Insurance deductibles for SFR

[Brian Stinson]

Curious of what everyone is electing their SFR deductibles to be? My thought was the higher the better to maximize cash flow. I have been keeping them between $9,000 to $10,000, does anyone go higher?

[Bo Bond]

Brian,

We see a lot of "residential" investors taking on larger deductibles than they have in years past, and even more so as we see rates increasing in a hard insurance market.  Over the past 20 years, the insurance market has a whole has been pretty soft, with a few flashes of hardening (after 911, and after the sub-prime issues of 2008), but nothing like what we're experiencing right now.  In a soft insurance market, coverage is usually broader, lower deductibles are more accessible, underwriting is usually more flexible, and premiums are generally aggressive / lower.  In a hard insurance market, we typically see the complete opposite.  We see a tightening or restricting of coverage, higher deductibles, more tedious underwriting requirements, and increasing rates.

As far as deductibles specifically, it really depends where you are in the country.  From what I've seen, the days of the $1,000 and $2,500 deductibles for fire, lightening, water damage (not flood), etc. are becoming harder and harder to find.  Especially when it comes to investors with a sizeable portfolio of rental homes (10+).  The most common deductible I see countrywide is $5,000 for your standard deductible.  That said, if you only have a few "residential" rental buildings, most direct carriers can get you pretty low deductibles on their stand-alone policies (State Farm, Allstate, Farmers, Nationwide, etc.).  That said, I've seen many of these carriers are pulling away from habitation exposures (non-renewing a good portion of that business).  It's when you get a more significant portfolio of homes that you start to see these larger deductibles.

Wind/Hail is a completely different topic.  OUTSIDE of coastal counties/cities (within 60 miles of the Gulf & East Coast), wind/hail deductibles are typically 1% or 2% of the building limit on file, and can many times come with a minimum deductible as well (typically $5,000 or $10,000).  If you have any significant loss issues (frequency / severity) due to wind/hail in the recent past, you could see this minimum deductible set at $15,000 - $25,000 (per building).  You will certainly see this in the more wind/hail prone states.  Again, this is typically for those with larger portfolios of "residential" rental buildings.

MN is very much a wind/hail prone state (assuming that's where you mostly invest).  It may not get the number of wind/hail storms like TX does, but when the storms do hit in MN, they're usually very large systems, and produce awful hail damage.  I think for MN specifically, a standard deductible of $5k to $10k is normal, and the wind/hail at 2% or $10k (whichever is greater) is typical for your area/state as well.  Choosing a higher deductible MAY allow you to maximize cash flow, but as you know, every investor's situation is different.  Yes, jumping that wind/hail deductible up to $20k or $25k should impact your premiums even more.  However, if you elect to go this route, just make sure you've analyzed your portfolio with your insurance agent to make sure you can afford these deductibles when it becomes absolutely necessary to pay them.

I hope you find this useful.  Good luck.