Sarah: Tonight, Alex Bell who is also my insurance broker has helped me close on many properties. He's the VP of the Realty division of MyCor insurance and also a real estate investor himself, and has a lot of different insurance solutions for whatever the real estate strategy you folks need. It can be everything from just the typical buy and hold stuff to very complex. Like I was talking to Alex earlier today about a house that we just bought that went through a fire and we bought it obviously afterwards, but it's completely empty. There's going to be different things, different needs, different insurance for all the different types of properties.
Today, Alex is going to be talking about insurance needs and what is new, what insights because there's always changes when it comes to real estate investing in different categories. Tonight, we're going to talk about the latest and the insights and what we need to know from an insurance standpoint. Alex, welcome.
Alex: Thank you, Sarah. Thank you very much. It's nice to see everyone again. What we'll do tonight is we're just going to take the next 15 or 20 minutes. It is insurance and I don't want to put everyone to sleep, but there's been a lot of changes within the industry over the last couple of years and maybe even a year before COVID. There are trends and challenges that investors are facing every day. I get calls every day. I guess more or less the takeaway after this conversation is go back and check your policies.
The devil's in the details and for newer investors, they think it's very straightforward. It's like buying house insurance or car insurance for that matter. That couldn't be further from the truth. Like with all in all as Alfonzo was touching on with all insurance, it doesn't matter what type of it is the devil's in the details. You really need to know what strategies. You'd like what you're looking for when you're putting together a pro forma and you have to find the proper or right insurance solution for that.
If I could just back up for a minute, for the newer investors that are new REITE club members. The appetite or capacity for investment property insurance traditionally has been very limited over the last few years. It's very limited. The underwriting is tightening up. Carriers, they're pulling out of certain provinces, they're excluding coverages and things like that. We'll do a deep dive but what I'd like to do is talk about a particular investing strategy and the insurance challenges and solutions that meet those particular risks.
For the purpose of the discussion tonight, we'll break it down into two silos. The first silo will be coverages. There's four or five coverages we'll cover here that are unique to investment property insurance. You would never find these on standard house policy wordings, and then we'll get into why this is important. Insurance is all about risk transfer everyone. I'm sure the REITE club does a great job, teaching the various strategies and the risk involved when you look at doing a particular deal.
It doesn't matter what the strategy is, with every strategy there's risk associated with that and the purpose of insurance. The main purpose is funding the deal. The bank will actually release your funds. You can close on that problem. The main high level overview is transferring risks onto the insurance carrier. That's the first thing we'll talk about. We'll talk about challenges that are actually happening in today's market, challenges that I see every single day and what the investor proactively needs to know to meet those challenges.
If we can go to the first slide. The first coverage is what's called a vacancy allowance period. This is something that when I started to review portfolio was sophisticated investors. Most of them are not even aware that this exists. Most investors in the application of this are very important, and what it really boils down to is for those who love the BRRRR strategy. Sarah Larbi and those who liked student rental strategies, this is very important. 99% of the insurance carriers out there, when you read the fine print, it says that the coverage is only included up to and including the 30th day of that property while it's vacant.
On the 31st day, if you haven't worked with your insurance provider and either purchased, what's called a vacancy endorsement or what you want to do ideally is find an insurance policy that will provide 120 day vacancy coverage. This was what I found as a great deal of it. Exposure for the foreign investors over COVID. As everyone knows, when people were doing deals, permit offices were closed. There were just so many barriers because of the pandemic that people weren't able to get.
Typically, I would say a duplex conversion would take anywhere from 90 to 120 days. Sometimes it's longer, but in a normal market. Typically, that is the case. A lot of people, and I have not had my personal clients, but I have heard of people within the industry that weren't aware of this vacancy allowance period pop to only including 30 days. That is very important how that relates to student rentals.
There's post COVID and and during the COVID outbreak as well. What we'll talk about is the COVID exposure. What happened was a lot of these students after a certain period of time, it was all online learning. They were pushed towards that. Most students went home. I had a lot of clients call me and said, hey, listen, the students have left. Whether they're paying the rent or not is another conversation, but that property now is sitting vacant and it's going to be sitting vacant for more than what would typically be from the end of school in June to September which is roughly or approximately 120 days.
What we had to do is in certain cases, we had to put on a vacancy endorsement above and beyond that 120 day policy to make sure that we're properly covered. That's a very important one. Again, something that even the seasoned investor is not really aware of the next coverage is tenant vandalism. Once again, very unique to the real estate investor. Historically, I would see now, again, most carriers that the limited amount of carriers that will play in insurance investment properties. This is an exclusion. They don't normally cover this. There are some carriers out there that this is a part of their normal or standard wording.
Traditionally, I would see a claim arise from this when someone was going through the eviction process. For those unfortunate people that have had to go through that. That's what I haven't had yet. But what typically happens is by the time you apply, go through the office and whatnot. When the sheriff serves that tenant, they have approximately four months before they need to be removed. Professional tenants and maybe not even professional tenants, but just some tenants. They know that they've got that date marked on their calendar, on their phone.
They know when they're coming to get removed from the property, not in every case, but in some cases, so low trash the place. I've seen some real nasty ones where this dog feces all over. They left the bathroom running upstairs, the bathtub and waters drained down to the secondary suite in the basement, some real nasty ones. That is a unique coverage that I believe that every investor should have, it's very important.
Next coverage is flood insurance. We'll talk about flood insurance and sewer backup. In my opinion, flood insurance is the most important coverage to have. The reason being is that's most likely where you will make a claim, it doesn't matter whether it's your principal residence or being one of the properties in your portfolio. 75 to 80% of the claims right across the Canadian insurance markets are water-based.
The majority of those are floods. Everyone can recall not too long ago, the lower mainland got hammered by atmospheric floods or atmospheric raining, something like that. It's happening with the change and global warming weather patterns, whatever you want to call it or chalk it up to we're starting to see a flash flooding more often than we used to in the past as a result of this.
This increases the risk to the insurance carrier. Rain bombs, there you go. Thank you, Tracy. What's happening in the insurance marketplace always takes a year or two to catch up from what's called a catastrophe or a catastrophic loss. We haven't quite seen the impact on rates from that particular flood, but that's for another conversation, but so what's happening is more specifically out in Western Canada than Ontario. A lot of the carriers, they're in the business of assessing risk. That's what they do. They are excluding that.
The first measure is the increase in flood deductibles. The second measure they're taking is they're actually excluding it specifically from the post. And this is very important. Again, not only do you want to, especially if you have a large portfolio in a certain pocket or postal code out in Western Canada it's very important. The reason being is you need to make, if you're refinancing a property or even going to close a new deal with a B lender.
They concluded that it's more likely than not that the minder is going to bring a risk manager into the scenario and that the risk manager will set out insurance requirements. One of those that probably the most important requirement will be that the policy wording covers. There's certainly a gap within certain pockets of Canada. It's becoming a real challenge. The standard insurance carriers or markets with the exception of one that I work with are definitely increasing and some of them are even excluding.
What happens then is I have to go into the secondary market or high risk carriers, which is not good for investors because the premiums associated with that are definitely considerably high. Let's talk about sewer backup. Very important coverage for the investor that loves the BRRRR strategy. When you are creating wealth or adding additional revenue the most common scenario would be a duplex conversion. When you're adding a new building with a renovation budget, creating another unit or door in that basement, you want to make sure that's properly protected.
What we find in the insurance industry is that certain townships or municipalities are more likely due to the age of their sewage or infrastructure are more likely to have sewer backup losses than say newer areas. I'll use Downtown Hamilton as an example. Hamilton used to be a very hot real estate market, maybe seven, eight years ago. I'm starting to see a trend back into the Hamilton area. Actually, the pricing is becoming more affordable for investors. They're slowly starting to venture back to Hamilton.
The insurance carriers when they have all their data and they look at the pockets. A lot of people and again, the sewer backup coverage. It certainly could be on an insurance requirements set out by your lender. That's it's becoming more challenging to find that coverage in, as far as today's marketplace is concerned. Finally, the last coverage that I'm finding I just had a large claim, a large loss with respect to this type of exposure.
What's happened with the new legislation in Canada. The federal government has changed the definition of what controlled substances are. How that related to the insurance industry was if you had any country, when again, this is when you do a deep dive into the minutia of the policy wording. For just a classic example. If one of your tenants and I have had clients go through this kind of left a cigarette unintentionally caused a fire, burnt three units in their multi unit building that was covered because it was a cigarette.
What's happened now, this is good news for investors. What's happened is with the change in the legislation. It takes insurance carriers a while to catch up to legislation or technology for that matter. What's happening is, and this is why you need to go back and follow up with your current insurance broker or agent and find out what the company's position is with respect to cannabis, because what's happening with a lot of the carriers that I work with, they have updated their policy wordings to include.
If that tenant leaves a joint unattended and it causes a fire. That is now covered and that's good news for investors. What is not covered? Is the definition. In the new legislation, the definition of a grow up is more than four plants. I don't know if anyone's had a conversation. Their tenants or more importantly, this is about tightening up your property management. That's the takeaway from this one everyone is you want to make sure that your property management is on top of this. I have talked to clients who had said they've had conversations with some of their tenants.
I have a God given right to grow marijuana and whatnot. That kind of speaks to the level of or the quality of the tenant that they have. But what happens is you need to make sure. That you have the property management in place. They're inspecting the property. An exclusion would be a grown up. I've recently had a claim where a fantastic investor, they thought they had good property management in place, but what happened was it was a husband and wife that they were renting that were on the list. They split up and the husband left and they started to find there were some red flags that the wife was still missing payments.
There were some red flags as far as it wasn't going as well as it did in the past. Cut a long story, really short this, the tenant rented out the basement. No addendum or whatnot to the existing lease, but they thought they could go ahead and ran up to the basement. It turns out she rented it out to young people that turned it into a grown up story, the panel overloaded caused a fire. That wasn't covered because once the insurance company will always do an investigation and do that investigation, don't kill yourself. But once they did the investigation, they classified it as a grow up and hence the coverage was denied. It's very important.
The other thing you need to consider as far as risk to yourself or your portfolio is mold. If there is a grow op in there, it doesn't matter if it's a small one or a big one. There's potential for mould. Mould is always excluded in an insurance policy. I just recently had someone call me about mold in a different case scenario, but I take away from this is make sure if you are doing your own property management, make sure you're getting in there. Make sure you have tight records because that can be gray or most tenants now feel that they can grow weed in their unit and you can't do anything about it as the landlord.
Very important one there. Finally to wrap it up here, these are not coverages, these next examples, but this is what I'm finding every day. My team and I, when we're working with clients, a great thing about this hot real estate market is the ability to refinance. Whether you're doing a straight refi or it's through a BRRRR, however you're creating or adding wealth to your portfolio what the bank or better yet mortgage brokers are not telling you from the insurance perspective. And then, you know what, in all fairness to them, it's not really their job.
That's why you have to work closely with your insurance advisor, but what's happening, because of the market. I have clients that are asking to increase their mortgage by $500,000 $600,000 $700,000. Now whether they're putting that in their genes or they're using it to buy additional properties, that's a personal decision, but where there's a gap in this, it becomes a problem within the insurance industry. Now a big problem.
The insurance carriers are in the business of insurance. The property and casualty exposure. They have no risk or skin in the game when it comes to ensuring that mortgage. That's what the banks do. There is a gap. You have a property for round numbers insured for $400,000. That's the insurance building limit through various mayflies or whatever structure you decide to use. It's very common. Now, we have clients everyday coming out to us and we're reaching out to us.
I had one the other day where they're not going to be registering in the increase in the mortgage to a million dollars. They haven't really made any changes to the actual physical condition of the insurance bill. We'll call it the insurance value but the real estate value has gone up dramatically. Subsequently, they're pulling equity out of their insurance companies which will only increase without any structural changes to the building. They will only increase that amount of insurance to a 10% or 15% ratio.
What's happening is that most investors know that they want a letter when you close on the day of closing. You need an insurance binder to match the amount of mortgage. There's a gap between the real estate value and the insurance value and insurance carriers. Fortunately, I have access to one company that seems to be meeting most demands for my clients, but the majority of the insurance carriers out there will not go above and beyond that 15% rate increase, hence where you know what a lot of insurance companies are not able to provide the insurance binder.
I had someone from Ryan Carson's Office. One of his staff members called me. It wasn't a client of mine, but they called the day of closing because whoever the insurance broker is, it's not important who it was, but they couldn't find an insurance carrier that would increase the limit to meet the new registered amount of mortgage. That is something I can't do. Enough everyone would, if you're looking at a refi, you need to be well in advance. In advance working with your insurance provider to make sure that the broker can find terms in the insurance marketplace for that.
Secondly, one that we're seeing trending is the short-term rental market. A lot of investors, and this was even a pre COVID as well. A lot of people are carving out a part of their existing portfolio and they're plugging in the proformas and all that, and they're changing some of it to the STR strategy which is fantastic. Some investors that's a large majority of their portfolio. The way the insurance industry looks at STRs is completely different from a long-term buy and hold..
Long-term buy and hold, there's more stability. There's more predictability. The actuarial losses. How insurance companies come up with their premiums is they look at their actuarial losses dollars in versus dollars out on the short-term rental strategy. Historically, it hasn't been around forever, but they have enough of a snapshot or data now to determine what the rate should be. There's only a couple of companies in Canada that are even interested in sharing these.
A lot of people now are looking at buying cottages then using the STR. My point being is if you are considering dabbling or getting into that strategy. Make sure the insurance piece will be the most difficult piece when it comes to usually that's not the case and a long-term buy and hold, but it will be the most challenging piece for you is to get insurance for that.
I'm always cautioning or asking everyone to reach out well in advancing yourself 10 to 14 business days on an STR. I would advise 30 business days in advance. That's a real challenge. Rent to own something that's near and dear to Alfonso's heart. He's savant, he's a ninja when it comes to that strategy. RTOs are becoming a challenge now as well. I do have an insurance company that understands that. The reason that's a challenge, everyone, if you're not looking at it, I would strongly suggest you do have a conversation with Alfonso because the returns, you're looking at 30%, over three years.
It's an amazing strategy. But it's not cookie cutter. It is definitely not cookie cutter. As far as the insurance companies consider this. The reason being is insurance is all about financial ownership. In its simplest form, if you financially and now that JV deals are our separate conversation, but we'll stick to the RTOs. In order for an insurance company, when they underwrite a risk, they look at financial ownership, because of the unique nature of the RTO deal. A lot of insurance companies don't understand that they don't understand the complexity.
There's three parties involved. There's the company, there's the investor and then there's Alfonso, what's the name of getting a tenant and investor? I think it's a tenant buyer. That's correct. What we're seeing is a shift again. I have access to an insurance company or one particular company that understood this relationship because I explained it to them and they had no problem with it. That's starting to shift now. Again, When you retire, if you are considering making that part of your portfolio that's changing as well.
Make sure you give yourself lots of time to find. There are a couple of companies out there that I found that clients were working with before they were referred to me. They thought they had the proper insurance when it came to a claim. The insurance company didn't understand that strategy and they actually denied the claim. The takeaway on the RTO is to do the due diligence, make sure you have the proper solution. And then finally student rentals, we're starting to see a change in what was always historically has been a tough class of business.
Insurance companies, when they look at the actuarial students tend to have a different lifestyle, more partying things of that nature. I still have access to quality insurance for that. But the insurance companies are really tightening up their guidelines and increasing pricing on that as well. I think that's pretty much a wicked talk about a best in class strategy to make sure your tenants are provided with renter's insurance. I've touched on that in the past, but I think for tonight that's pretty much it does. Does anyone have any questions right now or do you want to wait until the end?
Sarah: Thank you so much, Alex. That was great. I think we're going to take it. We're going to take some questions and if there's any specific questions in the chat, put them in the chat, we'll ask you those. And then we will wrap up and get to our networking events. I think there is a question here from Adrien about what insurance is needed for a small skill development project?
Alex: Builder's risk, in two words, the type of insurance you need is builder's risk to dovetail down into that. It all depends on the size and the scope of the project. And then you get into different things like wrap-up liability but what you need is a builder's risk policy.
Sarah: Awesome and Maria is asking, cause I know this is going to come quite often, especially as we're refinancing the equity, what should be the process? Even if it's a BRRRR or maybe we want to refinance a year later because there's equity, what's the ideal process?
Alex: What you want to do is you want to find out from the mortgage broker if you're dealing directly with a contact at the bank what if and what the insurance requirements that's the key, that's the operative word, their insurance requirements because what happens is, and I see this all the time.
The mortgage broker, it's not necessarily as seasoned a mortgage broker who knows what they're doing, will be aware of this, but so you want to know what the insurance requirements are, if any, and get them to your insurance carrier or broker ASAP. If they're standard, it shouldn't be a problem. But if they are certain in some cases, there are certain coverages that are requested there. And quite honestly, there's no need for them. But so get the insurance requirements to your broker.
Alfonso: Good advice and that communication is key. Getting all the information out there. I think I saw it on social media this week. Whether it's your mortgage broker, your realtor, your insurance agent. Maybe treat them like your doctor, like your priests, tell them everything,
Alex: Claire Drage, she's one of the best brokers in Canada. She'll tell you if you need to ask that question, if it's a B lender, if you're having to go with a B lender, there will be insurance requirements that will be a risk manager brought into the equation which makes it no fun for anyone. That would be a good guideline. Sarah and Alfonso, if it's not a traditional lender, there will be insurance requirements, a hundred percent.
Alfonso: Wonderful and another great question here that Ben had written in and guys keep bringing in the questions here. We have the expert with us. This is what The REITE club community is all about. Should your insurance needs be done? If you have your portfolio as personal or versus a corporation maybe a little bit of the difference of a personal insurance, if you're on the property.
Alex: The short answer is, yeah, absolutely. As I've said in the past, you want to treat your insurance portfolio as a business. Keep it at arms length from your personal assets right from day one on your first deal to however large you plan to get it to build your portfolio. Set it up separately from your personal assets 100%.
Alfonso: Guys, keep the questions coming in. And I love this. Shashi, do we always need to have contractors with liability insurance for the BRRRRs?
Alex: Yes, absolutely. That's a great question. Yes, that's very important. What happens is when you get those terms. Whether it's a builder's risk, sometimes I can get that can be done to a standard wording, a policy, but there will be a subjectivity that any contractor that steps on that property to do whatever scope or type of job has to provide a certificate of insurance. To the point where now you don't see this often, but I have heard of it happening is if there is a claim, whether it's a slip and fall or the electrician messes up and causes a fire, the reason is the insurance company that's underwriting your building. They want to subrogate or subrogation against that particular contractor's insurance company. That's very important.
Sarah: You know what? Let's talk about this for a second, because as landlords, I especially in provinces, such as Ontario, we don't have a whole lot of the things that we can ask for or require, but I feel like content insurance and tenant insurance is one of those things that even on the standard lease agreement is indicated that you can check off. If you wouldn't mind just talking about that briefly and how do we ensure that they're also not just getting it and then removing it and canceling it shortly after this question? I was asked to prove that my tenants had insurance while I want them to be insured and I warn them of the problems if uninsured, how can I make them get insured?
Alex: Great question, the answer is twofold. The first is you can legally make that now part of the lease agreement years ago. You couldn't legally, we're not allowed to do that. You can do that now. That's the first criteria, you make that part of the lease agreement. What happens is, in that I would make that subject to them listing you as an additional insured. Write that word down, everyone. Additional insured, because what happens? It sounds like it's a very complex insurance coverage.
When you get listed or added to their renter's policy, as an additional insured, the premium doesn't increase, there's no additional exposure to you as the landlord. But what that does is you are now entitled to rights and privileges. If that policy is ever canceled. If they refuse or canceled payment, the insurance carrier has to give you a notification that policy is no longer enforced.
Sarah: This is asking to be the additional insured. That's what you're saying.
Alex: Correct? Additional insured on their tenants insurance.
Sarah: How do you know, do you require them to send you a proof or a summary from the insurance company? Like how would that work?
Alex: That would be some subjectivity in the lease. They have to annually provide you with proof of insurance or a certificate of insurance that they have renters insurance in place. If they cancel it for whatever reason, you should be notified by the insurance carrier as an additional insured.
Sarah: Okay. And part two of Maria's question is short term. Does this still apply to short-term rent?
Alex: It absolutely does. Now again, in theory it does, but when you have a short-term rental agreement it's you cannot put in there provisions or clauses. That would be the same as a 12 month at least agreement and you know what, that's another conversation for lunch and learn. I'd be happy to jump on that one. There are nuances within the STR lease agreement. But again, in reality, Sarah, are you going to get someone that's going to send you if they're renting a cottage for the weekend or a week, are they going to send you proof of insurance? No, they're not in the real world, that's not the case.
Sarah: I'm not the insurance broker, but what I'm thinking there is, as you just gotta make sure that with your insurance broker, you let them know what the actual purpose of that property is, the proper insurance on your end. And then something like even just going through Airbnb, they have another million dollar liability insurance as well is like that dual protection for that short term type of thing.
Alex: You cannot buy property insurance on Airbnb. Not that I'm aware of yet. I've gone through their wording to see, but you do get some liability protection through that.
Sarah: They're pretty good even just, I've had to go through it a couple of times, just when there's stuff that is broken and you need to get yours, it's up to a million dollars, but like you can still claim and they take you about three weeks. It was actually pretty good. Let's switch it up and talk about pre-construction. When should somebody look at insurance and what is required for precon?
Alex: That's pretty straight forward. For precon all you need as the investor and you don't always need it, but again, it's all up to the lender that you're working with. What you would need is, again, you would just need to prove that you have liability $2 million, $5 million aggregate. It's typically the case that sometimes they'll want 5 million per occurrence, but you just need to buy a condo owners liability policy, which is very inexpensive. What it goes back to is as I said, previously, it's all about financial ownership. Until you are actually registered right as the owner of that unit, then you need to get a condo unit owners policy.
Sarah: Got it. Okay, awesome. A great question from Ben, your property management has their own insurance. I just recently saw a PM contract and they wanted me to add their name to my insurance, and I would also be liable for any issues caused by them or because of their thoughts.
Alex: Additional insurance. That PM covers their exposure through adding you on as an additional insured on your renters. That's a case example, case study of what we talked about with getting that on your renter's insurance. For property managers that know what they're doing. Absolutely for the hacks out there. Probably not, but for true property management companies absolutely.
Sarah: Awesome, contractors question from Katherine, does the contractor certificate of insurance also include WSIB?
Alex: No, that's separate, we don't get into that. I'm hearing the Canadian insurance marketplace and you get into liability and liability insurance in the US is completely different than Canada, right there far greater than the TIGIT society down there, but no WSIB is separate. That arm's length from your insurance policy.
Sarah: I don't know if there's any more questions. We're going to do networking very soon, but what areas of the country do you cover?
Alex: I'm licensed in every province, my team and I with the exception of Quebec. We used to be able to, that's a long story, but for now we're not writing in Quebec anymore. We're licensed in every province right across Canada. In fact, that's how Alfonso my first started working together was he had some out of province deals.
Sarah: Very cool. Every province except Quebec. And then in terms of timelines what do you ask for as a minimum? Timeline to start working on insurance.
Alex: For new REITE club members, we have gotten better. I was always pleading and asking. The team seems to be in place now. If you would like us to review an existing portfolio that you have, or you want us to quote or provide terms on a new deal, send an email to myself and then also send me a text at the same time. If you could do both, that would help tremendously. I see the texts a lot quicker than I see the emails, but we do have the team in place now. I will try my best to work on that directly myself, depending on timelines, but ideally 10 business days would be great. We would really appreciate that.
Alfonso: Awesome. Alex, always amazing information. You make the topic of insurance very lively and it's so important. And you know what? It's something that's so important. We all hope that we never need it, but there's something that is vital. When we do need it, it's there. And we do need to make sure that we have the right type of insurance. Always a wealth of information, knowledge that you share with us.
- Log in or register to post comments
- ARNEL-LLEMIT-1637316866's Blog