Risk and Property Ownership
Property Ownership remains one of the great ways that individuals can generate wealth. We see it with our friends and with people who immigrate to American and who buy property as fast as they can and often gain extraordinary wealth as a result. Property Ownership, like any investment however, is not without risk.
In past articles we have outlined certain types of coverage as well as pointed out exclusions to coverage – many of which you can either deflect by using professional property management or buy additional coverage to address the exclusions. This article is more of an observation regarding coverage, risk and how people tend to address this risk to their financial future. This is important as we hope cause you to re-think how you approach your investment.
Yes, your investment from which you hope to generate profit from an eventual sale, perhaps to be used to buy more property, or to use as supplemental income now – or even more important – when you retire. And, you purchase fire and liability insurance to protect your investment.
Coincidentally, I was driving this July, Sunday morning and heard a story about risk and addressing that risk. I’d like to relate part of it to you. An investment counselor told a story about a man who owned three apartment buildings in the Valley and who saw those as future income sources when he retired. When he paid off the first building, at that moment he added earthquake insurance to his portfolio but only for this particular property. The other buildings still had mortgages, and he did not place earthquake insurance on those (I suspect that in his own mind the did not “own” the other two).
Then, the Northridge quake hit and destroyed all three of the buildings. While we might think he was secured on the one property – he had earthquake insurance and owned the building outright, apparently his other loans were personally guaranteed and the lenders forced him to give them the proceeds from his earthquake insurance.
While I do not know if that scenario (attacking other holdings) can work in today’s legal environment, still, it demonstrates an important lesson: It’s not good to bet against mother nature (betting against the risks) and the corollary, that you shouldn’t play roulette with your investment as the house always wins. It’s not a great idea to partially insure your investments and bet on outcomes. That can also be said for the current political and legal environment: Don’t ignore or take lightly what other people can do to you.
Here is what we observe regularly and well as in the current Covid-esque environment.
- Most of our clients do not maintain Earthquake Insurance. Some think it will not happen, and others are hoping that the buildings explode and catch fire. I guess that’s a strategy; that, or they just do not believe it to be necessary as it cuts into their cash flow.
- It is a difficult conversation, advising clients and prospective clients, to address Earthquake Insurance. In the current economy, some of our clients have asked us to cancel or non-renew their Earthquake Insurance.
- Some of our clients – and most certainly other Property Owners calling in for quotes – in an effort to cut costs tend to let what they perceive to be luxury coverages go by the wayside when the temporary financial trends run against them, removing broadening coverages and endorsements intended to protect them from more than just basic liability protection (slip & fall claims, basically).
- Liability insurance coverage limits are often reduced.
What we are seeing is that valuable parts of property owners’ protection are tossed aside in an effort to maintain cash flows. It’s difficult for us, as insurance brokers, to discount a property owner’s concerns when the elected and non-elected officials make unreasonable demands upon them; we are not the ones bearing the impact of the property owner in this Covid economy.
Still, what is the risk for a property owner at this time, as respects insurance protection:
- Remember, never bet against Mother Nature unless you believe an earthquake or other disaster can never impact you. Your rents may be impacted by regulations and lockdowns, but has the chance of an earthquake lessened in response to the political impacts on your rents? It is likely that there will be little assistance to property owners in the event of a bad quake and, so, it’s not a good risk for property owners. At best, it will take years to get any government assistance as your competitors – who have earthquake insurance protecting their buildings and rental income flow (including positive cash flows) – are rebuilding.
- Costs of construction are not going down, even in this economy. Tried to get a contractor recently? Usually, there is a reason your values are increased at renewal. It is to the property owner’s benefit to accept the increases; if your deductibles are low, off-set that increase with a slightly higher deductible.
- You – the property owner – are perceived to be wealthy and to have “deep pockets”. Tenants are not likely to back down if you attempt to evict them for not paying rent; in fact, they will bring a suit for wrongful eviction against you if you attempt such a move. While they have been emboldened for years by California’s and in particular Los Angeles County’s new regulations, with the Covid economy your tenants are more emboldened than ever. And, regulations prevent you from evictions anyway. TIP: You are particularly vulnerable if you are self-managing your property.
- When tenants bring that wrongful eviction suite against you, they will most likely add discrimination to the suit (gender, race, single, married with children, and so on). Virtually anyone can claim discrimination; did you reject or simply ignore that coverage, too? That is a huge risk.
- Do you think that the tenant, who has acted as a de-facto property manager (cleaning vacancies, showing units to prospective renters, and sometimes collecting rent and arranging for property maintenance), will not want to file a workers compensation claim as a result of an injury? Whether retired or working, the tenant/occasional property manager/EMPLOYEE will see this as an opportunity. This is another reason, by the way, to have professional property management or Workers Compensation Insurance.
It is a tough time for property owners; you see articles monthly in the Apartment Journal outlining your current and new real estate exposures as landlords and investment property owners.
Our recommendation? Because we work with property owners in southern California and all across America, we are in a position see the ups and downs of our clients’ claims experiences and how our clients approach protecting themselves.
The savvy investors are buying more – not less – protection because of the activities of tenants and because of the newer insurance forms being introduced into the insurance marketplace which alter coverages that were heretofore available. These alterations come in the form of either lower, sub-limited coverages or outright exclusions.
These insurance buyers also see that coverages, which were either not available or expensive additional policies, are now available as part of their insurance packages. And, yes, they pay for the additional protection.
Please, don’t let yourself get caught short on coverage for the sake of maximizing or maintaining customary cash flows. It may cost you more than you think your saving.