible, and then lastly, your liability limit.

Ashley:
When I got started, liability was always my biggest fear. I thought the day I closed on my first property, the roof was going to blow off and I couldn’t pay to replace it, and a tenant was going to fall down the stairs and sue me. And I actually just saw an article today where some woman had tripped over a curb in a Target parking lot. Target

Tony:
Parking lot. I saw that

Ashley:
There. Yeah, one of $11 million. And it was because the curb wasn’t up to code and there was actually code violations that were engrossed in it, but it was just like, wow, just that simple thing happening that would destroy me if I didn’t have the right insurance coverage, a lawsuit like that.

Darren:
And this is a feature that I think a lot of us know very well is that in the United States, there’s a very huge gulf between will you win a lawsuit and will you get sued? And so there are many, many, many things that you will get sued for that you might be in the right and you might ultimately win that lawsuit, but you’ll spend half a million dollars over the course of four years defending it.

Ashley:
I used to work for this auto dealer and they would get, the garage door once came down on somebody’s head or whatever, the automatic door and tapped their head and they sued for a million dollars. And the insurance company literally said to them, “It is cheaper just to settle than to actually go through.” And the whole thing was anytime somebody tried to sue them, basically they just, the insurance company said, “We’re going to settle. It’s cheaper for us and everybody would win.” Yeah.

Tony:
It’s so unfortunate that we live in such a litigious society where even if you are not in the wrong, you’re still forced to settle for financial reason because it makes more sense. But I think you bring up a really important point, Darren, about the difference between the dwelling, the actual property itself and covering that, but then also the liability that comes along with people coming in and out of your residence. Most of my properties are short-term rentals. So not only do I have one family staying there for 12 months, we’ll have multiple families staying there for two days and we’re doing that multiple times a month. So even more kind of liability that we expose ourselves to. So on that note, are there any optional coverages that maybe Ricky investors often skip, but that you think would actually be very, very beneficial for them to include?

Darren:
One of the ones is specific to short-term rentals. So a landlord insurance policy typically assumes that the building is a vacant. And so you might have a rich refrigerator or a washing machine or something like that, but you don’t have a lot of contents in the property because it’s not furnished. So you don’t need to buy, let’s say that you have a $400,000 property. You don’t need to buy 1150 or $200,000 worth of coverage for contents the way that a homeowner would because it’s empty. And so that actually lowers the price of insurance. But if you have an STR, and especially if it’s nicely furnished, if everything in that property got swept away all the way down to the studs, what would it cost you to completely re-outfit that home? In many cases, it’s 25, 30, 40% of the overall cost of the property. And so that’s something to look at because a conventional landlord insurance policy is going to assume that it’s basically empty.
So we’ll have a low contents coverage. If you have an STR, you’re going to want to kick that up and think hard about literally it’s a shell. There is nothing in it. No appliances, no fixtures on the wall, nothing. What would it cost me to get it habitable again? And that’s the amount of contents coverage that you need. And it’s very often three times more than people initially think. Somebody came to me the other day and said, my wife actually, she’s like, “Darren, I’m looking at our insurance policies here for our house.What do you think our contents would be on the house?” And I said, “Oh, I don’t know. Let me think my laptop things like 20 grand.” And she’s like, “No, it’s like 150K.” It adds up quickly like you think of

Ashley:
Her thing. Just my kids’ sports memorabilia. My God, I have to get security just for their bedroom with all the stuff they’re collecting. True. Well, Darren, I’m curious as to before a rookie investor even buys a deal, what are some red flags they should look out for before even purchasing a property that may increase their premium? For example, I went to go buy a house, a duplex one time and it was considered a row house because it was so close to the building next to it. And I had a really hard time finding insurance and I actually had to pay a lot more than I would’ve if the property was like any of my other duplexes in that same town. But because it was so close, the premium was outrageous. So are there red flags across the board that rookie investors should look out for before even purchasing a property?

Darren:
The only real red flag that I can think of is knob and tube wiring. As soon as you go to a world where you’re not running on a circuit rator with updated electrical, the number of options, the number of carriers that will offer coverage for that property gets really small, and that’s going to make it take a lot longer to get insurance and the cost is going to be higher. It can happen. You can still get there, but it’s going to take more time and money. The other things are factors that are going to drive up your price 10, 15%. So yes, you mentioned row houses, and the reason for that is fire. So if you think about insurance companies, they’re looking at the last hundred years of data and they’re saying, “When did I lose a lot of money?” And when they have one standalone house, that house burns down, nothing else happens.
When you have a duplex, okay, to burn down. When you have a five in a row townhouse, tends to spread, and if you have 20 in a row, wow, now you’re talking about enormous losses. And so insurance companies are always trying to figure out how they can make their risks not coincide with each other. So if I insure 20 properties that are all in different neighborhoods around town, the odds that all 20 of those are going to burn down on the same day is zero. But if all 20 of them are connected in a row on a townhouse, the odds that all 20 of them are going to burn down on the same day goes from zero to not zero. And as a result, the price of insurance is going to go up quite a bit for those. So I wouldn’t call them red flags, but townhouses, houses built prior to 1974 are going to be more expensive than those built after because building codes changed, houses built before World War II are going to be another jump.
Houses that have anything really special or unique about them like converted barns, converted churches, those sorts of things. The cheapest properties to insure are going to be the most boring properties. So a subdivision house in Phoenix is going to be rock and bottom cheap to insure. There’s no hailstorms there, there’s no wildfires, there’s millions of them that have been built, and those are, as a result, going to be perceived as very safe investments from an insurance company.

Tony:
One last question, Darren. On that same note, are there any other markets that come to mind for you where from an insurance cost perspective, they’re some of the best places to invest? You mentioned Phoenix. What are some of the other best markets you’ve seen specifically from an insurance cost perspective?

Darren:
The markets like Nevada and basically all of Arizona, even Indiana is pretty good. Ohio is fairly affordable. Pennsylvania, as long as you’re a decent distance away from the Eastern coast, you’re basically thinking about where do crazy things happen to properties, either in the form of hailstorms or hurricanes or wildfires. And any of the states that are not heavily forested don’t tend to get huge amounts of hail and aren’t close to a coast, are going to be fairly cheap to insure, at least on a cost per square foot basis. Certainly as you get out to places like Massachusetts, now you’re talking about $750,000 million home. So those are going to be the total amount of premiums going to be buyer, but on a per square foot basis or per dollar of coverage, it’s still fairly affordable.

Tony:
Darren, I want to talk about the future of landlord insurance and just get your take on where you think the industry’s going. And we’ll cover that right afterward from today’s show sponsors. All right, Dan, my next question is where you kind of see the landlord insurance industry heading. I think you’ve got a really unique perspective because of the seat that you sent in as a CEO of Settlely. Right now, if I want to shop for car insurance, I can almost get a quote instantly for most places in a matter of minutes. For landlord insurance, I think there’s still a little bit more steps involved with that. Do you see us getting to the point where I can open up my phone, type in an address and get a quote that’s like 99% accurate, or are we still maybe some ways away from that?

Darren:
Very much so. So that’s Steadily’s objective and that’s where we’ve been building toward for the last five years. And I think as time goes on, we’ll see more and more carriers moving toward that level of automation until it gets very close to what it looks like for auto insurance. The main difference between homeowners and auto though is that on the auto side, they have so much information available to them that’s completely standardized. If I tell you that I drive a 2020 Honda Civic with 50,000 miles, pretty much tells you everything you need to know about that car. Whereas on the property, there’s so many other things that can be different about a property, especially as you get into ones that have been built 20, 25 years ago. So I don’t think it’ll ever be quite as easy or simple as auto insurance, but it’s already pretty close.
And we’ll see more and more people over time getting to that level of ease of use where you can get a quote in two minutes as opposed to a week.

Ashley:
One last piece that I want to touch on is midterm rentals, people who are listed on FurnishFinder and then also short-term rentals on platforms like Airbnb. So we talked a lot about homeowner’s policy, long-term landlord policies, but what about short-term rentals as far as the side of risk? We talked about having content coverage, but are there any other optional coverages that a landlord or a host should be incorporating in their property?

Darren:
One of the extra coverages that STRs or Mitter Rentals can think about is coverage for damage that tenants do to the property because typically insurance excludes what’s called willful acts. So it’s supposed to be for things that were accidental, but in the case of tenants, it gets kind of murky because you’re the owner and you had a tenant, and if they came in and threw a rager and just trashed your property, you didn’t intentionally do that. I mean, somebody intentionally did it, but you didn’t, and you want coverage for that. So that’s something extra that folks can pick up on their coverage. It’s not cheap because Airbnbs do tend to get damaged at a fairly high rate, but it can give a newer investor peace of mind that they’re not suddenly going to have to come up with 10 grand out of pocket to cover damage.
But I want to go back to something that we opened with, which is as a rookie investor, it’s perfectly fine to be shopping for a really low deductible with the goal of pretty much anything bad that happens insurance is going to pay for. That’s a reasonable thing to do because it will smooth out your earnings over time, but you’re going to pay so much for insurance to do that. And what you would hopefully be building toward as you build up a bank role is a world where you can self-insure the small stuff and only use insurance for the big stuff. And so when I started investing, I was looking for 500, $1,000 deductibles because no matter what happened, I wanted to be covered. But as I built up my portfolio, I instead started thinking, man, for every dollar of coverage that I get, I’m paying a buck 40, so I can actually increase my rate of return if I just buy less insurance, but I have to be able to handle the shocks.
And so over time, I’ve moved my deductibles up to 2,500 and 5,000, and now they run like $10,000 deductibles. And so what I’ve done over time is I’ve raised the upper limit of how much insurance I carry. So now I carry five million in liability, but I have very high deductibles. And as a result, my cost of insurance is actually less than what it used to be as a rookie, even though the upper limit of how much insurance coverage or production I have is much, much higher because I no longer submit claims for 2,000, $3,000 small stuff. Instead, the claims that I submit once in a blue moon are for a million dollars.

Tony:
Darren, you brought up a really important distinction here, and we talked about liability and what that protection means. We talked about the premium, but we didn’t really talk about the deductible. So for our Ricky investors who are listening, can you define what that is and why is it beneficial for you to have a higher deductible?

Darren:
A deductible to compare it to health insurance is a copay. So when you have a claim, they’re going to say, okay, it was a $30,000 water claim, pretty typically what a water claim is. If your deductible was 2,500, then the insurance company is going to pay 27,500 and you’re going to kick in the other 2,500. And the reason for the deductible The goal is to disincentivize folks from filing small claims. And so the lower the deductible is, the insurance company knows that means more small claims. And so the price is going to go up a lot.

Ashley:
I just listened to an episode recently on BiggerPockets Money podcast where Scott Trench went over the same thing with his portfolio that he has all of these really high deductibles that he carries for that exact same reason. He pays very, very low premiums on it. But Darren, thank you so much for joining us today on Real Estate Rookie. Thank you so much for sharing your knowledge and giving an insight look into policies for rookie investors. Where can people find steadily reach out to you and get more information?

Darren:
Please come to steadily.com to get a quote. We exclusively serve real estate investors like all of you on the podcast and certainly me as an investor. And so we’re built by investors for investors.

Tony:
And I just want to add before we close out, this steadily mug that I have right here, this is not because Darren’s on the podcast today. I actually have this with me on literally every recording. It’s just off to the side, but I figured since Darren’s here, I’ll put it front and center for today’s episode. I love it. That’s high quality swag.

Ashley:
Well, thank you guys so much for listening. I’m Ashley. He’s Tony, and we’ll catch you on the next episode of Real Estate’s Rookie.