Would you consider self insuring?

Just settled today on the latest IP (yay) and suddenly remembered to arrange landlords insurance.

For context, all the IPs are strata titled units (so the buildings are insured). Strategy is buy & hold good yield - I spend so much time working overseas I want minimum maintainence. There's also a whole less damage a tenant can do in the confines of concrete walls compared to a freestanding house.

I got thinking, cumulatively, insurance premiums are starting to add up. There's a natural spread of risk given the number of properties involved. It's something I'd never consider for a freestanding house, but thought what if I put all those insurance premiums in a bank account, and build up a pot of money for a rainy day & effectively self insure? What are people's thoughts? Would you ever self insure? Does anybody self insure?

 

I guess it's a cash flow thing, like if your tenant does some malicious damage then does a runner and you lose 3 months rent, can you candle that?
What about public liability?

Personally, I wouldn't consider it "self insuring".
You either buy an insurance policy or use the money for something else and accept the risk in the meantime.

 

Nope.

Professional insurance. My insurance costs about $800 per property. Losing 2 weeks rent from bad tenant plus repairs, waiting time for new tenant, would easily top that.

 

Many of my investors who own 15 to 20 properties do exactly that. Rather than insurance, they use funds from other properties to offset any losses in one property.

It also depends on where the properties are, some demographics are riskier than others and the general performance of the entire portfolio.

It certainly is an option, personally I would not recommend it to any client, I like to always recommend the right type of landlords insurance, but yes there are people who are choosing to do what you are suggesting.

 

I get the risk on one property. What if you had 10 properties and put $8,000 in your offset account? Yes it's a gamble, but landlords insurance is just a bet you're placing with the insurance company that your tenant will do a runner etc.

 

I would definately agree with going down this path for the property damage/loss of rent side, but it would be the public liability that would keep me up at night. What about that unlikely scenario where someone is injured on your property for a cause that could be attributed to you? Covering a few weeks rent or minor damage from savings, no biggie, but that worse case scenario of a few hundred thousand dollars in compensation would be financially crippling.

 

Great point.

 

You could get s public liability policy from an insurer like chub to cover all your properties for a maximum claim of $20m in one year. I'd guess about $1,500 for as many as 15 properties. Speak to an insurance broker.

 

That's a good point. That said I won't go without insurance... there are unlikely risk of the building burn down etc, public liability. Tenant arrears and damaged property happened more often to me as two of the propert is low socio economic area. As we speak, I'm owed about 3 months rent and counting (in the process of getting tenant for one, getting out the other tenant), water cost, tribunal cost, key change, cleaning and repair fees. Happened twice in the last 2 years. That's +$5k lost from rent alone.

 

Self insuring becomes more economically viable the larger the portfolio.

If you have 3 properties, then at $300pa for landlord cover, $900 pa is far less than a rental loss or damage claim and so holding insurance is worth it.

If you have 10 properties, then $3000pa for cover is bordering on risk of 4 weeks rent loss plus some damage.

If you have 20 properties, then $6000pa for cover is not worth it and you would self insure loss.

 

Always remember that even in strata properties, you still need to cover for kitchens, bathrooms, floor coverings, light fittings and other fixtures which can be costly to replace. With some plans, you may also be responsible for the glazing.

 

Keep thing simple use a insurance provider to cover the cost for insurance purposes. Use your funds as a safety net or better yet, use the funds for something else.

Insurance is tax deductible as well.

 

Insurance is simply another form of gambling. You can gamble and win (make a claim) or you can gamble and lose (pay for never making a claim).

In my insurance gambling life I have been a massive loser! Between home, car, health, income protection.etc I would probably gamble $5000 a year. I have collected in total about $7000 putting me down roughly $25,000 for my insurance life (very rough allowing for times when insurances were less.etc).

I would say Most people if they gambled would win, even if they had to pay out the odd thing you would still be well in front! But the question you need to ask, is how comfortable are you with it? For example would I drive my car the way I do without insurance?
Would I leave it parked where I do.etc. For me the answer is no so I just cop the loss for peace of mind.

 

Another option is pay your insurance
(as too risky in my book if a property that the bank mostly owns and i am responsible for- burns down)
but get a much lower premium on all yr policies by having a large excess.(usually 5k$ plus)Then save the extra funds (you would have spent on the higher premiums)over ten years from all your properties and buy another property with the savings

 

Depends on what insurance you are talking about. If it is purely LL insurance, then yes, over a large portfolio I might consider self insurance.
If you are talking about building cover then no. The risk of a tenant accidently burning the place down would be too large. Also - the bank forces you to have building insurance. So this isnt an option. However, you would need to advise the insurer that the property is rented, and ensure that you are covered for their actions/inactions.

When I owned a car I self insured - though took out third party property insurance, just in case I hit a ferrari and wrote it off.
My car was worth about $10k and premiums at the time were about $700 + excess (I was young).

The only car insurance claim I ever made I was in a company car - when a wheel came off and went through the window of a house. But thats another story.

Blacky