Sunday, December 25, 2016

Landlord Insurance?

Several advertisers on this site offer "Landlord Insurance" - is this a good deal?  Probably not.

In reviewing the ads on Google AdSense, I noticed more than one for "Landlord Insurance" which intrigued me.  Being a landlord is a risk-taking venture, and in any risk-taking venture, someone will no doubt offer to insure your risk to provide "peace of mind."  But like extended warranties, whenever someone tries to sell you "peace of mind" you should keep one hand on your wallet.

As a landlord, of course, you have to have insurance.  Usually a commercial homeowner's policy that covers a rented property against fire and other damage is required by your bank - and is a good idea even if you don't have a mortgage.  Liability insurance is also needed - and an umbrella liability policy should also cover excess liability if someone slips and falls on your sidewalk.   Be sure to tell your agent the property is rented out and make sure both policies cover rental properties.   Otherwise, claims may not be paid.

But what these ads on my blog are selling is something slightly different.   Some are offering, in addition to property coverage and liability, "Landlord" protection against eviction, vacancy, and loss of use.   This kind of landlord insurance, in my mind, is as pointless as an extended warranty and about as worthless.  As I noted in my extended warranty posting, as both an Automotive Engineer and a Lawyer, when it comes to repairing my car, I'd rather play auto mechanic than lawyer.   The former gets the car fixed, the latter results only in aggravation.

An extended warranty is a contract - a huge contract in fine print with a lot of exceptions which cut only in favor of the warranty company.  So if you go this route, you spend your hours going through pages of documents and arguing with people on the phone about who pays for repairs. Your car sits disassembled in a shop somewhere while you get "pre-approval" for repairs or have it towed to a shop of their choosing.

Or the company has gone bankrupt (and they do regularly) and you've wasted thousands of dollars on a useless warranty.

If you are so damn scared of owning a car, maybe you should be taking the bus, or buying a less expensive car you can afford to walk away from.

In landlording, the same is true. It is a risk-taking venture, like buying stocks.  Would you buy insurance on your stock investments?  Maybe someone offers such a thing - but I doubt it.  And if the stock market crashed, I doubt it would pay off. You can ameliorate risk in stock market investing my spreading your investments among a number of stocks, bonds, and whatnot - diversifying your portfolio.

In the landlord business, you do have control over a lot of the aspects of your investment, which an ameliorate risk as well.  You can do background checks on your tenants.  You can invest only in better neighborhoods.  You can charge reasonable rents to prevent turnover and vacancy.   You can do some repairs yourself to save money.   You do have a lot of control over the process.

Even then there is risk.  Tenants can stop paying rent and you then have to evict.  If this happens, evict promptly and quickly and move on.  Don't drag out the process by delaying by even a day - or listening to long-winded sob stories from wily tenants.

Would landlord insurance help?  Maybe.  But it seems to me that bleeding to death slowly by paying insurance premiums is just as bad as having the occasional vacancy or even eviction. And if your finances are spread so thin that you can't deal with vacancy or even eviction, maybe you shouldn't be investing in Real Estate.

One reason I shied away from buying more investment real estate is that I realized that if the shit hit the fan and all my tenants stopped paying rent, I could still afford to "carry" the overhead costs of the properties.   If I doubled my portfolio, this would not be true, and I could end up in a bad place in a real hurry.

This is not to say you should not insure the property - your bank will require that. And a lot of "Landlord Insurance" policies cover what is covered by a basic homeowner's policy.  By the way, if you are renting out a property, make sure your homeowner's policy covers rental use - some do not and cover only owner-occupied dwellings.   A commercial policy may be necessary.

And it goes without saying, that an umbrella liability policy that covers you and your rental properties is a good idea in case someone falls through the front porch or whatever.  Again, make sure the policy covers your rental properties as well as your own home and cars.  Usually they ask this on the application form.  And no, lying on the application is not a good idea, but a way that allows the insurance company to legitimately deny your claim.

But some optional coverage (which was apparently advertised on my blog) may include loss of use, loss of rental income, and some even cover the cost of evicting tenants, etc.   I am not sure this is such a swell deal, as the premiums would be correspondingly higher, and insuring something that is at least partially in control of the insured seems kind of weird to me.

It is like these car - and especially boat - policies that offer to pay the retail price of a new car or boat if you wreck or sink your existing car or boat.  It is a 100% incentive to set fire to your car or sink your boat, if they promise to give you a brand-new one, without even a deductible.  Such policies can't be cheap, as they are certain fraud-bait.

There are two kinds of people in the world, I think.   The first kind looks at insurance policies like a Chinese menu - figuring out what claims they would like to file.   These are the kinds of people who get low-deductible policies and file claims often.  The complain if the claim service isn't fast or efficient.   They don't understand why anyone would want a lower-cost policy or high deductible.  To them, insurance is all about what you get paid, not what you pay.

The second group, which includes me, views insurance as a necessary evil in a world where there is risk.   But it is an evil to be minimized as much as policy.   We would like to pay as little for insurance as possible, as we don't plan on filing claims, if at all possible.   And we are not interested in coverage for trivial things like broken windows, which we can repair ourselves.  We are just interested mostly in catastrophic coverage for when the shit really hits the fan.  And we want the lowest possible price and could care less how fast or efficient the claims service is.

Sadly, it seems the first kind of people dominate the world - they want something-for-nothing and want to "make money" on their insurance policy, which is very hard to do.   These sort of folks drive up insurance costs for the rest of us, and they are one reason Obamacare is so damn expensive.

In the long run, though, the first types never win.   Sure, they will regale you about how they got free carpeting in their house when the washing machine overflowed.   But like gamblers who like to tout their "wins" but forget about their losses, the first types will never talk about the high premiums they paid for decades.   And the analogy is apt, as insurance is indeed a legalized form of gambling - albeit a necessary one.

I think I'll take a pass on "Landlord Insurance" for the time being.   Property and liability coverage really is all that I need.