461: Skyrocketing Insurance Costs, The End of Free Money

Sharply higher insurance premiums are affecting property owners nationwide. It’s especially bad in: CA, LA, FL, TX and CO.

This is due to erratic weather (climate) and higher rebuilding costs. 

Phenomena like an increasing intensity and frequency of hurricanes, tornadoes, wildfires, and floods are sending some insurers out of business.

State Farm and AllState completely stopped issuing new homeowner policies in California.

Some areas are on the brink of becoming completely UNinsurable. In that case, the only sales that could occur with all cash buyers.

Learn three techniques to keep your skyrocketing insurance costs lower.

As you’ll learn today, landlords have more options than homeowners for navigating spiking insurance rates.

Then, listen to a CNBC clip along with me about how the end of ZIRP (zero interest rate policy) affects your life and investments.

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Complete episode transcript:

 

Welcome to GRE! I’m your host, Keith Weinhold. First, I’m going to help you make your real estate more profitable in the near term as I discuss how to deal with skyrocketing property insurance costs. 

 

Later, I’ll inform your strategy about your long-term, overall personal finance as we talk about what the end of free money means in this new era of higher interest rates. Today, on Get Rich Education.

____________

 

Welcome to GRE! From Tirana, Albania to Albany, New York and across 188 nations worldwide, I’m Keith Weinhold and you’re listening to Get Rich Education.

 

This is how real wealth is built in the real world with real estate. We aren’t day traders. We are DECADE traders.

 

And we do that with the right mission. Let’s invest directly in America - own real property in American neighborhoods, and provide housing that’s clean, safe, affordable and functional.

 

And when we all do that, we can abolish the term “slumlord”.

 

Conversely, what do some people think about first? Themselves.

 

[RIC FLAIR CLIP]

 

Ha ha ha! Over the top with some vintage Ric Flair. There’s nothing wrong with living well. But that best comes as a byproduct of serving OTHERS first.

 

Let’s talk about the SKYROCKETING cost of property insurance. Why it’s happening, what MY experience is, and what you can do to manage it.

 

First of all, and I hope that none of my insurance agents are listening, but why would you ever work in the insurance industry? 

 

And I kid. But that’s got to be one of the most boring industries to work in.

 

What 15-year-old ever says that when they grow up, they want to be an insurance broker? Nobody.

 

But, in any case, it is a STABLE industry because there will long be a need for insurance.

 

But, I mean, even your customers - the policyholders like us - we don’t really want insurance.

 

Insurance ads all say the same thing: “Switch and save.” No one has seen an advertisement from this industry that says, “Upgrade for better coverage.” 

 

That’s because so many people just want the minimum coverage and want to get on with their lives… until a calamity occurs.

 

But now, the insurance industry has gotten SOMEWHAT more interesting lately, the effects of which center around erratic weather… maybe you like calling it climate change, maybe you don’t.

 

But suffice to say, if erratic weather persists, then it’s no longer erratic, rather, it is, in fact, a pattern, and then, a change in a region’s climate.

 

The intensity & frequency of storms is increasing. I’m talking about weather phenomena like hurricanes, floods, wildfires, tornadoes, and even high snowfall. 

 

Inflation also means that there are rising COSTS to rebuild. 

 

And RE-insurance costs are higher. Yes, your insurance company gets insurance from insurers themselves, called re-insurance. Re-insurance companies insure insurers.

 

Everyone knows State Farm’s jingle. “Like a good neighbor, State Farm is there.” No, State Farm is gone. 

 

State Farm is the largest home insurer in CA. So they’re the largest home insurer in the most populous state.

 

Well, you might have heard a few months ago that they’re completely stopping issuance of new home insurance policies in all of CA. And AllState followed shortly afterward.

 

Persistent wildfires are a culprit there.

 

Insurance companies can’t make any money so it’s hard to blame them.

 

Well, why don’t they just, say, double their premiums? Some sure have. Others can’t because of competition for lower rates from other companies. 

 

But a lot of SMALLER insurance companies - including many in Florida - have done just that. They’ve gone out of business… and when there are fewer companies in business - less competition - that’s when rates can get jacked up high.

 

Insurance rates are up the most in many of the states that have the greatest incidence of hurricanes, floods, and wildfires.

 

What are the states where rates are rising most? 

 

CA, LA, and FL. And after that, TX and CO too, and some other states. 

 

TX is one state that’s subject to both hurricanes and tornadoes - hurricanes in SE Texas - Galveston, Houston and Corpus Christi.

 

And tornadoes in NE Texas, like Dallas-Fort Worth.

 

So, when hazards happen, losses can occur. That’s why your lienholder - your mortgage holder - forces you to have insurance. They require you to have it because they’re not willing to take that risk.

 

Louisiana’s problems with insurers REALLY compounded a few years ago when Hurricanes Delta, Ida, and Laura hit the state. That created a true crisis in Louisiana’s insurance market. 

 

A lot of insurers just left with $24B in insurance claims during that period. Others in Louisiana stopped issuing new policies and increased the premiums on the existing insured homeowners.

 

Now, I’m going to center on the homeowner’s insurance problem in Florida soon, because Florida is a popular investor state, I own a lot of rental properties in Florida and I’ll tell you about my personal insurance experience there shortly. 

 

When it comes to wildfires - which are often spurred by hot, dry, and windy weather conditions, some areas are on the brink of becoming completely UNinsurable. 

 

California has a bunch of regions like that. And other places like Bend, Oregon and Boulder, CO are in danger of insurance denial because the homes are surrounded by forest. 

 

If that happens there, the only resale market for the properties would be to all-cash buyers, unless the state ever comes in to buy them out since people were ALLOWED to build there in the first place.

 

Now, notice that I haven’t mentioned earthquakes yet. Earthquakes aren’t related to the surface weather like hurricanes and wildfires and these other things are.

 

Earthquake insurance, which many people have in places like CA, WA, OR and AK is often a completely SEPARATE policy from your standard homeowner’s policy and EQ insurance is prohibitively expensive.

 

Besides that, their deductibles can be high, like 10 or 20%. If an earthquake completely destroys your $500K home and you have a 20% deductible…

 

… then to even make a claim, you’d need to come out of pocket $100K first - plus you’d be paying high premiums all that time just to have that condition!

 

Anchorage, AK had a big magnitude 7.1 earthquake back in 2018. 

 

I was in Anchorage when it happened and I told you about that here on the show back then. I was pretty shaken up. 

 

At the time, I owned dozens of apartment units in Anchorage. I don’t anymore. I had, maybe $40,000 of out-of-pocket cosmetic damage that I had to pay from that one earthquake.

 

Lienholders DO not make EQ coverage a necessity, and 25% of Anchorage homeowners had coverage before the quake. It went up to 35% afterward.

 

Fortunately, the top cash flow REI areas don’t tend to be in the west coast of the United States.

 

So, how high have some of these insurance premiums gotten in states known for disasters?

 

Well, the average is about $225 per month in LA. In TX, it’s $250 per month on their average $300K home, and in Florida it’s about $325 monthly on a $300K home. 

 

Of course, that’s going to vary by what region of the state you’re in and distance from the coast and such.

 

One weather phenomena that I haven’t seen any evidence of in contributing to higher insurance costs is heat itself. 

 

This summer, Phoenix hit a new record for consecutive days that exceeded 110 degrees Fahrenheit. That went on for weeks on end.

 

But heat in itself, and its resultant air conditioner use and power load - is not something directly attributable to escalating insurance costs, unless power load problems start a fire.

 

Now, you keep hearing about climate migrants moving to more northerly places with access to a lot of fresh water like Minnesota, Michigan, and Wisconsin.

 

But these stories seem to be largely anecdotal and of little impact.

 

The faster-growing areas continue to be in the Mojave and Sonoran deserts - that’s Las Vegas and Phoenix - places with lots of heat, rising heat, and dry conditions. 

 

And despite what you might think, they’re not going to run out of water anytime soon. 

 

Those deserts actually have a lower incidence of natural disasters too, which is one reason why they’ve built new microchip plants in Phoenix. 

 

Climate migrants moving north might be a thing at some point - but it still is not.

 

Well, speaking of hot in-migration states, Florida has had a LIGHT hurricane season so far. But that’s not the kind of thing that we can count on for long.

 

Rates have gone up more than 50% throughout the state of Florida, with ALL insurance carriers. 

 

Carriers are either pulling out of the state (because its not profitable for them), or they’re increasing rates across the board, or they’re not renewing policyholders.

 

Now, I’ve had my rates hiked up on my Florida properties more than once. 

 

There, it’s often because an insurance company goes out of business due to too many claims, and then I have to switch to another landlord’s policy carrier that always has higher rates.

 

So here’s what happens. I get a notice in the US mail that my current insurer on a Florida rental SFH - call them Insurer A - is going out of business in 5 months and that I have 5 months to find a new insurer - call them Insurer B.

 

So I take a photo of that notice and forward it over to my Florida insurance agent and ask them to give me quotes for my new prospective Insurer B. 

 

Now, say that if you don’t do that. 

 

If you don’t ask your insurance broker or agent to get you a new policy, if you don’t act, here’s what happens.

 

Say that the 5-month deadline approaches and you still don’t have new coverage lined up.

 

Your mortgage holder, call them Wells Fargo or Chase, they’ll send you a notice in the mail and remind you that it’s required that you have insurance in place – because Wells Fargo or Chase doesn’t want to be on the hook for the risk… and if you don’t get a new insurer - Wells Fargo, say, will buy a policy FOR you & make you pay it.

 

And the insurance that they buy for you will have lesser coverage and cost way more.

 

It seems like, whoever the bank is, they always tell me that they’re going to buy me an ultra-pricey policy with Lloyd’s of London.

 

So again, it doesn’t entail too much work on your part. If your insurer is going out of business or just doesn’t want to issue you a new policy, share that notice with your insurance person and ask them for new quotes. That’s a quick, easy thing to do.

 

And then, when you switch insurance companies, your PM must submit photos of your rental home to the new insurer within something like 15 days.

 

Over the past few years, I think I’ve had Florida properties where the premiums have been hiked up steeply twice. I seem to remember a complete doubling a year or two ago.

 

More recently, I had 30% rate increases on some of my Florida rental properties.

 

So how much am I paying now? Well, on one Florida rental SFH that has a market value of about $300K, I’m paying $330 per month. 

 

Of course, for your long-term rental properties, your landlord insurance contract should provide what’s called “loss of rents,” coverage.

 

That’s something that OO homeowner’s policies don’t have. 

 

That means that if your property is damaged and your tenants are displaced, your insurer pays the fair market rent to you since the tenant won’t. That’s typically capped at 12 months.

 

On your STRs - like AirBnBs and VRBOs, the coverage that you want is called “lost business income” with no time limit. And that might take an upgrade to a commercial insurance policy for STRs.

 

Alright, so let’s get to something actionable. We are real estate investors for the production of income.

 

So amidst what are perhaps UNPRECEDENTED increases in insurance premiums these last few years, how do you navigate this, and what do you do to stay profitable?

 

Well, whether you’re an OO or a rental property owner, you can do things like make sure that your coverage is appropriate.

 

You can raise your deductible amount to reduce your annual premium, of course.

 

The more financially strong that you are, the higher you can make your deductible because the less a claim is going to impact you.

 

But as a rental property owner, you have a FEW LEVERS that you can pull that OOs cannot.

 

The big one - is that this is your cue to RAISE THE RENT.

 

Yes, higher insurance premiums point to raising the rent. 

 

Really, this is like a game of hot potato… and it is your job to pass along the potato. That’s all that you’re doing here.

 

See, the reinsurer raised rates on your property insurer.

 

Your property insurer is raising the rate premium on you, the property owner.

 

Now it’s your job to pass along the hot potato to the tenant in the form of a rent increase.

 

Then your tenant has to pass along the hot potato by asking their employer for a raise or finding new employment.

 

And it keeps going, now your tenant’s employer needs to pass along the higher labor cost in the form of raising consumer prices on the goods or services that they produce… and it continues throughout the economy.

 

That’s how inflation works.

 

It’s your job to pass along the hot potato.

 

What if the tenant leaves? Well, there’s always that possibility. 

 

But if they go to rent or buy a “like” property, it’s still going to have the same higher insurance cost that they’d have to pay.

 

For help with that, and this is the second time that I referred back to this recently, in Episode 449, just twelve weeks ago, I provided you with 12 ways to raise the rent. Again, that’s Episode 449.

 

You always want to provide a REASON to the tenant about why their rent is increasing, say 5% in this case for example.

 

Nothing beats the truth. Your insurance costs are higher. That’s the reason.

 

Now, you might be wondering, if, say, insurance costs just rose 30%, like they did on one of my own properties recently, then how is a 5% rent increase going to offset that?

 

That’s because your rent amount is multiples more than your monthly insurance amount.

 

If your rent on a property goes from $2,000 to $2,100, that’s just 5%, but it’s a $100 increase in your income.

 

If your monthly insurance cost goes from $200 up 30% to $260. That’s a $60 decrease in your income.

 

You have a $100 gain from rent and just a $60 deduction from your insurance increase, and you’ve more than offset it. It’s THAT effect.

 

Now, what if your numbers don’t work for raising the rent though? As an income property owner, you have other levers that you can pull that are less palatable as an OO.

 

That is, can you sell the property? If you’re in SFRs, there is a big buyer appetite for them.

 

And in just the past three years, there’s been so much appreciation that you might have a lot of equity such that you can trade it up for 2 SFRs.

 

Now, new-build properties in a place like Florida have substantially lower insurance costs than older properties, because new-build properties are built to more stringent wind resistance requirements.

 

So you might trade up your older, existing Florida property in this case for a new-build property that has lower insurance deductibles.

 

Insurance costs ALONE rarely drive investment decisions. But it’s the fact that you’d get to reposition dollars at a higher leverage ratio at the same time.

 

But now, if you’ve owned the property for, say 2 years or more, you might lose your ultra-low rate mortgage that you got a few years ago.

 

You need to run some numbers and see if it’s worth giving up your low mortgage rate in order to get more leverage and lower insurance premiums. That’s the trade-off.

 

See what works best for you.

 

So, your first lever is clearly to just raise the rent on your existing properties that have higher insurance rates.

 

To summarize what you can do to meet higher insurance premiums is:

 

#1 - Raise the rent. #2 - Tilt your portfolio into more NEW-BUILD properties in some markets, and #3 - Increase your deductibles.

 

They are the actionable takeaways that I really wanted to share with you today. 

 

Keep investing. Tweak your strategy where you need to. Be sure that your tenants are taken care of.

 

And after that, remember, that it’s common that when you have an insurance CLAIM, that you often profit from the event when your claim pays more than your actual losses were.

 

Coming up shortly, the 15-year Era of Money for Nothing is Over. How does this new era look and how do you adjust to it?

 

There is more real estate news and more that impacts your personal finances every week that we can cover in one big, weekly show here.

 

Strip Malls are Hot (yes, really) Strip malls are hot, Old Houses are Now as Valuable as New Houses, and Zillow predicts 6.3% HPA from June of this year to June of next year.

 

More details on stories like that, as well as my breakdowns of developments like that are in our Don’t Quit Your Daydream Letter. You can get it free. Just text “GRE” to “66866”. 

 

Actionable real estate guidance, breaking news, and a dose of my dorky, cornball humor are all in the letter.

 

Get it free by texting “GRE” to 66866. More next. I’m Keith Weinhold. You’re listening to Get Rich Education.

_____________

 

Welcome back to Get Rich Education. This is Episode 461. I’m your host, Keith Weinhold.

 

The United States is entering a new economic era. 15 years of access to nearly FREE MONEY has come to an end.

 

Let’s listen in to this terrific CNBC compilation where you’ll hear the voices of a number of economists, reporters, and directly from people that used to work at the Fed… on what this all means with the end of Fed Funds Rates at zero - the good and the bad.

 

Some familiar voices that you’ll hear include CNBC’s Steve Leisman.

 

And, near the end, Former Fed Chair Ben Bernanke.

 

This is about 12 minutes in length and then I will come back to comment.

 

[CNBC Clip]

 

Let’s remember that economies work slowly. There are lag effects. The Fed began hiking rates in March of 2022.

 

And higher rates are only starting their job, not finishing.

 

Today, higher insurance premiums and a higher cost of MONEY (which is what interest rates are) are trends to navigate.

 

With both, if you’re a landlord, you can raise the rent. 

 

Longer-term, have that 30-year FIRD. Just that plain, vanilla loan in most cases. Nothing fancy. 

 

That’s because, living in the US has many benefits, like stunning national parks, seedless watermelon, and pizza with cheese baked into the crust.

 

But it’s got something even better, even better than fixing your rate for 30 years. It’s that ability for you to refinance as soon as rates drop.

 

You get to alter the deal whenever it’s best for you whenever you’re in residential real estate.

 

Well, at the end of the show, I’ve learned that you’re often thinking “I want more. How can I get more content like this without having to wait until next week?”

 

I often like to leave you with something actionable at the end. Get our Don’t Quit Your Daydream Letter. I write every word myself. You can get it free right now. Just text “GRE” to “66866”. 

 

Until next week, I’m your host, Keith Weinhold. DQYD!