Full Transcript

Taylor   0:02  

This is the passive wealth strategies for busy professionals podcast. Today, our guest is Darren Gross. Today we're talking about insurance for real estate investors. This is a big topic that's just not talked about enough, you guys they're everybody has insurance on every piece of property they are, at least you should if you've got it financed, you definitely need to have insurance on it based on the terms of your financing. We won't go down that route. But insurance is just not talked about enough in fields like these podcasts. So you know, we're talking about the sexy aspects of investing in real estate making awesome returns. That's great. We need to know these important facts around what it takes to get an insurance policy, what factors the insurers consider, and we're going to cover a few of those things today. If you're looking for insurance on multifamily property. This is the conversation for you if you need to learn these lessons, here you go. There's some fantastic ones from Darren Gross here today. He has many other types of insurance. But that's the topic that we're going to hit on today. You can go check out some of his information to get deeper information on the other assets, other asset classes of real estate and how to ensure those important factors, all that great stuff. So great interview, I learned a lot about the details of multifamily real estate insurance on this one, and I'm sure you will as well. If you're new to the show, I'm your host Taylor load. I am a real estate investor and a real estate syndicator. I buy real estate with passive investors and split the return. This is one of those great topics that all real estate investors need to understand. If you're out there buying property and making offers. You have to know what your insurer is going to consider and then also what is going to play  after you close the deal. So that's what we're talking about today. A lot of great lessons in here from Darren gross without any further ado, here we go. Darren, thank you for joining us today.

Darrin Gross  2:12  

Yeah, I'm glad to be here.

Taylor   2:14  

Thrilled to talk with you. We've been chatting for a while before we hit record and you've got a lot of cool ideas and a dying hit record, but you know, before we get into some of your ideas, can you tell our listeners about who you are and what you do?

Darrin Gross  2:30  

So my name is Darren gross.

Darrin Gross  2:34  

It's legal in jondor and growing so I go by JD and gross and tell the TSA that I didn't use my first name, john. So the Jays Jays become very important now or John if I'm in trouble. But I'm based in Portland, Oregon. I'm an insurance broker focused on working with real estate investors. My wife and I, we also invest, we've got a handful of single family properties, we've got a 12 unit property down in Florida. so that's pretty much the focus of what I do. I've been doing insurance since kind of like 90 1990 when I got my license, so just a little while just getting started.

Taylor   3:20  

Wow. You've seen a lot of a lot of insurance cases.

Darrin Gross  3:25  

Yeah, yeah. Fortunately, I fell into the real estate side of things from the standpoint of having somebody call in and they were buying a rental property, and they needed insurance. then they called back next week and needed more insurance when they called back the week after that, and they kept and so that was kind of my introduction to like, Oh, well, tell me more about how this works. but, yeah.

Taylor   3:51  

So what's your focus on now in terms of who do you insure, what do you write policies for and how does that work for you?

Darrin Gross  3:59  

Right? So like I said, most of what I spend my outbound efforts on is talking with real estate investors, landlords. Anybody that has anything to do with real estate, I've got some people do some construction or some new construction properties but primarily its investors, it could be apartments, could be retail, it could be office buildings, flex space. But that's kind of the left to right of the people I try to work with.

Taylor   4:34  

Nice. So you know, insurance is one of those things that you use when you need it, you really need it, and when you need it, it's too late to go get it. So I think there's a lot of temptation for people to either cheap out in their insurance or not get what they need, particularly in the apartment space. You have You come across that, is that true?  What are your thoughts on that regard and people not being adequately insured for safer apartment investments?

Darrin Gross  5:10  

Sure. I think one of the challenges is that all of us like to have a reference point where we can plug in a number and just assume that everything's good. I've seen this happen and I've gotten into numerous conversations online with various people about an assumption or a number to use for your underwriting and, and whether it be you're remodeling a bathroom or, or a price per door for insurance. I've seen that in and I'll just say that, anybody that's doing that, I would caution you, especially if you're underwriting your properties and in like Florida, and you live in Oregon, and you're you know, because insurance is driven by weather, for the most part, especially for for real estate. So if you have You know, property in a territory that's prone to catastrophic loss like tornadoes or hail storms or hurricanes. That's a whole lot different of a risk model than somebody lives in Oregon like I do, where we get rain, you know. so, I think that's one of the things that I would caution anybody about is just having some sort of a preset notion as to what it should be. I think you have to understand that, that each property is going to be different, each buyer is going to be different. if you're buying from somebody that that has a large portfolio, and they've got a master policy, and they run with a high deductible, and they're showing on their, their their numbers that they're giving you on the pro forma that their insurance cost is No, a very low number, and you assume that you will be able to duplicate that and run with that number. you don't think to call an insurance person until, like a day or two before closing, you're gonna be in trouble. You know. Again, I get insurance, it's not something people understand for the most part. It's something you pay for, you hope you never have to use. Like you said, If you, you need it, and then you try and get it that's too late. If you need it, and you don't understand what you have, that's probably too late as well. But it's kind of out of sight out of mind. I always tell people when I sell policies that I hope you never need it. Because if you do, you're having a bad day, and this will help but it won't take all the pain away. So gotta dedicate some time you probably got a deductible. You're going to have to get involved in the process. You can't just call the insurance company. Have them show up. For their tool belt, fix it and you know, shake their hand and they go away. It's not that at all. the insurance company provides a contract, that's the policy. They then provide the money for when the clauses in the policy are triggered. so they're the checkbook, and they're the terms. The work that has to be done that's up to you, you can pick your contractor, you get to negotiate all that stuff. But again, these are things that most people when you have a loss it's just not. It's not understood. You don't understand what's next. I think

Darrin Gross  8:35  

When was the last time you had an animal automobile accident?

Taylor   8:40  

I was a junior in high school and somebody hit me and rolled my car. Okay, over a decade ago,

Darrin Gross  8:48  

okay, so your, your 10 years plus, since the last time you had to use it, right. Chances are you may have forgotten how it worked. Or how the things you know, because you haven't had to read redo or revisit the steps on how to make your coverage work. and that's that's, that's what I'm trying to get at is it people just it's something that you have to have that the banks don't get alone your money, your investors are likely not going to sign up for you if they find out you don't have insurance. so based on that people don't really have a full understanding of what is covered. They know they have to have it. Because it's a budget item. They're trying to hit their pro forma numbers. They're looking for a number that fits rather than trying to make their purchase price fit their numbers. So that was that kind of cover it we kind of sometimes get going and I forget what the question was.

Taylor   9:48  

Yeah, yeah, absolutely. I think you really hit the nail on the head with people who want to have a pretty simple formula or percentage or whatever that they want, they can plug into Their cash flow calculator so they can get an idea of where I am going to be roughly for insurance numbers?  it's definitely interesting to hear that most insurance claims are weather related . My exposure to actual claims for real estate is none I've ever had to make a claim on any property that I've been involved with, at least to my knowledge. I think it's gonna hopefully stay that way. But I think about it, it seems like insurance could be applicable for a lot of things right. You potentially have arson. I don't know the other ones though.

Darrin Gross  10:40  

Well, no, and I was just gonna just want to make sure we're clear on this is that the rates are driven primarily by weather. Okay, the claims and the severity are driven by that but I mean, probably your number one claim is fire, and even in that your number one claim is probably cooking. Right? Okay. Sure. But the and that doesn't vary from region to region, that's kind of a recognized thing at five o'clock at night people cook dinner if I mean presumably they still cook dinner. But, but that's it but that's kind of like a, that's a constant but when you go into these other things that are dramatically different, you have to account for that and so your ratings you know, are varied based on the, the potential for catastrophic loss is kind of what I was trying to get at. So that's, that's okay. A lot of how that happens. Gotcha.

Taylor   11:36  

Okay. you know, how do we as investors make the right decisions for insurance and while keeping numbers in mind I mean, I'm sure you could, somebody will sell you an insurance product that'll you know, how you could uh, there's under insured and over insured right there. So How do we really thread the needle and have the appropriate amount of insurance and not spend too much, but also not spend too much too little?  really figure that out?

Darrin Gross  12:10  

Right? So I think here's kind of what I always try and recommend to people when they're when they're getting into this is it especially, and again, a lot of the people I talked to are doing value add properties, maybe they're buying a C property, they're hoping to bring it up to a b, increase around maybe some renovations. That's a tried and true strategy. It's, it's worked for since the beginning of time and in residential, they call it flipping you know, it's been it's basically that's, that's the thing is you're taking something that's old and worn out and you're trying to reposition it with the insurance companies are really trying to pay attention to and a lot of these online digital tools are giving them the ability to do it in real time. Or we're Better real time than traditional kinds of applications. They can go to Google Earth and they can see the front of the building and they can see that it doesn't look good. if there's a picture that doesn't look attractive and goes to the crime data, they can go to all these different sources and kind of realize that it's either something that they do want to insure or they don't want to insure. So what you can do to help yourself is when you're doing your due diligence, is to make certain you're, you're up to speed on what the system's age is. There's four systems that you want to pay attention to. The first is always the roof. Okay, if you have a roof that was replaced in the last couple of years, that's great. If you have one that is old, worn out, and it was the original roof and it's a 50 year old property, that's going to be a problem. Okay. We are getting a lot of pressure on electrical systems, okay. There are a couple of panels out there that have become just kind of lightning rods for insurance companies. There's a federal Pacific and as ensco panel, and if you're doing an inspection on a property and you come across as it's important for you to know that these are going to be problematic, and to get a bid from a electrical contractor on what it's going to cost to update or take care of things, okay? If you didn't calculate that into your, your purchase price, and you bought that and insurance company goes out and inspects it, either they're going to cancel you or you're going to end up with higher price insurance and you originally budgeted, or you may find out that by the time you're in this situation, that there aren't any companies that want to insure, and I say any there's always somebody that's willing to, but I'm saying that your price If you had, if you had position, if you had presented this as a very desirable property, the insurance company gave you a very desirable property price. when they go out and inspect it, they find out otherwise, you're going to find your numbers aren't going to match. Okay? The third system is your plumbing.

Darrin Gross  15:19  

Plumbing is not really

Darrin Gross  15:23  

you know, I guess it depends on the age you know, if you got if you got older properties that has any kind of cast iron

Darrin Gross  15:31  

waste lines, if you have

Darrin Gross  15:34  

galvanized pipes that are notorious for rusting or if you have any of the camera, the name of it now, but there was a man made pipe. It was kind of a plastic pipe.

Darrin Gross  15:50  

butylene

Taylor   15:52  

Oh, yeah, yeah. poly butylene.

Darrin Gross  15:54  

Yeah, it's problematic.

Darrin Gross  15:58  

And then the last is a heating and cooling system. it's got to be current. But you know, depending on where you're buying and what the systems are, I mean that that can be a major expense. But, that would be the least of the four. But if you start with knowing those four things, you can position yourself in a way that you can have leverage in your negotiation, because if you know these things are going to be problematic, they're going to be problematic for everybody. if you get a, a cost to correct, you can work that into your negotiations. The other thing is, when you're when you're in your negotiation, make sure you're getting a copy of the loss history from the seller. Okay, if they've had water leaks and all these other types of claims, and you didn't know about it and you got a price that doesn't reflect that. Chances are that the insurance company they may say No thank you, or be because they fear that these problems are going to continue You know, raise your deductible raise your price, however, but again, it's the picture change and insurance companies now or they have a window once they bind coverage to review everything to make sure that what you said it is it actually is. So you want to be aware of that.

Darrin Gross  17:17  

But those are those are kind of the

Darrin Gross  17:22  

the upfront due diligence. then the last thing I would add to that is making sure that you're, you're working with a realistic replacement cost. Okay? Again, if you're buying the property from somebody that's on the property for 20 years, okay?  they bought it at a low price, everything's gone up in price, but the value on their policy has not increased to match what an actual replacement cost is. you try and replace or try and insure it for the value they had on their policy. A you might get that limit, but if you have a loss, you could run into a coinsurance penalty. Which is problematic, right? Just for the short version is you're not going to get what you think you're going to get back and put a lot more pressure on you and your investors on that. But those, those would be kind of the upfront things that I would recommend that anybody that is buying a property dodo the roof inspection, do the electrical inspection, do the plumbing inspection get a thorough due diligence, and make sure you are able to document those things, because those are the questions your insurance broker is going to ask. if you can provide those answers, you're going to get a better price. I mean, if you can provide favorable answers, you're going to get a better price. If the answers aren't favorable, you can use that in your negotiation. then you can also if you have a plan to correct those, you can relay that to your insurance broker so that you can then present that to the insurance company and get either a better price or they'll give you a you know, an amount of time to correct that or they might say come back when those are done. But you'll have again, those can really affect your price.

Taylor   19:05  

Yeah, great for negotiation. Something that you mentioned about the electrical systems and certain types of panels that they're concerned about. Are those because it was related to the fire issue that those particular models that panels are prone to cause fires at this point in their lifecycle?

Darrin Gross  19:25  

Yeah. Well, here's what I hear. I do notice the zins co has actually been recalled.

Unknown Speaker  19:31  

Okay.

Darrin Gross  19:34  

And I'm not certain on the vintage of when those were popular. But there are a lot of them out there. I mean, I've started going into buildings now and I opened them up and I Oh, my God, this is one that's one this one so they're, they're out there. The Federal Pacific is a little less clear, but it somehow got on the radar of insurance companies. I can't tell you the full story there. I know that I've talked in depth before. Some electricians and they said look, this one was not recalled. But it's still it's it's made the list kind of like a vicious dog kind of thing if you've got those types of things. So it's, it's at least it's something to be aware of. The last thing you want to do is get this property you think everything's great, you're collecting your first month's rent, the insurance inspector goes out to inspect, they send you a loss control thing, and the insurance company says you've got 14 days to correct this or we're canceling the policy. Those are always fun to communicate with your client. Hey that inspection went really well except for these two things and so, wow, before worn,

Taylor   20:45  

another electrical banner that comes up sometimes this is aluminum wiring does that factor in as well?

Darrin Gross  20:53  

Yeah, no, absolutely. There was a period of time and again, I'm not 100% on this, but I want to say it was like the late 60s, early 70s. Where the price of aluminum wiring was cheaper than copper and some some building contractors were using that and it can be retrofitted where they they essentially the pigtail for lack of a better word but they encapsulate they somehow there's like you take the aluminum wire and you take the the copper wire and you put them in some sort of like a little thing and they kind of shrink wrap them together. then but you have to do that at every terminal in every outlet and every fixture. I mean there are buildings I ensure that have that. Wow, I've had that done to them. But that can be kind of costly. But if you know that to be the case you can get to know you again then have that conversation with the seller. you know, put in a price for what it would cost to to fix that is definitely something to be aware of.

Taylor   22:00  

Well, well, yeah, that's one that comes up and I would hate to have to bear that expense, but that should be relatively easy to find on inspection. Now, are you? Are you seeing people whether deliberately or inadvertently or otherwise under ensuring their properties to increase their cash flow? I mean, it seems like if somebody was so motivated to increase their cash flow their noi, they would do one thing that could potentially reduce insurance. I mean, is that happening and like, what, if it is happening? Is there any particular class of real estate where it's happening most frequently?

Darrin Gross  22:47  

Well, here's, here's what I see. This is where I've had buyers balk at my price and go with somebody else and it's based on replacement cost estimates. there's a cost of labor materials, right?  in the area that you're buying in, that's, that's the number you want. The policy says it will pay replacement costs, provided that you've insured to a percentage of replacement costs. where this is, it's critically in a total loss, you're gonna get the most the most you're gonna get what's the limit on the policy, right? So if you insured for a million millions, you're gonna get, the more likely scenario is you're gonna have a partial loss. Okay?  if you have a $300,000 loss, and you will be insured to 500,000, your first thought is, hey, we've got 500,000. That's why a $300,000 loss. We're good. But if the reality is that the policy says you have to ensure a replacement cost and the replacement cost is a million dollars, you've been under -insured by half. so the insurance company is not going to say, oh, here's your 300,000. They're gonna say, hey, you're under -insured, so we're going to under pay your claim, here's 150,000 below man. So I mean, that's a dramatic example. But it's but it is something if your policy has a coinsurance penalty on it, which all of the policies are written with some sort of some sort of a coinsurance requirement. You can work around that with various endorsements and stuff, but it's, but again, my point, you were asking the question, do I see people doing it purposefully? I think that if, if the buyer doesn't understand what they're buying, right, and you're given two policies, both of which will satisfy your lender, right? Both of which have a price, you're going to take the low price because you're trying to get the deal done. Yeah, grade, absolutely. So if you Don't understand the cost of what it's going to cost to rebuild. I would encourage you to at least ask whether it be a contractor or the inspector or somebody get a realistic Tell me what it would cost per square foot. If I asked you to build this building backboard, it costs just get a, just get a number. So you're, because that's what the insurance is based on. It's not based on what you bought it for. It's not based on what you can sell it for. Okay? we're only talking about what it costs to build it back. that's something a lot of people don't they, they're detached from that because they're caught up in the the the buy, but what they're, what they're paying for it, and what they hope to be able to sell it for which I get it right, because it's again, it's a foreign thing, and nobody wants to really get into the understanding, but I say this is more of a cautionary tale I I've had numerous claims over the years. If you get an A coinsurance penalty, it's not a happy day.

Taylor   26:01  

Yeah, I mean, I go back to, I think about what you said kind of earlier in our conversation about you hope your clients never have to use it because the insurance company's not going to show up and magically fix all the problems. This seems to be one of the biggest potential pitfalls and not only not going to show up and solve your problems, they could show up and kind of sort of make them worse.

Darrin Gross  26:27  

Oh, yeah. No, if you don't have coverage, and then yeah, and then you know, and then you're left with trying to sue your insurance company or whoever type thing but if the contract is written the way the contracts written, the use has been tested. I mean, it's not a matter if you know, they didn't do what they said they're gonna do, their contract says what they're going to do. no, I again, I say this is not a matter of trying to scare anybody, but I think that if you don't know, and you're just going off limits, Limit Price price. Limit Price price thing is probably not as bad because if you're saying both things are the same limits, but if you're if you're just going price price, if you're just looking at the low price wins and you're not paying attention to the above numbers, that's probably more detrimental. So yeah,

Taylor   27:14  

yeah. Are you seeing any difficulty in issuing or writing policies for value add strategies that people are doing today? people having a hard time getting insured? Like, what's that? How does accessibility, you know for syndicators? Look these days that are doing your typical value add

Darrin Gross  27:38  

strategy? Well, again, it goes back to basically the condition of the property if the property is if it's if it's more of a cosmetic remodel, that's not a problem. Okay. goes back to the systems we just talked about. If you're buying something that's older, that's got a lot of systems that are in disrepair or that need to be replaced. What's interesting to me is that insurance is kind of broken down into the preferred companies, which are the companies that want to insure everything is brand new. Construction is not a problem, we can ensure that all day every day with anybody we want, right? Because it's presumably not going to have a problem. Everything's new. Yeah. The issue in the issue is you get older and these systems are less secure, less sound more likely prone to to a problem, the companies that are saying pick me kind of thin out, right, so then you get into the kind of the second tier, which are more like your Desperado markets, say you know, raise your hands how much money do you have kind of thing give me money, they're looking for more, but they're also taking on more risk. Right?  So what, but in that second tier, historically, I've felt pretty certain that we could find somebody that would be willing to take on these, these lesser desirable risks. I'm finding those tier of companies to now adopt some of these higher, more stringent underwriting guidelines of the top tier companies. So that's so historically, I would have thought we always had that kind of a layer of safety. But there's been a lot written here. lately. I know, like Lloyd's, the plot of the Lloyds markets have realized that they've taken on more risk than they could potentially pay out. so I think there's a lot of these models that are now asking for more premium and they're all they're all getting back to some basics on underwriting and so is that is it that goes it's just it's more of a cautionary tale. I think, again, if you're doing a value add strategy you're buying something's built in the 80s relatively safe. You might need a new roof. But your systems are going to be up to speed. If you get older than that, probably more of that's really probably more of a line of demarcation. Because if you're doing kitchen and bathroom models, it should be some cabinetry, some fixtures, paint, flooring, you know?

Unknown Speaker  30:22  

Yeah, nothing too major. Cool. So right now, we're going to take a quick break for our sponsor.

Taylor   30:29  

All right, Darren, I've got three questions. I asked every guest on the show. Are you ready? Oh, so All right, great. First one, what is the best investment you ever made? Other than in your education?

Darrin Gross  30:47  

We built a house that's used for adult it's not an adult foster care, but it's an adult

Darrin Gross  30:58  

kind of mentally handicapped.

Darrin Gross  31:01  

People on it were something I stumbled into. I had a client that was a care provider. They work closely with the county that provided the funding for this. in a conversation learned that the county is constantly looking for more housing, and I got to talk to them about it and ended up I got a grant for like a third of it for like the down payment and that and then then the, the rent so you can charge for this type of home or like three times what a normal home would rent for so that's, that's that was like, just like wow, mind changing just the, the cash flow and, and just really the ability to save and invest more. that by far was the best.

Taylor   31:54  

Yeah, we've had folks on the show to talk about residential assisted living in the past primarily for us. Elder Care things like that we didn't really talk about folks with developmental disability. So definitely interesting that you know, that those things are being built and that's, that's great. you know, glad to hear that on the other side of that what is the worst investment you've ever made

Darrin Gross  32:19  

worst worst investment I probably go to another property and even though it was the worst turn, it was even the worst I'll say it's the worst out of the ones that I've done. It was just a really, really rough property. I mean, it was scary and it was my first property and it didn't know what I was doing. But well, it didn't make money in the short term. Then I have another client that was looking for a rental and he bought it from me and I essentially did a flip not even not trying and made you know, at the time Probably equal to half a year salary based on just a seven month hold kind of thing. It got me excited about real estate. So really hard to say it was the worst one, but it was probably the scariest property from a standpoint of just something that I own.

Taylor   33:19  

I'm okay. Okay. My favorite question here at the end of the show, is what is the most important lesson that you've learned in business and investing?

Darrin Gross  33:29  

Most important, there's a lot of weight on that answer there. But I would say you got to ask the questions. You gotta communicate. If you don't understand, ask some questions, work to get the answers. don't be afraid to ask the questions. don't assume anything, that's for sure. I mean, if you assume anything that you know, making the most out of you and me kind of thing is definitely the the Have that so I think that don't be afraid to raise your hand ask the questions, make sure you understand the numbers, how everything works, because otherwise you're going to find out and it may be too late.

Taylor   34:12  

Nice. Ouch. Yeah. Wow. So thanks for all the lessons today about real estate insurance. It's not a topic that really is discussed enough. It's, we all have insurance on all of our properties or at least you know, we should probably be required to, but if people aren't, they aren't out there and talking about it that much. So I appreciate you coming on the show and sharing some of the important lessons that we need to know about ensuring our properties if folks want to learn more about you, Darren, where can they find you? Where can they get in touch

Darrin Gross  34:46  

you but you can check out my website. It's Jaden gross, the letter J Darren da ri n gross groSS calm.

Taylor   34:56  

Nice, nice. You got that radio voice going on. you know, I, you have your own podcast.

Darrin Gross  35:04  

Yeah, no, we also have a podcast, commercial real estate pro network. We do weekly interviews where we interview real estate investors and professionals in a very similar format to what you've got. We try and kind of get some ideas or stories or some sort of valuable information that helps real estate investors.

Taylor   35:30  

I love it. I love it. Like I said, you got a real radio voice going on. So just makes it great to listen to so folks should definitely check that out as well. Thanks once again for coming on the show and sharing those lessons to everybody out there. Thank you for tuning in. If you're enjoying the show, please leave us a rating or review on Apple podcasts, very much appreciated. If you know anyone who could use a little bit more passive wealth in their lives, please share the show with them and bring them into the fold. I'd have a great day and a great rest of your week. Thanks for tuning in once again. We'll talk to you in the next episode. Bye

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