Why Home Insurance Costs Are Exploding (And How It Impacts Your Investments) | Ep 40

James: Welcome to the Furlo Capital Real Estate Podcast, where we dive into the intricacies of passive real estate investing. And our mission is to equip people to invest wisely in both properties and residences so that together we can build wealth while improving housing. I'm James, and this is my wife, Jessi.

Jessi: I'm here with a hurt elbow.

James: How'd you hurt your elbow?

Jessi: So dumb. I hit it on a towel rack. Okay. Like a week and a half ago. And my fingers still feel a little numb. Like, I think maybe I tweaked a nerve or something. Man, getting old is lame.

James: Have you thought about seeing a doctor?

Jessi: No.

James: No. Cause you're afraid insurance won't pay for it.

Jessi: Oh yeah. Total scams.

James: Yeah, that's actually what I want to talk about today is your hurt elbow and insurance. I there's something going on right now in the U S probably around the world, which is kind of interesting

Jessi: with insurance,

James: Yeah, with insurance. I've, what was it? I was talking to somebody about it.

I saw a video, and then I read an article about it, and I was like, Okay, this is clearly a thing, it's becoming a thing, we've got to talk about it. Is this like, all

Jessi: forms of insurance? No, home

James: liability insurance. Home insurance, alright. It's probably all forms in general, but I'm specifically, like, we're a real estate podcast, so we're talking real estate.

And so yes, I want to talk about it, so that you are aware of what's going on, and and what I want to share are some insights, From the stuff that I've seen and read and then some actionable advice that you can take from all of them. I've got six that we're going to, yep, go back. So I'm intrigued that I'm going to, I'm going to blast through here.

All right. Ready? So let's talk about it. All right. Number one. Is just the problem is that there's a rising cost and unavailability of home insurance.

Jessi: Okay.

James: Okay. So the home insurance market is increasingly becoming, it's unstable. And that is there's, you will hear some bias in these articles that I am repeating.

But they're like, there are more frequent natural disasters and climate change. Is getting us. And so, insurers, or perceived climate change, we'll put it that way. Sure. So insurers are either withdrawing or significantly increasing their premiums. Mm hmm. Okay?

Jessi: Right. Which is They don't want to pay out more money.

James: Yeah. Right. Yeah. Exactly. And there's a few reasons behind this. Those are kind of like the, the two top ones, but there are more things that are playing into that. And so my advice at a very top level is research the insurance landscape in the area that you're considering for investment and take into account some of the factors that I'm about to share.

And you especially want to pay attention in regions that are prone to natural disasters. So think hurricanes, earthquakes, floods, that kind of stuff. So like Florida is one. But it's not just the fact that there are more frequent natural disasters and things like that. There is this paradox that has been emerging in real estate, a paradox of increased real estate demand and insurance availability.

Okay, so here's what happens is you have a whole bunch of people who want to live in a particular place. So the density goes up. And so let's say you have a house fire. Like, in a rural area, no big deal, right? I mean, it is to that family, but like, that house goes down, okay, we're done. But if you have a fire, let's say in Paradise, California, where it's a whole bunch of neighborhoods together,

Jessi: one

James: house happens, the entire neighborhood goes down.

Same thing happened in Hawaii recently. And so that has become a problem. So places like Florida, California, and Texas are the ones that are facing the most severe insurance increase. And Yeah, and so it's just weird, like, more and more people want to live there, but insurance is becoming more and more expensive, and so there's this demand supply curve

Jessi: thing

James: that's happening, and we haven't quite found that equilibrium yet.

Yeah I think it's in my next one I'm going to talk about the role, yeah the role of government policy and mitigation risk, which is super fascinating on what's happening there. So, here's my actual advice. Don't invest there. I would explore secondary markets. Places that are a little bit more spread out.

So Corvallis, Albany, Wyoming Valley, just in general, is definitely one of those secondary markets. You may not need to go to tertiary, but that's even more rural, removed, rural, that kind of stuff. Interesting. Yeah, I think is, is safer just from the insurance lens. Obviously, that's not the only thing that you look at.

You gotta look at the market as a whole and the investment specifically, you know, there's eight different things. But insurance needs to play into, into one of them and it's worth just considering all things being equal. I would go where there's less dents. All right. As a result of that. Yeah.

Jessi: So, is it like insurance is available, it's just super expensive, which makes it cheaper Like unaffordable or unattainable.

So number three, just not even available, the

James: role of government and policy in mitigating risks. So places like California have noticed the rent, the insurance premiums drastically increasing. And so they have set caps saying, sorry, like you can't increase it any more than that. That's unfair to people.

And so insurance companies like totally makes sense. We actually lost money last year anyways. So we're out.

Jessi: Oh, they're just, they're just. Yes. Closing down.

James: Yep. And so it is becoming increasingly more difficult to find insurance. Or the other game that they're playing is they're saying, okay, we'll offer them a cheap rate and we'll just increase everybody else 5 percent and we'll make up the money across the rest of the nation while keeping that level.

Jessi: Interesting. That's actually the

James: thing that happens with rent caps.

Jessi: Because there's only caps in certain locations where it's more dense.

James: Yeah, that's actually, so that's a classic thing that happens with rent caps in general,

Jessi: where

James: you go, well, I have current tenants and I'm kind of stuck on how much I can raise it.

So anyone new who comes in, you go, well, I'm going to make up for that difference. And so you set it at the top of the market. And so it actually creates this entire run up and, and to the point where everyone who is in a space, they go, Oh my gosh, it's gone up so much. I can't afford to move. And so when you increase it by the maximum amount, they're still not going to move because they're still on their market because they're It's just, it creates all sorts of weird dynamics.

And so now we're seeing that in the insurance game as well. Another thing that the government has is doing is they're implementing programs like the fair plans, the fair access to insurance requirements. Essentially what they're doing is they're saying, you know what, We, the government, will offer insurance instead of having it being privatized.

Insurance for all is the idea. I'm sure that will be fine. Just like all big programs. I mean, if they have to

Jessi: pay things out, they'll just print money and pay it.

James: I guess, right? Why not? That's kind of what they

Jessi: do.

James: Yeah, so my actionable advice for this one is to stay informed about those government backed insurance programs.

Or at least make sure that your sponsor is paying attention to what those options are, because they might be better rates. But you've got to pay attention to what the coverage is for those, because they may not actually be better in the long run. Just got to pay attention. Right. So we have

Jessi: health insurance.

James: Yeah. It's like,

Jessi: Oh yeah, this is way affordable. But then you're like, Oh, it covers two things. Right. And so you're like, well,

James: yeah, similar bucket. Yeah. That's kind of, so yeah, what happened in the health insurance region with like, you know, government care. Yeah, it's kind of weird. There's this thing called aggregation theory, which is the idea that if things can be aggregated, they will be and should be, and it's more efficient to do it

Jessi: because

James: you get a whole bunch of economies of scale.

You know, you see this with you saw it, like, famously with Google, right? We figured out how to make it super easy to find things on the web and they aggregate it all. They won Facebook, figured out how to aggregate relationships on the internet. They aggregate it all. They won. Amazon figured out how to aggregate all the products for sale.

And insurance, I think, falls into one of those categories as well. And it, these are genuinely, generally winner take all types of categories. Whoever can aggregate the best ends up winning.

Jessi: You know,

James: you think about it from like Netflix, right? Like, if you're like, if you could only have one service, you're like, well, I'm going to go with the one with the most shows.

And for most people, that's it. They're not going to subscribe to multiple things. They're going to buy a product from one place. They're only going to do a search from one place. You're only going to look for hotels and flights from one place. So whoever has the most comprehensive ultimately wins. It just becomes a snowball effect.

Jessi: And

James: I think potentially you could see something like that with insurance where, and if the government steps in and says, like either home insurance or even healthcare insurance, or, you know, They get the aggregation piece to it, where they go, well, we can offer all these things for all the people at the cheapest rate.

You go, oh, that one wins. So, I think that's playing a little bit into what's going on here. It's kind of interesting. Alright, another insight that I had, kind of taking all this in, is that you can use insurance as a leading indicator of market shifts.

Jessi: Okay.

James: Okay? So, insurance availability and cost. They like if something becomes uninsurable, they could potentially experience some rapid declines in property values or at the very least liquidity.

And so it creates both opportunities and risks. So like, again, Southern California is like a, or California in general, like it's creating a liquidity issue. Because people are like, well, like I'm not going to buy a new place cause I can't get insurance and I'm not going to sell because my insurance rates kind of locked in and it's so good.

So there's, there's all sorts of weird issues that are happening there. And so I think if you start to see insurance go nuts, cause they've got professionals who study this thing and they're doing actuary tables and trying to figure out the probabilities and the risks. If you see an area where the costs are starting to go up, but Ooh, there's something going on here.

I need to pay attention to that. Because. They are not all going up equally. Yeah. I think is the thing that is important to that.

Jessi: Makes sense.

James: Yeah. So you want to find a sponsor who monitors insurance trends pretty closely as a barometer of future market health improvements would be my actual advice for that one.

Jessi: How do you do that?

James: How do you

Jessi: how do you know what, what insurance rates are?

James: I've got an insurance guy who's awesome. His name is Ben. We talk all the time and that's what we do. We regularly talk, we connect the base. Whenever he comes to Corvallis. We try we grab lunch, we chat. I mean, we talk a lot about life.

Cause he would,

Jessi: he would see a broad spectrum of different properties and different,

James: yeah. And I can ask him like, so what are you seeing like for the trends and what are your thoughts for this and that? And I can get that kind of insight from him. But yeah, and again, it's just one factor. So you may still go like, yeah, I get it.

It's rising, whatever. I don't care. I got a triple net lease on my industrial buildings. It is what it is. Might still work. Yeah, yeah, exactly. Okay. These last two are alternatives that are starting to pop up to it and there's pros and cons to them. So the first one is just self insurance and risk pooling.

So again, I think there's a lot of parallels to health insurance where essentially you have a bunch of institutional investors, the really big guys who are like, Hey, we'll essentially do our own insurance. We'll either self insure or we'll do group insurance,

Jessi: but not

James: like we won't become an insurance company.

We're not available to everyone, but Hey, the five of us, we all like each other. We're all going to pull together. And if something happens here, especially if a bigger portfolio, they go, I can just self insure this sector. You're required to have insurance if you have a loan,

Jessi: the,

James: the lender requires you to have it.

And so like, and they just go, yep, we've formed our own insurance

Jessi: agreement or whatever they call

James: it. Like in the health insurance space. I feel like I should, I can't remember this term at all

Jessi: provider.

James: No, it's like when you pool together as a big group, it's like a co op. Yeah. Yeah, yeah, yeah.

Jessi: Which we, we kind of looked into a little bit. With the health, on the health side of things. Correct. Because it's like, I mean it, it totally makes sense if you're like, Alright, well, if it's just as expensive to pay out of pocket for certain things, Like, why in the world would I pay this premium if I'm going to pay out of pocket for other things that aren't covered?

James: And often times it's just catastrophe insurance. Is, so you have, you, ideally you have really low premiums and you just have a high, Yeah. Deductible essentially. So just for catastrophes, which is how we do all of our properties. Which

Jessi: on it,

James: we self insure.

Jessi: Well, and honestly for properties, it's kind of like that makes sense because if something were to happen to your property, it's probably pretty rare that you would have that amount of cash in your pocket that you're like, Oh, I can just cover this

James: 50,

Jessi: 000 fix or whatever, which is similar to health insurance.

Like you need the big stuff covered.

James: Yeah, yeah, yeah, exactly. So there's more companies who are doing those kinds of things. It's a little more complicated, but they're like. We kind of all set our own costs and if something happens, like we decide, okay, we want to have this much in the account and nothing happens because we all manage it really well or whatever.

Jessi: Yeah.

James: Cool. We'll all just pay it back out. We paid in. So there's things like that. The other thing, and I kind of hinted at this is you just don't get a mortgage. Just cash. Go the whole way. Your return on investment is going to be a little lower because you don't get leverage, but if you pay cash, you're not required to have insurance.

Interesting. And your cash flow is going to be significantly higher. You're not required to have any type of insurance. Correct. Oh. Or maybe you get like some super, super minimal something. I

Jessi: don't

James: think I knew that. But, yeah. Huh. Yeah, I know. If we, so like for example last week when I was talking about that haunted house property.

Huh. I was like I'm just gonna demolish it and turn it into dirt.

Jessi: Yeah.

James: I wasn't gonna get insurance on it. Right. I didn't care. Well,

Jessi: that makes sense. Well,

James: it's that same idea, like, I didn't have a loan on it, so I didn't have to have it. Interesting. And, and in that particular case, I was like, I don't even want it.

Like, if it burns down, that's better for me.

Jessi: If we were to pay off this house, would we, like, would that requirement go away, to have insurance? Yep. That's weird. It's just They just, they want to make sure that It may not be smart, but Like, if you lost the property, they want to make sure that you'd be able to pay it Pay off what you owe for it.

James: Yeah. The, yeah, the lenders, the one who's like, we want to make sure you don't burn down your property and go, well, I don't know how you're going to get your mortgage back. That's not what they want. So they require it. But again, if you don't know anything on it, it burns down. Who cares? Like, I guess it's a bummer for you, but no one else cares.

So that's the idea. Weird. So what I would do from an actionable standpoint is I would just try to understand what the all cash. Purchase looks like if someone's coming at you with that and they talk about the insurance, I think the questions I would start to ask are like, okay, so what do you do if the place burns down?

What are the plans for this? How are you mitigating it? Are you part of a pooled thing? I don't know. So I wouldn't just, I think we're getting to a point. Where, as a passive investor, you can't just assume, and there's an insurance line item. You gotta actually ask a couple more questions. I still think, 90 percent of the time, that's gonna be the answer.

It's like, hey, we just got regular insurance. But, it's worth just like, having that extra eye on it. And if you see something weird, you should probably ask about it. Because my guess is, it's being affected by one of these things.

Jessi: Yeah.

James: That's especially true if you're investing in a high densely populated area because the chances of something happening are dramatically increasing.

Insurance companies are reacting by dramatically increasing prices or limiting the options slash just sort of leaving altogether

Jessi: is something

James: that's happening. And I think if this trend continues, this is going to be something that will probably come to a head in the next like five to six years, I guess.

I don't think we have to worry about it with this current administration. They're just focused on rent rates in general, which they don't need to anymore because they've all flattened out, but whatever. But I think next administration, I would not be shocked if that was a talking point about insurance and stuff like that.

Interesting. Yeah. Yeah. There

Jessi: you

James: go. There it is. That's a little bit about what's happening in the insurance space. Kind of a scary thing, but I still think manageable and I think could potentially provide some very interesting opportunities as long as you're walking into it. Open nine. There you go.

And if you also found this very interesting, we would appreciate it. If you left a rating or review, wherever it is that you listen to podcasts, and if you would like to learn more about investing with us, you can check us out at furlo.com. Thanks again for listening and have a great day.