Insurance Knowledge for Passive Syndication Investors with Drew Maconachy

Drew, thank you for joining us. 

Taylor, thanks for having me.

It’s been a great conversation so far today. We’re going to dive into insurance for real estate investors for our listeners out there who don’t know about you and your business. Can you tell us a bit about yourself and what you do?

Yeah, I am a commercial insurance consultant, so a lot of us call ourselves agents, but I don’t think that’s probably a very fair term.

We, we consider ourselves an extension of. Our customer’s businesses. I help you backstop your growth. If you ever have an issue within your business. My job is to make sure that, if you’ve gotten your business to be a $10 million business, Then my job is to make sure that you don’t go below a $10 million business.

You worry about the growth. I keep you from going backward. And we w we were founded in 1995. I became a partner in 2016. And my main niche is helping real estate investors, that’s what I think let us together here, Taylor. Yeah, happy to help anybody. And I love educating my customers.

That’s probably my favorite part of the business. think people, the basic understanding of insurance, why it’s important, where you can skimp and where you can’t scamp so that you can target the right areas to try and cut some fat. 

Nice. I certainly appreciate that you’re providing that education for us today and our listeners out there.

There are, you point out that there are a lot of like misconceptions that people have about insurance for real estate investment. And I think that’s true, I’ve seen that up and down and I certainly had some and undoubtedly still have some, so let’s break into it. Get into that insurance 1 0 1 for real estate investors and, understand how.

Yeah, that’s great. That’s a great place to start. I think the biggest misconception is that all insurance is created equal. If I buy a policy from state farm, or if I buy a policy from Drew, or if I apply a policy from John DOE, it’s the same policy. All I need to worry about, oh, the only thing I need to compare, what I’m seeing three different policies is the premium, whatever the cheapest premium is, the right deal for me because I can as I’m saving money and as I’m refiling, I can get a multiple on the amount of money that I’m saving.

Boom, let’s go with the cheapest deal. I can go, I can sit here and fill your whole time together. Case studies and customers of mine that I’ve picked up after they had used that mentality and gotten burned by it. But one quickly comes to mind. I have a very good friend of mine who let me quote, and I was $1,300 more expensive, and he draws it times are tight.

I’m just getting into the business. I can’t, I just, I got to go with the cheaper quote. It, they had a claim and one of the basic foundations of any property insurance policy is ordinance and law coverage, which means if your building’s out of code R a policy would pay to bring your building back up to code, because the issue is if you have a, like a fire and a third of your building and you have to the county, the state is going to come and make sure your buildings up to code as you’re in there in the walls, opening it up and you would have to come out of pocket to pay the cost, to bring building up to code on a partial loss like that.

That’s exactly what happened to this guy. And it was a $700,000 uncovered claim that would have been covered under my policy, the $700,000. And it was a $1,300 savings. I, my big takeaway from that is don’t think that all policies, or maybe even if you want to have a couple of agents work on it I can argue that’s a bad idea too, but if you’re going to do it.

Make sure that you’re, that each of them is comparing the quotes for you so that you can know what you’re buying. And if one of them doesn’t want to compare their quote to somebody else, then it’s a really good indicator right there that it’s probably not the right home for you. While I would argue that price is super important I would argue the price is most important, right?

I get that, but. You have to make sure that you understand what you’re buying. I’m not going to tell you what to buy. I’m going to tell you what there is in there to buy and then educate you enough to let you as an investor make a decision. 

I certainly appreciate that. I think we need to always as business owners and investors always focus on value rather than price and understand the value that we get for our money. And sometimes the price is too high, whatever. But the value is pretty much, always more important than the price alone. But I think that brings up an important point about what is a reasonable expectation for an investor to have their insurance agent or their consultant as a term you like to use, Hey your prices, in this case, are $1,300 higher, can you reasonably line out for me?

What the differences are so that I can make an informed decision about it?

Yeah. Yeah. So what we, that’s a good question. What we do is we have a sheet, right? I’ll you can’t see me because it’s a podcast, but we have a sheet where it is one-column is here’s your quote, here’s your expiring policy.

Here’s a quote that you have from somebody else that you’ve shared with me. And my column, I’ll say here is my quote. And I go through and I actually color code it right. To make it really nice and easy to see here is where. If there’s no color, the coverage is the same. If where it’s green on one side, that coverage is better. Where it’s red on the other side, that coverage is worse, right?

So I just go through, so you could actually really quick look at it and see how much green and red there is and get a basic idea of this policy. Garbage versus the policy that I have, or Drew’s quoting me a garbage policy versus the policy that I have. And maybe I listen, right?

My job is to listen to you. You tell me how good of a policy you want. If you want a Pinto that’s fine. I’ll quote you a Pinto. I want you to understand what a Pinto covers, right? If you want to escalate, I’ll quote you the escalate. But you have to understand that my escalation is going to be more expensive than your Pinto.

I think it’s a very reasonable expectation of your agent, your consultant, your broker, whatever they want to call themselves to spreadsheet out what you have. You must, in my opinion, you have to demand that. Here’s what I have. Here’s what I’m being offered. Show me the differences. And if they don’t want to do that man, what a good indicator that’s not the right partner for you because they probably think it’s a, they probably think it’s a commodity.

And especially in this real estate business right now, the policies are changing every year. The terms are changing every year. Pricing is certainly changing every year. So I think it’s more important than ever to understand exactly well not exactly to have a basic understanding of what you’re buying and really trust your partner who you’re working with.

You mentioned. The changes in insurance pricing and costs. And this is one of the things that, we both see and hear in the space is, that pricing has changed. And to my understanding, it’s because a lot of the insurance companies are starting to figure it out.

Basically climate risk and put that across their policies, but there may be other factors in there. I don’t know, I’m not an insurance guy, I just, buy the insurance and try to understand it. But is that your impression from the inside? Are there other factors? Inflation’s out there.

What else is going on?

So that’s actually the big one this year. Taylor is inflation, right? Okay. What does an insurance policy promise do your building burns down? I’m going to come to rebuild your building now over the last. 18 months. How have those construction costs gone?

They’ve gone through the roof. You can’t find labor, you can’t find materials. Everything is more expensive than it was a year before, which actually is a really important point that we’re hammering home with our customers is you need to make sure. That your policy limits are ample today because if they’re the same policy limits that you had 18 months ago, and you think that you think your policy is going to rebuild your building you’re wrong, right?

It’s very simple. And I think that what people are seeing as cost increases in insurance right now, a big component of that is the insurance companies are being proactive and helping their customers understand that. Their replacement costs, right? The big number that’s on the back page, the replacement costs of your building is going up.

The same rate times higher replacement costs equal a higher premium. So a piece of higher costs is that Now to your point, the other piece of the pie is terrible claims experience in the industry. Now that’s a couple of things, right? There’s been a ton of large fires or medium-sized fires, right?

If you get a fire in a multifamily building, It’s really hard to make that claim under a hundred grand. So you know, it, if you have a 20 unit building that you’re paying 1500 bucks for, and there’s a hundred thousand dollar loss, think about how many of those think about how many clicks. In other comparable buildings, two years there have to be just to just the insurance company and a breakeven.

And they went to operate at a 50% loss ratio. So then you need to double that number to get it, to be profitable for them. And then let alone these catastrophic claims where a hurricane comes through and you’ve got a 500 unit building with. 80 million bucks of coverage on it. And it’s an 80% loss on the building, right?

It’s it is. The fractional amount that you’re paying in premium based upon the claims potential the insurance company is getting, just getting clobbered on it. So that’s a major increase, a major reason for the premium increases as well. 

It’s all about they’re all about spreading out that risk across their entire portfolio.

So when disasters like that happen, we’re all going to bear at least some of the burden on that and that topic of replacement costs, I think is. And there, there are really, I think, two angles to that because from an insurance standpoint, it does make your insurance more expensive from an investor and value-focused standpoint.

If I can buy a building for $200,000 to put a number on it, it would cost me 350 to build that building today. Don’t commit fraud. Don’t burn the building now. Of course never. But to me as an investor, I see that. To me, there’s value in that, that I’m just buying it way below what it would cost to build it today.

And that might not translate into me making a return directly, but I just think that market has in that case, likely undervalued that building right now. But that’s just my perception as an investor. 

Yeah. I don’t think you’re wrong. Some, I get a lot of people who say, listen, I bought a C class building in a tough part of town.

And it’s a 75-year-old building. I don’t want a new building if there’s a claim, I just want, I want my cash out. There’s, there are ways to get that, you don’t always have that again. That’s buying the Pinto instead of buying the Escalade. And if your building’s a Pinto, then putting escalate insurance on it may not make sense.

Again, that’s the value of having an agent, with who you can be a contact, that you can talk to and trust Where they can say, yeah, I’m here are the different coverage level options and make the decisions that are best for you. But I totally agree with your statement, right?

Not only are you going to get a building back, but it’s going to be a much nicer building than what you lost. So the that and the insurance company is paying for that. It’s important for a customer to perceive value in that so that they understand, Hey, costs are going up, everything’s going up, it’s just a, it’s a tough time to be in the business from an insurance perspective. And there are certain areas we can. To get rid of it. And that’s a great one to start with, right? If you don’t need a brand new building, you just want to cover your loan and get out, maybe cover some of your loan and some of your equity in the building.

I can create a policy. That’s going to do that for you.

So, it’s good to have somebody on your team that can help you with that. And I think that really leads into the area of understanding. What we as investors should, if we’re conscious of both the, like our coverage amount, but also what our costs are, then we need to know that going into but that leaves the question of what should we look for in the due diligence around.

When were, what do we need to target to understand the physical condition of the building and how that influences our premium amounts? And then also, our coverage and all of that, because we don’t want to be under-insured, but we don’t want to be over-insured either. We don’t want to pay for the value that, Yeah, sure.

Right. 

Yeah. Yeah. I think, to your audience, I think this is one of the most important questions that we’ll go over today because this is a really hot every underwriter that I talked to asked me these same questions. And if the question is answered the right way, it’s a 50% savings. They’re huge questions.

And the biggest question we’re getting right now is about electrical. And the reason for that is there’s been a lot of fires that have come off of the mechanicals, the electrical mechanicals within your building. So if you have Federal Pacific breakers, right? A lot of your audience might probably be familiar with that term.

There are called stab lock breakers. They were put into buildings in the seventies and instead of the breakers breaking they just burn up and caught on fire. So for whatever reason, they’re not there, we still are seeing them all the time. And it’s gotten to the point now where the insurance company.

There are three insurance companies that will insure a building with stab lock breakers in it. So think about that. My normal market is 40 insurance companies. Now I have three how’s your pricing going to be with that? It’s a huge space to be aware of. The other one is honestly, geographic location has gotten huge.

W we’ve seen a lot of transactions in the last year in the Sunbelt. And those are those states, right? Have hurricane exposure or we call them convective wind exposures. That you get either hurricanes or you get tornadoes. So think of the east coast and through the lower middle part of the country.

So Oklahoma, Nebraska, Louisiana, Mississippi, Alabama the Carolinas, Florida. Texas, all tough states right now, really tough states right now, unless you have a new construct, new construction being 15 years or newer your prices are just it’s too. I can’t even explain to you how different the pricing is.

Based upon being in of those states are out of those states or having old aged electricals versus having upgraded electrical. So those are the two areas in your bill, right? If your building is, if your building is 50 years old and hasn’t been, hasn’t had a major rehab, so you have to disclose to the insurance company that your building, is 50 years old, you’re automatically out of all of the chief.

High-end insurance companies that probably a lot of your customers have heard of the travelers, the Liberty Mutual’s the Cincinnati is of the world who are very big players in the space. And now you’re going into, it’s a substandard market. Where pricing is highly variable. And, if you would come to me and say what’s this building and it cost me in Ohio, it’s 15 years old.