Property Insurance: is it worth it?

Question

Some will undoubtedly think I'm crazy, but I invite B&H investors who owns 5+ SFH to give their inputs on my thoughts about forgoing property insurance on my 3 SFHs.

Here's why I'm thinking of forgoing property insurance:

1) In the past 20yrs of owning all 3 units, I've had the following claims:

1 floor damage due to dishwasher leak, 1 garage roof damage due large tree branches falling down, 1 burst pipe due to the extreme cold, 1 act of vandalism that ruined a bay window.  The insurance company paid for the floor damage from the dishwasher leak, and didn't pay for anything else, either because the $1000 deductible exceed the repairs or I didn't have the riders/extra coverage required (vandalism for example).

2) In the past 20yrs, I've paid the following : $650/year/SFH (average) = $39k (assuming no inflation nor interest).  My rental homes are valued ~$50k, I can almost buy another unit in cash every 20yrs at this rate, instead of settling only for flooring replacement.

3) If I were to keep property insurance, I would more than likely increase the deductible to $2k to reduce premiums.  At $2k deductible, the insurance company would cover virtually nothing in my opinion since most things that go wrong are under $2k to fix.  Again, very few natural disasters in my area other than risk of fire.  And if that fire was vandalism, then I'm probably going to get screwed by some insurance lingo verbiage that I didn't really understand because I didn't spend hours perusing the insurance booklet of fine prints.

4) If I save $1850/year for my 3 units, I'd put that in my own insurance fund.  in 10 years, something will most likely go wrong (furnance blew up from spontaneous combustion, aliens decided to zap my bay window again..whatever).  $18k in 10yrs, I think $18k would pretty much cover whatever I needed to fix from a "big disaster" on a $50k SFH.  This "self-insurance" makes more and more sense as I accumulate more and more properties.

5) I would buy some type of umbrella liability insurance to cover me from lawsuits.

Let's assume I would buy insurance when required due to loan requirements from the bank - but if I can help it, no insurance.

What are your thoughts on my craziness?

Jean Bolger · Answer

Well, if you've got a loan, you'll have insurance. No way a bank will allow you to self-insure on a mortgaged property. In the past five years my insurance has paid for three roofs. One at $16k, one at $12k and one at $7k. So I wouldn't consider trying to self-insure, but I also live in an area that does get a fair number of hailstorms and I don't have a lot of cash stashed away

Andrew S. · Answer

Agree with @Jean Bolger - this only works if not mortgages.   Regarding umbrella for liability, I doubt you'll find a company that will just write an umbrella on an uninsured property.  Usually, each item (car, property, etc) has to carry a certain minimum liability and then the umbrella is on top of that. I'm guessing your type of general liability insurance would be quite a bit pricier than a normal umbrella, if it even exists.

That said, I totally agree with your premise - self-insuring might pay off for a substantial portfolio.

Sylvia B. · Answer

You're not crazy. You've run the numbers, you are the only one who really knows if you are willing to take the risks. I happen to be a very anti-insurance person, though.

Hattie Dizmond · Answer

As long as you have liability insurance to cover you from litigious action AND you have sufficient reserves, I don't think you're crazy at all, particularly not on $50k properties.  It would be different, if you were talking about properties $200k each or something.  You do your own financial risk analysis.

William P. · Answer

@Bao Nguyen

I think poster @Andrew S.  is correct, you cant just get an umbrella.  Not sure.

The approach I take on my personal home is to have a high deductible (10K). I had to clear that with the lender.  I wouldnt bother making a smaller claim anyhow, as then you rates go up

On these low priced properties tho, I wonder if the banks would allow you to have that high of deductible.

Anyway you are definitetly not crazy - I'm with you.   I only buy insurance on things I cannot easly cover (my life, liabiity).

J Scott · Answer

Good advice above.  It really boils down to your level of comfort.  If there's a fire, you risk losing your entire investment...but if you're comfortable with that risk, that's all that matters.  I self-insure about 50% of my flips these days (I have my own criteria for when I do and don't), and I recognize that I'm always taking a risk of losing an entire investment if things go horribly wrong; on the other hand, I've probably saved $10K over the past couple years by self-insuring.

Property Insurance: is it worth it?

Most Popular Reply