Property Management and Insurance Go Hand in Hand
Who manages your investment properties is important to your insurance company.
One of the first questions any real estate investor should be able to answer is, “How am I going to manage my property(ies)?” The answer is important for many reasons. It’s also important to someone you may not have thought of: your insurance company.
Some investors handle their own property management and others hire a third-party company. The important thing is to make sure whatever property management strategy you use allows you to maximize your yield and minimize your risk.
Entity Separation
If you do decide to handle your own property management, it is often recommended that you set up the property management services as a separate entity from the entity(ies) in which you hold your assets. The former is considered the “operational entity,” and the latter is the “asset-holding entity.”
Separating the two will help maximize your protection and may add additional layers of insurance coverage for potential claims. It is always important to protect your asset-holding entity, meaning all the agreements you enter and risk management decisions you make should be done with that in mind.
Even though you may own and control both entities, think of them separately, each with its own assets, liabilities risk exposures and insurance policies. When you self-manage, you will wear two hats—that of an investor and that of a property manager. When you are wearing your property-owner hat, maintain the same expectations of your own property management company as you would a third-party company.
You would expect a third-party manager, for example, to:
- Quickly respond to emergency calls.
- Use insured subcontractors (meaning your contractors have general liability, workers’ compensation and commercial automobile coverage in place).
- Handle evictions that follow local, state and federal housing guidelines.
If you are unable to handle these basic requirements, then hiring a third-party manager may make the most financial sense for you. Outsourcing property management automatically gives you entity separation and clearly defines expectations and expenses. A good third-party property manager can also help you minimize your insurance claims, especially smaller, nuisance-type claims. Fewer claims can result in lower premiums.
What Insurers Look For
Next, let’s take a look at good risk practices as it relates to how your properties are managed. This is not only important in helping you protect your assets, but also in helping you reduce and transfer risk. Most insurers will look at whether you are following good risk practices in managing your properties. Here are some of the items they look for when underwriting and pricing insurance for your asset-holding entity.
- Signed property management agreement. A signed agreement outlines what is expected of both you and the management company as it relates to a variety of services. Even if you self-manage, it is important that you maintain a signed agreement between all your asset-holding entities and your property management entity. In the event of an insurance claim, this agreement may be the difference in which policy responds to a loss. Since insurance policies “follow the contract,” it is very important this contract is in place and enforceable.
- Signed lease agreement. The term should be for at least 12 months. Make sure the lease is compliant with any local and state laws and ordinances.
- Tenant screening of all residents over age 18. Proper screening includes a criminal background check, employment/income verification and sex-offender registry verification.
- Renter’s insurance. Renter’s insurance provides your tenant not only coverage for their belongings but also liability coverage if the tenant unintentionally causes damage to your property.
Forty percent of all fires are tenant-caused. If your tenant does cause a claim, a renter’s insurance policy can be the primary policy to respond. This allows you to avoid filing a claim on your policy, paying your deductible and having a claim on your insurance record. A high percentage—43%—of renter’s insurance policies cancel within the first week, meaning tenants often start a policy to satisfy a lease but then quickly cancel coverage. It is important to use good tracking systems to ensure your tenants maintain coverage. - Rekeying/Lock Replacement. Make sure your property manager rekeys or changes locks when a tenant moves out or is evicted.
- Vacant Property Procedures. Many insurance claims that occur do so in a vacant property. There can be multiple reasons for a vacancy, including tenant turnover, renovation or eviction. In fact, 38% of claims filed happen when a home is unoccupied. By putting good controls in place and scheduling regular inspections of a vacant property, you can avoid or reduce your claims exposure.
Also consider having your management company install cameras or video surveillance of the vacant property. Make sure any system you install can work off cellular technology in case there is not active Wi-Fi. - “Smart” Home Technology. There’s been an explosion of “smart” options for making housing more secure and efficient. There are systems that can provide keyless locks, cameras, smart thermostats, water management, lighting control, sprinkler control and garage control. Although these systems help save residents money and protect the asset while its occupied, they can also help when your property is under renovation or between tenants. For example, they can reveal when a vendor accesses a property to do work, an HVAC system is not performing, a water leak is detected or a real-time photo of a prospective resident doing an unattended showing.
These are just a few examples of actions a property manager can take to help contain your risk and minimize your exposure in the litigious world we live in. It is highly recommended that you utilize a reputable, insured property manager as you begin your investment journey. As you continue to scale your operations, you may want to consider vertically integrating your operation; however, be aware that capturing these costs through your own operations entity/property management company may not always be profitable.
