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The number one thing you have to do is have conversations with that person with your insurance

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advisor from the beginning and just see if they make insurance simple.

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[Music]

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Welcome to the TCO method, the only show focused on helping you massively increase your net

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operating income. I am Andy McQuade and thank you so much for tuning in to another Saturday

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interview special this time with my special guest Jeremy Goodrich. Jeremy is the Chief Protection

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Officer at Shine Insurance Agency, host of the Managing Commercial Real Estate Risk Podcast

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and the CRE Risk King on LinkedIn. An expert in CRE Risk Management and asset protection, Jeremy is

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a teacher at heart helps his clients understand the challenging world of real estate insurance

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and assists them in building a strategy to mitigate and minimize risk and exposure while making sure

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that they have the right coverage to protect their assets. Jeremy, thank you so much for joining me.

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I appreciate you taking the time. How have you been? I’ve been wonderful, Andy. Thank you for having

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me really excited to chat with you and talk to your audience about something that is a little bit

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hard sometimes risk management but actually if you think about it absolutely increases your NOI

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over and over again as you think about it in your commercial real estate portfolio so happy to just

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dig in and share with your audience today. Awesome. Well we’ve seen tons of stuff in the news about the

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shocking or maybe not so shocking developments in Florida and Texas and other parts that have been

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negatively impacted by all this crazy weather that we’ve been having and just in sanity with

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tenants and all the other stuff so I guess maybe we start with current events and where the industry is.

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I know they’ve been losing their butts for the last several years and they’ve decided this year

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to really kind of pile on and stop losing money and there’s a lot of people who are cranky about

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that but it’s a business so it’s to be expected that they’re not just going to hemorrhage money because

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people don’t want them to have their rates go up you know what I mean so why we start there.

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Yeah absolutely so I mean you got at the heart of it right I mean when we’re looking at insurance the

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first thing to understand is you know insurance is is we’re passing risk on to someone else there are

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not a lot of people in the world who could go out and buy a $10 million apartment complex by themselves

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right anybody who’s involved in the commercial real estate world knows you have to have a team that

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means lenders that means investors that means a lot of different things and one of those folks is

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the people that you pass the risk of bad things happening on to right and that traditionally is your

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insurance company and so if we say okay well that makes sense now I’m passing risk on insurance

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companies are actually giving me the ability to do something that I wouldn’t have been able to do before

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it’s like okay well now we get it all right so an insurance company is a for profit business like you

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said and they’re losing a ton of money like you said in 2021 just for example property

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commercial property and this includes a lot of different kinds of property but the losses for

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commercial property were about six billion dollars okay so that’s a number has nothing to connect

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with well let’s give me something more to connect with in 2022 the losses on commercial property were

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36 billion dollars now it doesn’t take a rocket science to see that is six times as much as 2020 2021

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and 2021 was higher than previous years but but not by much so in 2022 multiple things happen one

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are what’s called underwriting losses or the losses the insurance companies took simply by money

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going out in claims increased sixfold six times so that was one thing in 2022 the other thing in 2022

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for anyone who invests in stocks bonds any of those other places we invest besides commercial real

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estate is that it wasn’t a great year for investing on that side either right a lot of people lost a lot

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of money on that side well where do insurance companies put all the money that they have in holding

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before that they can you know pay it out in a claim well they put it into stocks and bonds in real

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estate and other kind of investments and so it was sort of a double whammy not only did they lose money

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on the underwriting side just how much they had to pay out in claims but they were also losing money

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on the market and so insurance companies started to freak out probably is the best word for it

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and we saw this in early 2023 where insurance companies were doing one of a few things one they

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were just closing up shop for new business if you were in Texas for example you mentioned Texas as a

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state that has had a drastic change right insurance companies were canceling policies no one and then

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you ask your insurance agent to go out and find a new policy they’re like man there aren’t very

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many people out there suddenly your insurance policies going from $20,000 a year to $100,000 a year

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or something crazy like that right a lot of Texas property owners were experiencing that

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and that was because it’s a supply and demand thing if insurance companies are all shutting down in

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Texas then the ones that are left are going to say huh well if I’m going to take the risk if I’m

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going to be willing to ensure these properties I’m going to charge a lot more money for it and so

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that’s what we really saw and that’s the current market across the country really right now I mean

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those losses that I said 36,000 or 36 billion instead of 6 billion that is not just Texas that is

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not just Florida that’s not just Louisiana that is across the country that we’re seeing in fact in 2023

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right now as we’re recording we’re in Q3 right of 2023 and we’ve already crossed beyond the

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36 billion dollars of underwriting loss that we saw in 2022 so 2023 is already going to be a worse

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year when it comes to claims disastrous things of that nature then 2022 was the good news is that

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the stock market and that kind of area is doing a little bit better and so we’re seeing the other

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side of investment potentially looking better and so if we can just get a few few or big hurricanes

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or big storms I think we could see things turn around a little bit in 2024 and start to see some

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stabilization in the insurance industry so that was a quick version I don’t know where you want to go

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from there but that’s kind of the high level what’s going on in the industry right now.

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So the only the only real question I have that I really kind of queued in on was the potential

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turn around in 24 now typically we’re not we don’t see companies once they raise rates come back

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down unless there’s some sort of outward market pressure like a commodity where the price drops and then

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for the raw materials and whatever in a service business like this where you’re literally

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taking on risk how would they price that in and would they lower rates or is that something where

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we just might see it flatten and then just normalize over time. Yeah I mean we’re not going to go

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back to where we were before I don’t think that’s very likely I think that for example in Indiana

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where I am you know we used to be doing for a standard apartment complex you might expect three to

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four hundred dollars per unit as an annual insurance cost right and that is more like six hundred

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now and that’s never going to go back down to three to four hundred dollars a year. And it’s not the

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eighteen hundred dollars that they’re seeing in Texas and Florida but that’s again caused by the

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exit of so many different companies you don’t want to underwrite any risk there anymore. Exactly

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right so that’s going to be the big question. You know Florida is used to this in some ways it still

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hurts but Florida you know since ’06 ’07 when a couple of hurricanes came through in a row we had that

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exodus of insurance companies we had this supply and demand issue and so Florida investors have

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seen this before are kind of prepared. I think the investors that are really shocked by what’s going

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on are the Texas investors and obviously there’s a lot of folks investing in Texas and Texas prices

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used to be significantly lower you could be in the six to eight hundred dollars a door especially if

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you were in central Texas and even getting closer to the coast you would see some lower numbers now

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like you just said if your coastal Texas with a of a frame construction apartment complex that was

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built before two thousand five you should expect fifteen hundred dollars a door at least getting into

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that two thousand dollars a door and if you’re not underwriting that for that you should be

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that hurts there’s just no way around it especially if you bought a property and you were underwriting it

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at six hundred seven hundred dollars a door that could be a huge you know hit on your NOI.

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Immediate erosion of asset value overnight. Just absolutely and so you know I also see a lot of folks

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what you don’t want it what I see folks do that is is I mean if you already bought the asset that’s

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one thing if you’re thinking about buying assets you know getting deep into due diligence with a number

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like six hundred dollars a door in coastal Texas or you know in the Harris County area or something

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you know you get close to the end and you find out you’re actually looking at two thousand dollars

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a door that kills a deal you got a bunch of you know money on the line at that point

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so I’m seeing a lot of carnage especially in Texas around this insurance things and property

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taxes are another piece of the conversation too yeah the property taxes um I think the majority of

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the property tax impact that people are claiming was unpredictable it was unpredictable for

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inexperienced teams underwriting deals if the value of an asset goes up and you put a note on it

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and it’s recorded at the county your taxes are going to go on yeah that is like real estate one

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on one and yet all these people are crying surprise I don’t buy that for a second I think it’s stupidity

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but that’s me and it’s my show so I’ll say what I want well yeah if you’re using the property taxes from

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you know the t12s or whatever and at the same time you’re planning on increasing the value of the

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property by 10 15% and you you aren’t figured that out of the taxes then yeah you just don’t really

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understand how all this stuff yeah pretty much now insurance insurance was a little bit of a

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shocker but having a relationship with your broker there should have been a conversation had

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there like hey listen this is what we see coming you probably want to be aware of this and I know

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that you’re on top of that right that’s your wheelhouse that’s what you do yeah just like any other

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business any other team that you build you’ve got 50% of people who were just show up and then you’ve

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got like another 30% that are decent at what they do but they’re not on top of everything and then

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you’ve got that top 20% and then the you know the top five and I would put you in the top five of

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of of insurance underwriters and operators for real estate in what you do but most people don’t have

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somebody like you on their team right so what kind of what kind of outreach should they be doing

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proactively now that they’ve kind of gotten the black guy and the bloody nose how should that

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relationship look and how do they identify somebody like you that they can find and work with obviously

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you’re on my show I want them to work with you but right yeah I mean well I work with large portfolio

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so my clients have at least 200 units most of my clients have thousands of units so that’s kind of

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the folks that I work with so a lot of your listeners you know may not be able to work with me

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anyway so really the place I’m coming from is providing advice and insight about the topic and I

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think the number one thing you have to do is have conversations with that person with your insurance

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advisor from the beginning and just see if they make insurance simple right like right especially in

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the current market that we’re in right now no one has a crystal ball no one including myself is

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going to be able to tell you exactly get what’s going to be happening six months from now a year

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from now two years from now but someone should be able to make it as simple and clear as possible so

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that would be my number one thing to say I think you have to go with an independent insurance agent

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if you only have a couple of you know four unit properties or something like that you can go with

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the state farms of the world and that that will probably work for smaller portfolios if you’re getting

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into five unit buildings or more or larger portfolios it’s really time to move to someone who can

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shop for you who has access to specialized programs that are for these types of properties an independent

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insurance agent is going to be the one that has that so that would be two pieces of advice

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and then if you can get someone who really understands commercial real estate you know I think

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that’s a big piece if someone like when I’m thinking about a conversation I have with an individual

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who’s considering purchasing a 300 unit apartment complex I understand what they’re doing

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I understand where they’re putting the number on providing them and most importantly I understand

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how big of a deal that number is to their end of their their decision process right when you submit

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an L.O.I. when you’re going through due diligence and of course when you’re now into the asset management

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part of your your business plan every line item matters and if you’re insurance advisor doesn’t

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understand that doesn’t get that then they’re they’re going to be more likely to say a number that’s

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lower because now they’re trying to attract you they’re trying to fish you in right and get you

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to work with them and so what’s their motivation going to be well they want to say a number that’s

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lower what I want to say to clients is a conservative number I want to say a conservative number from

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the beginning and I want to say a conservative number for what I believe the increases will be over time

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and so it’s an entirely different mentality and if you get roped into the wrong person they’re going

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to you know decrease your NOI which is the bottom line of the whole thing right yeah absolutely and

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I had a conversation with an investor last week who had a fire that took out had an arsonist who

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took out two of his buildings on a three building property yeah and he was massively underinsured and

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had no idea but he you know he became the victim of the low bid and he listens to this show so

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sorry man I’m using you as an example but it is what it is yeah and I think that’s a really key point

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you know your question before was how do you choose between insurance advisors and I think that

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that low bid usually the lowest price is a problem right you want the lowest price on the front end

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because you don’t want to pay more than you have to for insurance this is this thing that like

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I’ll never have to use it nothing bad’s gonna happen to me and I hope that’s true I hope that is

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the case but for those folks like your friend who have to find out did I underinsure it where

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their clauses inside the policy that said I would only get depreciated value instead of replacement

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cost thousands of dollars that won’t get paid out in the situation do I have a wind hail deductible

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that’s significantly higher than my other deductible where again tens of thousand dollars are being paid

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out that I didn’t realize I would I’ve had I have an example that I use in in classes a lot

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essentially where someone had a five hundred thousand dollar claim and in the end got about a hundred

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thousand dollars from the insurance company and that was because of all of those clauses and I looked

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at what I had offered that person so that person that person had not chosen me but when they got

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in that claim situation when they went through that process they came back to me and said hey

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for one they asked me for advice during the claim which I thought was interesting but I looked at

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the policy that I had offered them which was about 10% more and my policy would have paid out about

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four hundred and eighty thousand dollars with a twenty thousand dollar deductible and so it’s about

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three hundred thousand you know more than three hundred thousand dollar difference and and but

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you can’t blame the investor because this is a world that is hard to understand it’s in legal ease

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and that’s why it’s so important to trust the person you’re working with.

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Yeah absolutely and I think that you know having an expert that can advise you is super important

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when you build your team your team will make or break you especially in real estate right you use

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your cousin Ted who’s a real estate agent part time and he works with homeowners he’s never going to find

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you the residential never real estate that you’re looking for as an investor it’s just not going to work

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out you know maybe he might get lucky and finds you like a lake house you can turn into an Airbnb but

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you’re going to be buying that at retail you’re not going to be buying that you know anything but turn

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key through that guy and that’s the same thing with your insurance advisors is the same thing with

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your consultants that you bring in your attorney needs to be a full time real estate attorney cannot

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stress enough how specialized and fragmented and just broken up real estate is across the country

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and every situation is a little bit different but you need somebody who understands it and even if

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they’re not familiar with that specific property in that specific market they’re in the game enough

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where they can figure it out pretty fast absolutely and that’s true like you said for I mean you think

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about property management right if you think about property management probably the single most

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important thing that you make a decision about if you’re having property managers come on they’re

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going to make or break your deal you know those people are all going to say that they know how to do

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what they do so how do you find out if they really do well you ask other people that they manage

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properties for you keep you know you trust but verify which is important in all the processes so

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I think you’ve got it right you just really have to make sure that your insurance advisor has access

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to the best products has access to the best prices for quality coverage it’s actually going to take

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care of you with something bad happens right absolutely and you know something bad will always happen

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there’ll always be that guy you know walking down the street and I use this example because

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another investor that I am actually partners with on some storage he had somebody walking by the

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end of his driveway and there was a pothole and the guy was like oh look a pothole and he purposely

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put his ankle in there and like tried to fall over like five different times had it on camera

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watch the guy do it didn’t stop him from suing like you can see the guy trying to hurt himself in

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a stupid pothole over and over again on camera absolutely and he’s still litigating it and it’s been a

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year and a half like really yeah I mean those clients I have to have thousands of doors I mean every single

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one of them has some kind of liability claim going on right some kind of claim usually it’s a tenant

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usually it’s walking out to their car sidewalk a tripping or you know some kind of tripping

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heat hazard and they hire a personal injury attorney and you know most of them don’t get a whole lot of

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money but you still have to be they still have to the the investor still has to invest them defend

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themselves and all that kind of stuff so it’s just a part of it yeah absolutely it’s an ugly part

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but you know it costs money people wonder why insurance is expensive people wonder why

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you know construction is expensive people wonder why all of these things that impact their day-to-day

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lives are so expensive but because we’re a litigious society and there’s no

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loser pays laws were one of the only developed countries in the world that doesn’t force the

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the loser of a lawsuit to pay all the legal fees and bull crap that goes into defending it I couldn’t

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agree with you more I think that there’s and you know and this is true on the the liability side with

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lawsuits and lawyers and I feel like lawyers should just have to you know have some consequences for

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filing frivolous lawsuits I think on the property side there’s the property the public adjusters

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who in some situations can be valuable a public adjuster is someone who you hire to help you navigate

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the insurance company in a claim situation and the thing about a public adjuster is they take 20 to

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30 percent of the claim payout just like an attorney does in a liability scenario in a property

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scenario claims are a lot more clear cut and you know straight forward though and so you see a lot of

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public adjusters come in promise the world talk about how insurance companies are awful and terrible

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and they’re going to be awful and you’re going to hate it and and then they get in the middle and

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they actually make a ton of money off of the situation and the situation that you could have

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navigated on your own or with a good insurance advisor without a public adjuster there’s certainly

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times when public adjusters are necessary especially if an insurance company is trying to screw you

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right think that’s a time to get a public adjuster involved but you’ve got to give your insurance

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company the chance to do the right thing first oh absolutely and a lot of people don’t have any

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type of industry background to really know that and so what you’re sharing right now is going to be

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hugely valuable if they listen to the show so yeah I mean in my own personal life just in my house I

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had a tree fall on it and they came out and it was meek I think and they’re terrible but it is

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what it is and they came out and they looked at it and they were like okay we’re gonna give you

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a check for three grand mine meanwhile it’s a hip roof they were only gonna cover one face yeah

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and I’ve been in industry long enough I called a buddy who specializes in just twoing

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fire water and and storm damage restoration for insurance companies he brought his

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exacto made on his laptop out and he did the quote he’s like two this is seven and a half grand

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eight grand all day long yeah handed that over as an estimate and they’re like okay we’ll pay it

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yeah yes you will thank you yeah and I think that’s the other folks there are a lot of

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free folks that you can use in a claim situation that are not going to take 30% of the claim payout

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right the remediation folks who come in and clean up the water or fire damage things of that nature

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those folks should be knowledgeable about the exactimate system which is a standardized system for

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pricing that insurance company professionals and contracting professionals speak the same

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language in right those folks can help you the contractors should be knowledgeable if you’re working

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with contractors in a claim scenario you should be saying hey have you worked with insurance companies

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before are you comfortable with the insurance process because it is a specific process some contractors

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want to come in just charge whatever they want that is great that’s awesome for them no problem but

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is not going to work in an insurance claim right and so you really want to understand who you’re

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working with through that process oh yeah absolutely absolutely so you and I have talked in the past

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about the TCO method and potential for creative underwriting by mitigating risk and all that other

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fun stuff that goes into just planning for stupid putting resiliency into your business plan making

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sure that you’re prepared for the unexpected because it happens and it should be expected in some

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cases right like you put water in appliances in a three-story apartment somebody’s eventually

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going to pull that that stupid refrigerator out from the wall and that little plastic elbow that

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feeds the water is going to break off and you’re going to have two or three units of flood damage

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right drywall and all the other stuff like there’s things you can avoid right we call the stupid

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tax right there’s stupid tax you can avoid what are you advising some of your clients to do right

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now that helps them with the stupid tax well I think that it really comes down to how you set up your

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risk management system now that sounds really nerdy but all you’re really doing you’re doing this a ton

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I mean do diligence in and of itself during the acquisition process is nothing but an exercise in

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risk management like what are you doing you’re going and saying okay what is the risk what is the

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risk of the profitability what is the risk to the safety of my tenants what is the risk to the safety

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of my employees what is the risk to my pocket book and my investment in this deal you’re figuring

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out all the risk associated with that given business that given apartment complex or given tall building

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office building retail building whatever it is you’re looking at and deciding whether it makes sense

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for you to actually acquire and get involved in right that’s that’s a great risk management strategy

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that almost every investor has and if you don’t you should is your due diligence process from

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beginning to end are you going to snake the sewer system right that’s a there’s a whole there’s a

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cost associated with that you can check the water lines check you know things that are going out all

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of that is risk management absolutely I think that the best thing people can do is just shift their

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mindset from the idea that they’re trying to get away with the cheapest thing in the world to how

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can we balance taking care of our tenants taking care of our employees and taking care of our pocket

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books at the same time if we put a hand railing into a staircase and that helps an older person get

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up and down the stairs in a safe way that of that yeah sure that avoids a lawsuit absolutely

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but also make sure that person doesn’t actually break their leg make sure that person actually

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doesn’t have to stay home for three months and not go to work because they hurt themselves at your

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property right I mean things are going to happen but your strategy with your property around safety

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is is is not just about money it’s not just about some insurance company wanting you to do all these

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things so you know whatever it’s about the safety of the entire ecosystem and I think that mindset

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it is really key it is I agree completely I can’t tell you how many due diligence walks I go on

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and they bring me because I look at things that they’re there guys don’t look at right so I walk in

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and I see a yellow smoke detector on the ceiling that’s 25 years old I’m like that thing doesn’t work

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anymore there’s no chance zero zero chance that’s actually functional well we you know we push the

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button in it beeps okay well great so the button works the battery works and maybe it’s hooked up

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to the central system but when a fire happens it’s not going off and it’s just there so that’s

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one of the things like okay you guys have got all of these like they all have to go I don’t know

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what else to tell you you’re not going to like it but it is what it is you’re you’re going to have

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to spend time on this and then all the regular stuff that just breaks down stairways handrails any of that kind of stuff all

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of the appliances all of like do you have fire stop cans installed it’s something that I’ve seen

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operators who have shifted the captives and maybe we’ll talk a little bit about that option but

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they’ve shifted and done a captive program where they’re going to eat the first part of that risk

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yeah and part of their risk management became okay well I’m I’m going to see apartments and yes we

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we supply the appliances but most of the issues we see are happening at the stove so we’re going to

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just put stove top you know fire stops in on all the microwaves all the range hoods underneath the

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cabinet if there’s neither of those things and we’re just going to tell tenants if their stuff gets

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stupid they’re they’re going to have fire extinguishing powder all over their food and it just is

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what it is and they don’t care and stuff’s good for three years it’s expensive but from a risk

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management standpoint if they’re going to own the first X number of millions of dollars of liability

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that they have to rate a check for they probably should have something like that in place so

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hmm what else are you seeing people do do diligence is hugely important pre-planning for the stupid

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is hugely important what else are people doing right now obviously they’re shopping around they’re

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trying to find the cheapest policies but again it’s part of the race to the bottom if they haven’t

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already experienced the catastrophic loss where their insurance didn’t cover them they’re just

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going to take the lowest thing they always seem to learn through the school of hard knocks so what’s

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the answer like what else should they be looking at as opposed to just getting bloody at some point

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in the future yeah and and so I want to just add on to what you said there because I think I talk

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with a lot of investors you know and and when I do the preliminary call with someone to see if

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they’re the right fit for working with me it’s amazing to me how you see two different mindsets

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and these two different mindsets are always aligned with successful business owners successful

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commercial real estate investors as opposed to folks who are struggling and not getting it done

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and the big difference is what you just described there you know having I’ve had multiple people

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who talk to me brag almost about their safety systems like the fire suppression you just talked about

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and they just talked to me in this way that’s like they’re almost I don’t want to say they’re pumped

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about it because that’s probably going a little bit too far but you know they’re they’re really proud

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of the safety systems that they put in and of course they know they’re talking to a risk manager

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so I’m a person who’s gonna appreciate it right but these are people who are proud of the systems

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that they’ve put in place proud of the way they take care of their tenants proud of what they’re doing

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and how they’re doing it and of course it’s based on a strong fiscal you know system and business plan

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those people are successful I would say almost a hundred percent of the people who come to me and

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are talking in that way are successful in their business the people who are talking to me about

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price who are talking to me about cutting corners who are trying to figure out if there’s some

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secret way I can get them the cheapest insurance policy in the world those people also tend to not

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have successful business plans and so I’m again I’m coming back to it’s really about mentality and

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it’s about you know almost a scarcity mindset versus you know an abundance mindset and I think

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having a strong risk management strategy is about abundance but your question is a fair one look

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listeners are saying Jeremy can say all this stuff whatever in the end if if insurance doesn’t have

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a cost that’s reasonable it doesn’t work for me the deal doesn’t work for me and so for smaller

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investors I think a lot of the strategies of you know finding the right advisor finding someone who

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can find good deals for you by you know at getting quotes from a few folks now generally with

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independent insurance agents they’re getting quotes for you and if you ask three different independent

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insurance agents to get quotes for you they actually step on each others toes and it actually

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treats more problems than good things but you know if you’re getting a few proposals to make sure you’re

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getting the right price that’s good increasing your deductible and this will get to the captive thing

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sort of you know quickly I think you brought it up and I think we should talk about it you know so

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an investor when you buy a house a lot of personal insurance homeowner’s insurance you have like a

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thousand dollar deductible or a two thousand dollar deductible right that can make sense in that

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situation for property investors why have such a low deductible you don’t necessarily want to make

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tiny claims anyway because it’s going to affect your premium in the future and so can you increase

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that deductible what is your capital situation give you the opportunity to do can you increase it to

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five thousand can you increase it to ten thousand as I get to larger portfolio portfolios that work

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with me more often can we get to twenty five thousand can we get to fifty thousand right now we’ve

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got a really high deductible you know fifty thousand dollar deductible sounds high but if you’ve got a

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thousand units and you’ve got a master policy that’s over all this stuff you know right you’ve got

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tons of capital that you’re not working you know and as it gets higher we start to get into the idea

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that you can retain more and more of the risk associated with your properties that’s all increasing

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a deductible is right right saying I’ll take the first five K I’ll take the first ten K what happens if

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you said I’ll take the first million now most your listeners probably saying well it would mean I

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would be in trouble right and so that’s true but but for investors you know a lot of the investors out

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there are spending two three four million dollars or more on insurance premium when you’re getting to

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that size the question for me is what what would it look like for you to take the first million and this

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is where something called captive insurance can really help you because lenders aren’t going to let

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you take the first million on your own it’s not going to work but you can create your own little tiny

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insurance company and and say well this insurance company is going to take the first million

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dollars and I’m going to put some money in there and if there is a claim the first million dollars

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comes out of my pocket right right yeah if there isn’t a claim though I get to keep that million

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dollars if I don’t spend it in that year then I get to keep it right and of course what’s that going

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to do if I take a million dollar deductible what’s that going to do to my insurance cost for everything

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above that what’s going to make it way cheaper and so captive insurance is a great solution for taking

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on more of the risk but keeping more of your own money in a way that lenders will accept and works

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inside the system absolutely so my my first experience with captives was a very large operator

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family office I was working with they’re based out of jersey and they had picked up a 24 hundred unit

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apartment complex on 256 acres in Michigan and they had to do a captive and so when they built this

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there were all these hoops they had to jump through to get compliant with their risk management

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strategy at that property and it was a property that had been owned by one dude developed over 30 years

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building buildings right through the 80s started in the set that started in the early 60s built

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it right through the early 80s and so there were 19 or 20 different unit types and 300 plus buildings

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you know golf course pretty cool mine yards was a beautiful property right huge upside because the

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rents were way down they bought it for a song so you know it didn’t owe them anything right off the

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bat they made a couple hundred million dollars just by acquiring the property without even having

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to do any work to it so cool yeah but they had to do a captive and so they were going through and

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and that was really where the smoke detector thing I was really where I cut my teeth figuring out oh

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this the stuff doesn’t actually like these old ones they’re 40 years old they don’t do anything

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anymore they don’t function so had good advisors there we had good good stuff we had to find a

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self lit self illuminated exit sign for every single hallway and every single part of the building

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because none of them were there in the cost of hardwired it was astronomical yeah so we were able to

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locate a basically a radioactive glow in the dark it was tritium it was a tritium exit sign and we

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had to buy thousands of them thousands of them but in the end of the day they saved a ton of money

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they they established the captive for that particular property and they were able I think they’re

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actually using it across their entire portfolio now which is getting close to 20,000 doors yeah

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it’s a great example and and they’re you know if they have a year where they have significant losses

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then the captive you know probably doesn’t help them a ton right because they’re they’re losing the

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money out of pocket that they would have paid in insurance premiums but the place that a captive

374
00:34:47,480 –> 00:34:52,520
really helps is those years that you don’t have as many claims and then you get to you know if they

375
00:34:52,520 –> 00:34:57,320
had three million dollars in insurance premium for that particular property and they were able to

376
00:34:57,320 –> 00:35:02,440
retain a million dollars of that premium and just put it into the captive then if they have a claim

377
00:35:02,440 –> 00:35:06,440
if they have a million dollars in claims well they spent about the same amount of money that they

378
00:35:06,440 –> 00:35:11,640
would have anyway and if they don’t then they keep that million dollars can reinvest it and turn

379
00:35:11,640 –> 00:35:16,040
it over that is the beauty of captives the other value of captives is there are some properties

380
00:35:16,040 –> 00:35:22,760
that are just simply not capable of finding standard insurance anymore I mean Louisiana coast is

381
00:35:22,760 –> 00:35:30,680
probably the biggest example a captive that recently I was a part of had a 17 million dollar captive

382
00:35:30,680 –> 00:35:37,240
this person had a ton of capital and they took on 17 million dollars of exposure primarily because

383
00:35:37,240 –> 00:35:42,840
they just couldn’t get property insurance for these properties on the coast of Louisiana from anybody

384
00:35:42,840 –> 00:35:48,680
that was reasonable and because they had the capital to do it they essentially completely self-insured

385
00:35:48,680 –> 00:35:53,240
with that 17 million dollars now that’s an extreme example but when you’re talking about 20,000

386
00:35:53,240 –> 00:36:00,040
units like you just described it’s just a bunch of extra zeros on the end and so a lot of things can

387
00:36:00,040 –> 00:36:06,040
happen you know a lot of your listeners this is a far off into the future of their portfolio journey

388
00:36:06,040 –> 00:36:12,040
but you know for folks who have even a thousand doors or or 1500 doors a captive is something that at

389
00:36:12,040 –> 00:36:17,160
least your insurance advisor should be saying why they feel it’s not the right option for you if

390
00:36:17,160 –> 00:36:21,880
they’re not saying it is right and and again it comes down to who’s on your team and what do they know

391
00:36:21,880 –> 00:36:26,760
and how experienced are they in the industry I can guarantee you that the vast majority of people at

392
00:36:26,760 –> 00:36:32,440
my local rhea and that listen to this show aren’t there haven’t dealt with it unless they’ve worked

393
00:36:32,440 –> 00:36:37,800
for a commercial real estate brokerage at some point in the past or they’re doing like syndications or

394
00:36:37,800 –> 00:36:45,720
something like that now what I’ve also seen is a lot of these newer operators and not

395
00:36:45,720 –> 00:36:51,080
dissing anybody who’s listening to the show but a lot of newer operators have spent the last 10 or

396
00:36:51,080 –> 00:36:56,520
15 years with the ZERP right zero interest rates so money’s been cheap a lot of operators didn’t

397
00:36:56,520 –> 00:37:00,520
even have cash reserves because the cash was so cheap and easy to get they could just draw it off their

398
00:37:00,520 –> 00:37:06,120
line of credit and pay 3% or 4% anything under 4% is free money you know what I mean yeah so you know

399
00:37:06,120 –> 00:37:13,880
their risk of exposure if they had to tap into some sort of of capital access capital they could just

400
00:37:13,880 –> 00:37:19,480
go to their lender or pull it from their their line of credit that they have at their bank on their

401
00:37:19,480 –> 00:37:23,560
on their business and now that’s not the case because suddenly the cost of capital has doubled

402
00:37:23,560 –> 00:37:29,080
so you guess what you have to have cash reserves now you have to be able to plan your capital expenditures

403
00:37:29,080 –> 00:37:34,760
and a lot of them have no experience with planning capital expenditures they have no experience with

404
00:37:34,760 –> 00:37:39,800
estimating timelines for failure on stuff like anything other than a furnace or a hot water tank those

405
00:37:39,800 –> 00:37:43,880
are always the hot ones everybody talks about when they take these guru courses always check the

406
00:37:43,880 –> 00:37:48,360
dates on your furnaces and hot water tanks check the dates on your roof and you know blah blah blah well

407
00:37:48,360 –> 00:37:52,040
that’s great but what about all the other crap that has a limited lifespan it’s in your apartments

408
00:37:52,040 –> 00:37:56,680
that’s in your properties that you’re going to need to deal with if you’re going to hold this asset

409
00:37:56,680 –> 00:38:02,520
for anything longer than a couple of years like yeah and I think that’s where it comes down to your

410
00:38:02,520 –> 00:38:09,560
due diligence checklists is you know from acquisition to asset management right your acquisition

411
00:38:09,560 –> 00:38:14,200
checklist is the first example of what you’re talking about but your asset management checklist that

412
00:38:14,200 –> 00:38:18,280
you should be you know you should have your weekly checklist you should have your monthly checklist

413
00:38:18,280 –> 00:38:22,120
you should have your six-month checklist and you should have your annual checklist and you should be

414
00:38:22,120 –> 00:38:26,280
working with your property manager to make sure that either they are doing it or someone on your

415
00:38:26,280 –> 00:38:31,080
asset management team is doing it and if your property manager is doing it there has to be a clear

416
00:38:31,080 –> 00:38:35,160
reporting system so that they can tell you how those things are turning out and you have to make

417
00:38:35,160 –> 00:38:39,080
sure they’re doing it you may have to pay a little bit of extra to have your property manager do it

418
00:38:39,080 –> 00:38:43,560
but it’s a lot less than you’re gonna have to pay if you have someone trip and fall or you know those

419
00:38:43,560 –> 00:38:48,840
kinds of things so right and it’s go ahead I was just gonna say it’s very important when you’re

420
00:38:48,840 –> 00:38:55,080
vetting your property manager that when you want to do extra stuff right when you want to do

421
00:38:55,080 –> 00:39:02,120
extra due diligence when you want to do extra checks extra unit inspections extra risk management

422
00:39:02,120 –> 00:39:09,160
assessments whatever it is changing how your property manager does business every day is going to be

423
00:39:09,160 –> 00:39:14,280
an uphill battle you will never win it’s just like when you’re in my experience it’s been when you’re

424
00:39:14,280 –> 00:39:22,120
going out and you are trying to convert you know people off of Sherwin Williams to like another

425
00:39:22,120 –> 00:39:28,360
brand of paint whether it’s Benjamin Moore or Glidden or whatever the painters want what they want

426
00:39:28,360 –> 00:39:33,320
and they will find every excuse in the book to not do what you’re asking them to do and why this other

427
00:39:33,320 –> 00:39:37,320
stuff is junk and they just want their stuff and they don’t want to have to worry about it or think

428
00:39:37,320 –> 00:39:43,560
about it and the conversion costs you more money than anything you would have saved by switching vendors

429
00:39:43,560 –> 00:39:48,680
and it’s it’s the same thing I think when you’re looking at property managers if they’re not that

430
00:39:48,680 –> 00:39:55,480
caliber where they’re already involved in that part of the process I don’t think it’s gonna go well

431
00:39:55,480 –> 00:40:01,800
I think that change management is very expensive and most property management companies unless they’ve

432
00:40:01,800 –> 00:40:08,600
been able to systematize and scale are not equipped to handle any type of change because they’re being

433
00:40:08,600 –> 00:40:14,200
operated typically by people who were really good at whatever they were doing and wanted to expand

434
00:40:14,200 –> 00:40:21,560
but don’t have any actual experience running a corporate enterprise where where constant improvement

435
00:40:21,560 –> 00:40:27,000
and efficiency is a thing yeah and I think that’s where you get into if you what you need more than

436
00:40:27,000 –> 00:40:33,160
anything from every person on your team is clarity if the person if the property manager says look here’s

437
00:40:33,160 –> 00:40:38,440
what I do I’m not interested in doing all your extra stuff I’m not interested in all these additional

438
00:40:38,440 –> 00:40:45,240
checklists but I am really good at the foundational things I do we do leasing well we do maintenance well

439
00:40:45,240 –> 00:40:51,800
we do a really good job of this at you know these xyz if that’s true that’s fine maybe you just need

440
00:40:51,800 –> 00:40:56,120
someone who’s boots on the ground to do that for you and has some equity ownership or something like

441
00:40:56,120 –> 00:41:01,160
that maybe your asset manager is in the same town and can do that themselves what you need from every

442
00:41:01,160 –> 00:41:06,440
member of your team from insurance to property management to accountants and beyond is clarity

443
00:41:06,440 –> 00:41:11,560
and with that clarity you can decide how to navigate from there absolutely I think that’s great

444
00:41:11,560 –> 00:41:18,920
so I think we’re coming up to the tail end we spent about 40 minutes so far and it has been hugely

445
00:41:18,920 –> 00:41:25,240
insightful for me hopefully it’s insightful for the audience what else have we not

446
00:41:26,040 –> 00:41:31,720
touched on yet that you think needs to be keyed in on I think we’ve really dug in I mean we’ve talked

447
00:41:31,720 –> 00:41:37,720
about the current state of the insurance market it is what it is and we have to realize that we have

448
00:41:37,720 –> 00:41:41,800
to underwrite for it we have to adjust our business plan for it and we have to have really good

449
00:41:41,800 –> 00:41:46,760
advisors that make sure we’re getting the best scenario we can we’ve talked about taking on more

450
00:41:46,760 –> 00:41:52,520
of the risk ourselves for small investors as just a slightly higher deductible for bigger investors

451
00:41:52,520 –> 00:41:56,760
that’s higher and higher deductibles all the way to a captive structure where you’re actually taking

452
00:41:56,760 –> 00:42:02,680
on large portions of the risk yourselves we’ve talked about not going for the cheapest

453
00:42:02,680 –> 00:42:09,080
policy because it’s going to burn you in the end in the example of the person who chose a 10%

454
00:42:09,080 –> 00:42:13,400
cheaper policy then the one I offered ended up getting about a hundred thousand dollars in a

455
00:42:13,400 –> 00:42:17,560
claim scenario instead of four hundred and eighty thousand dollars a claim scenario and we’ve just

456
00:42:17,560 –> 00:42:23,880
talked about clarity across your strategy when it comes to team making sure that every member of your

457
00:42:23,880 –> 00:42:30,280
team is clear in what they’re doing is capable of handling the piece of the puzzle that they’re playing

458
00:42:30,280 –> 00:42:35,800
and they’re an A player in the game when I look at my team my business is an insurance agency right I

459
00:42:35,800 –> 00:42:40,520
turn around and look at my team and look at all the players and I look around and I see A players

460
00:42:40,520 –> 00:42:44,280
and they’ve been some B players and they’ve been some C players and it’s been a little tough to

461
00:42:44,280 –> 00:42:50,120
kind of move and change seats and ultimately move those folks out of the organization but

462
00:42:50,120 –> 00:42:56,840
if you look at your team and you look at A players then you’re doing things right and if you’re not

463
00:42:56,840 –> 00:43:01,480
looking at A players and you’ve got to think about how can I start to get A players in maybe you’re

464
00:43:01,480 –> 00:43:06,600
newer so it’s harder to get A players at that point right so how can I get a B player how can I get

465
00:43:06,600 –> 00:43:11,880
someone who’s you know a B player trying to be an A player sort of like a C class property trying

466
00:43:11,880 –> 00:43:17,480
to be a B class property who’s coachable yeah who’s coachable who can I take in that scenario at some

467
00:43:17,480 –> 00:43:22,440
point as a commercial real estate investor and as a business owner you realize that the primary role

468
00:43:22,440 –> 00:43:28,760
that you play is team manager is you know the person who’s making the baseball team you’re not

469
00:43:28,760 –> 00:43:33,160
hitting the balls anymore you’re not catching the fly the fly balls you’re the one finding the people

470
00:43:33,160 –> 00:43:37,480
who are doing that and I think that transition is hard for a lot of people but if you really want

471
00:43:37,480 –> 00:43:41,160
to succeed in commercial real estate you’ve got to understand that and you got to start building teams

472
00:43:41,160 –> 00:43:47,720
with A players I do not disagree in any way with any of that that is spot on and so I have two questions

473
00:43:47,720 –> 00:43:54,920
the first one is and this is an outlier specific to somebody that I know again they had a I think

474
00:43:54,920 –> 00:44:00,920
was a five family is either four family or five family that partially burned but it was condemned

475
00:44:00,920 –> 00:44:07,800
they found out that they were under insured not because of the value replacement value of the

476
00:44:07,800 –> 00:44:14,920
property but because they didn’t have a demo a demolition rider and the demolition for the building

477
00:44:14,920 –> 00:44:22,760
because of where it was in the city was over ninety six thousand dollars right so is that typical

478
00:44:22,760 –> 00:44:28,200
where replacement value is covered and then you have to deduct your your demo value from it or is

479
00:44:28,200 –> 00:44:33,640
there a demo rider you can get put in there to cover removal costs in a weird area where there’s

480
00:44:33,640 –> 00:44:39,000
lots of power lines and it’s tight and the demolition itself because maybe there’s a spestus or lead or

481
00:44:39,000 –> 00:44:45,640
whatever they have to spend extra money for disposal and safely tearing that down is that typical

482
00:44:45,640 –> 00:44:49,640
or is that just something that we see more in the northeast where there’s just a lot of lead paint a

483
00:44:49,640 –> 00:44:56,280
lot of a spestus in bull crap well it depends on the policy so insurance policies have endorsements on

484
00:44:56,280 –> 00:45:00,840
them and these are all little additional things some of them take away coverage some of them ad

485
00:45:00,840 –> 00:45:06,120
coverage you know an endorsement will say we won’t cover flood which is a common exclusion right that’s

486
00:45:06,120 –> 00:45:12,200
an exclusion or an endorsement say we will cover water backup which is when sewers backup but will

487
00:45:12,200 –> 00:45:17,320
only cover it for twenty five thousand dollars not for the entire limit so it’s impossible for me to

488
00:45:17,320 –> 00:45:24,920
say until I look at a policy how demolition is handled most quality policies do have that as an

489
00:45:24,920 –> 00:45:33,080
endorsement just sort of built in to the standard policy but if you get into a higher risk properties

490
00:45:33,080 –> 00:45:38,520
again back to the coast because they’re just the easiest high risk properties a lot of those things

491
00:45:38,520 –> 00:45:42,920
get stripped out so talking to your insurance advice you know you can’t talk to your insurance

492
00:45:42,920 –> 00:45:48,040
advisor about every single thing but again it comes back to quality is it more likely to be in a

493
00:45:48,040 –> 00:45:53,960
quality policy yes if you have a concern you’re in a city and you’re downtown or something like that

494
00:45:53,960 –> 00:46:00,520
uh you know what about ordinances as well what if you’re at building half burns you’ve got to rebuild but

495
00:46:00,520 –> 00:46:05,640
now you got to put an elevator in because now you got to fit ADA laws where you didn’t have to before

496
00:46:05,640 –> 00:46:10,680
well that’s making the building better than it was before and that is not included in your standard

497
00:46:10,680 –> 00:46:15,960
building coverage that’s included in what’s called ordinance and law coverage I think a listener

498
00:46:15,960 –> 00:46:20,440
right now is going wait a minute this is just like it’s starting to become too much and I think that’s

499
00:46:20,440 –> 00:46:25,000
why you know you just have to back off and trust the team member who’s the knowledgeable person

500
00:46:25,000 –> 00:46:30,120
in there you don’t go through every single line of your lease you ask your lawyer to help you with it

501
00:46:30,120 –> 00:46:34,200
right you read your lease you surface read your lease because you want to understand it so trust

502
00:46:34,200 –> 00:46:39,960
but verify is my best answer and that particular example should have had coverage in the policy I’d have

503
00:46:39,960 –> 00:46:45,240
to look at the policy to really know right and then I guess the very last thing which maybe is

504
00:46:45,240 –> 00:46:50,680
completely a non-factor all these lawsuits and failed syndications right capital calls all this

505
00:46:50,680 –> 00:46:55,960
insanity going on in multi-family specifically right now from inexperienced underwriters inexperienced

506
00:46:55,960 –> 00:47:03,080
operators capital-ragers and GPs that have no business being involved in commercial real estate but

507
00:47:03,080 –> 00:47:09,400
are doing it anyway what has that done to the costs of insurance and how is that impacting the

508
00:47:09,400 –> 00:47:13,400
industry what are you seeing on your end or is it just a non-factor it’s just stupid people doing

509
00:47:13,400 –> 00:47:19,880
stupid things like always and it’s the next wave of of grift that we’re just going to have to work

510
00:47:19,880 –> 00:47:25,800
through well I’m a passive investor too so I’m involved in a couple of deals at least one right now

511
00:47:25,800 –> 00:47:30,840
that’s not doing particularly well so I’m very familiar with exactly what you’re talking about

512
00:47:30,840 –> 00:47:36,120
you know it from the insurance perspective I think it affects in the sense that you’re more likely

513
00:47:36,120 –> 00:47:41,560
to have lower risk management your motor you know everything we’ve talked about in this conversation

514
00:47:41,560 –> 00:47:48,600
is done well by good investors by good sponsorship team by people who have done this over and over

515
00:47:48,600 –> 00:47:54,040
again who have systems and successfully do it where are the problems with folks who aren’t as good

516
00:47:54,040 –> 00:47:58,840
at it who don’t have as much experience who make mistakes and then suddenly there’s a fire suddenly

517
00:47:58,840 –> 00:48:04,920
there’s a lawsuit suddenly there’s something going on there so I don’t know that the the experience

518
00:48:04,920 –> 00:48:10,360
is a direct relationship with the cost of insurance but the fact that claims are high anyway

519
00:48:10,360 –> 00:48:15,000
you know more of that inexperience is going to be more mean more claims which ultimately turns around

520
00:48:15,000 –> 00:48:21,240
to higher costs for folks trying to get insurance not exactly a direct relationship though

521
00:48:21,240 –> 00:48:27,240
well I see it in in what I do because most indications if they’re if they’re doing the typical now

522
00:48:27,240 –> 00:48:32,760
which is the 506 they’re only going to hold that for five to seven years right on that’s on the

523
00:48:32,760 –> 00:48:38,360
outside yeah so they’re planning for immediate returns and immediate immediate immediate return of

524
00:48:38,360 –> 00:48:43,480
capital to the investors so they can pay what they need to pay which means that they’re cheaping out

525
00:48:43,480 –> 00:48:47,640
and participating in the race to the bottom on the front which in and of itself increases risk

526
00:48:47,640 –> 00:48:53,720
because they’re going to be using cheaper product lower resiliency lower life span lower useful life

527
00:48:53,720 –> 00:48:58,840
the units are going to get beat faster they’re going to have to do rehabs and turns immediately after

528
00:48:58,840 –> 00:49:02,840
they dump that asset which means that they’re eroding asset value as they go because they’re taking

529
00:49:02,840 –> 00:49:07,080
this this thing they took from a sea to maybe a B minus and by the time they’re done with it it’s

530
00:49:07,080 –> 00:49:13,240
going to be whooped again and it’s going to be a sea so for me that raises risk oh yeah and another

531
00:49:13,240 –> 00:49:18,840
example is you know a lot of these 70s bills late 60s early 70s bills you know they’re the lowest

532
00:49:18,840 –> 00:49:23,240
hanging fruit for someone who’s a new investor the price is really low on them so it seems like a really

533
00:49:23,240 –> 00:49:27,560
good opportunity what you’re missing is aluminum wiring that’s potentially causing a lot of fires

534
00:49:27,560 –> 00:49:32,440
hand making insurance a lot more expensive you know breaker boxes and a lot of those newer investors

535
00:49:32,440 –> 00:49:36,760
aren’t going to invest the capital to actually increase it you know fix it to where it’s at safe

536
00:49:36,760 –> 00:49:40,840
and so you get a lot of problems there so this is what I want to do

537
00:49:40,840 –> 00:49:50,200
tell everybody who’s listening what your your ideal client is how you can help them where they can

538
00:49:50,200 –> 00:49:56,520
find you so you know my ideal client is someone who embodies the things we’ve talked about in this

539
00:49:56,520 –> 00:50:02,280
conversation who is a risk manager at heart who has a mentality of keeping their their employees safe

540
00:50:02,600 –> 00:50:08,440
their tenants safe their business safe both financially and physically who has a large

541
00:50:08,440 –> 00:50:14,360
portfolio like I said my minimum is 200 units and so has to be in that larger space and someone who

542
00:50:14,360 –> 00:50:19,560
really wants some creative solutions an advisor who is going to be a part of the team so that’s what

543
00:50:19,560 –> 00:50:24,200
I’m looking for as far as where you can find me it’s shine insurance.com I actually have for

544
00:50:24,200 –> 00:50:32,200
multi-family investors at shine insurance.com/ballpark a nine yes or no question a ballpark it

545
00:50:32,200 –> 00:50:38,040
advisor that’ll give you immediately an insurance ballpark you can use for penciling so that’s pretty

546
00:50:38,040 –> 00:50:44,440
helpful bookmark that and just use it when you’re penciling deals so that’s at shine insurance.com/ballpark

547
00:50:44,440 –> 00:50:49,560
everything else is at shine insurance.com that is awesome thank you Jeremy so much if you enjoyed

548
00:50:49,560 –> 00:50:54,200
this episode please if you’re on YouTube ring that bell subscribe if you were listening on Apple

549
00:50:54,200 –> 00:51:00,200
podcast Spotify Google podcast I heart radio wherever else you get your podcasts please subscribe

550
00:51:00,200 –> 00:51:05,960
leave us a review and leave a comment if you have questions you can email podcastatcomephad.com

551
00:51:05,960 –> 00:51:11,480
please visit Jeremy site check out his awesome tool he’s providing for free for everybody to help

552
00:51:11,480 –> 00:51:14,600
them with their underwriting and we’ll see you next time

553
00:51:14,600 –> 00:51:17,180
(upbeat music)

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