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Brian: Hey, guys, Brian Davis, and Deni Supplee, from Spark Rental.
Deni: Hi, everyone,
Brian: Happy Tuesday. So last Tuesday, Deni interviewed attorney Sayge Grubbs on how to protect your assets, especially in your golden years as you get older and accumulate more assets. How to protect them? I was actually on vacation in Montana last week doing some hiking. This week we are diving into rent default insurance, how it works, how it protects your rents. And we will also go over a couple other ways to protect both your rents and you as a landlord, protect some of your liability. As you guys join us, let us know where you’re tuning in from. We’d love to hear that. And, of course, fire your questions at us. This is a live, interactive podcast, and it is just as much about you and your questions as it is about Deni and me up here talking at each other. So this is a particularly timely issue, you know, rent default insurance and rent defaults, because over the last 15 months, there have been record rent defaults in the US and landlords have not been able to actually evict and enforce their leases because of the eviction moratorium, which the Biden administration announced within the last week or so that they were extending one more month through the end of July, although they insist that this time is the last time, despite it having been extended over three times, though four times, though it’s been extended repeatedly.
Deni: It’s like one more time, but exactly.
Brian: And, you know, this is a big problem for mom-and-pop landlords who still have to make their mortgage payments. They are not protected under the foreclosure moratorium because they are not homeowners, and they are in business as property owners. So, they still have to make their monthly mortgage payments. But many of them have not collected rents in 15 months. So even before the pandemic, the risk of losing rental income was still a massive risk. The landlord business model. So, Deni, let’s talk about how rent default insurance works, how it protects you, why you should consider it. And you also start off with what is a blanket definition, you broad based definition here of what is rent default insurance?
Deni: Well, basically, when a tenant is in default, which means he’s broken the lease or he has broken the lease and owes money or damages or whatnot, and you can get an insurance, which is amazing because I’ve been in this business since way back and we had nothing like this. So, I think it’s amazing. But it protects you in case they don’t pay their rent. It provides you income regardless. And a lot of people don’t go. They don’t invest because that’s one of their fears. This alleviates one of those fears.
Brian: So, to put it in one sentence or less, I guess there’s no such thing as less than one sentence. But if the tenant stops paying the rent, the insurance kicks in and starts writing your monthly rent checks until you have replaced that tenant with a new paying tenant, or, of course, until the tenant catches up, in which case you do have to pay the insurance money back, the rent that you were that you received. But if the tenant defaults, then you have to evict them. The insurance company pays you the rent until you evict them and get them out and get a new tenant in there. By the way, Tim Dewey says Happy Tuesday. Hope you guys had a great fourth, Tim. We hope you had a happy fourth. And Tara Christine says hello from Long Island, New York. Thank you so much for joining us today. And again, guys fired questions at us as we talk about rent default insurance today, because it is a new concept for a lot of Americans. This is actually a very standard type of insurance overseas. In most English-speaking countries and most European countries, all landlords get rent default insurance for every property. And it’s just kind of part of the business. It takes that element of risk out of the equation. When you buy a rental property or when you convert your home into a rental property, it takes that risk of your tenants stopping making rent payments takes it out of the equation. So how much does this insurance cost? Because that’s this usually the first question that landlords ask, right, when they’re introduced to this concept of rent default insurance,
Deni: It’s largely based on the rent, but on an average of 12 to fifteen hundred, expect to pay somewhere around four to 450 a year. And I like to say budget it in. Brian and I talk a lot about budgeting all the costs, even if you’re self managing budget management costs in. If you’re budgeting before you even purchase a property or you’re, you know, looking at what you should run it for, maybe throw a little extra in for this insurance, it kind of pays. You know, you’re double safe, I guess is the best way to say it. I’m going to put our little handy dandy calculator in the chat that I happen to really like.
Brian: Well, of course you do, we created it,
Deni: But I always play around with it.
Brian: No, it’s great. It’s a totally free rental cash flow calculator, you guys, and it includes a built-in mortgage calculator as well.
Deni: Right.
Brian: You can run the numbers for how much you can expect in monthly cash flow. And it also includes a cap rate calculator and a whole bunch of other numbers that are as, as Deni said, handy dandy. So, yeah, this is just one more cost to include among your expenses when you’re running your cash flow numbers. But again, you know, four hundred and fifty bucks a year for an average rental property. We’re not talking about a massive amount of money here, and especially given that it helps you sleep at night. But, you know, it’s one less risk.
Deni: And can you imagine, like some of the mom-and-pop landlords that are hurting right now, if they had this in place already, it would be a whole different outcome.
Brian: All oh, for that. Yeah, I mean, you know, people, landlords who have experienced rent defaults during the pandemic and have not been able to evict their tenants, if you had this insurance, you would have been collecting a rent check every month from the insurance company. So, you know, this is one of those policies, you know, like most insurance that you don’t think you need it until you do and then you really need it. Once you know you need it, it’s too late if you if you don’t have it. So right now, by the way, that cost is tax deductible. So, you can write that off with your taxes each year. Which takes some of the effective cost out of it. Right. If you’re not having to pay taxes on it.
Deni: So that’s even better.
Brian: Yeah. So, Deni, what is how widespread is this? Like are there are a lot of companies in the U.S. that offer this? You know, where can people buy and learn more about rent default insurance if they’re interested?
Deni: Well, there are. There was a lot I think the pandemic took a few out, unfortunately. There’s one big one that we work with named Steady. And I’ll put that link in too. But for there used to be quite a few more. But I don’t know, to be honest with you, if the other ones are still operating. Brian?
Brian: Yeah. So steady is still operating. The other big one that we used to work with was Rent Rescue. And they were forced to suspend writing new policies during the pandemic. They so honored their existing policies, but they suspended writing new policies during the pandemic because they didn’t, they didn’t know how long the eviction moratorium would be in place and didn’t want to be on the hook for six months of rent payments. Right. You know when landlords can’t get these erstwhile tenants out of their properties. Whether they will resume writing new policies come August 1st, I don’t know. We should actually reach out to them because we used to have a relationship with them. But we haven’t talked to them in a year and a half since the since the pandemic started. But steady is still writing policies. So, Deni, you put a link to them in the in the chat and you know, then let’s walk through the mechanics of exactly how a clean works. Have you ever filed a claim with Steady or one of these other companies?
Deni: No, I’ve been pretty lucky, Brian, but from what I hear, it’s not very hard. I mean, you basically are going to open the claim. It’s like opening an insurance claim. You’re going to have to show them paperwork that you’re not getting paid or how much you’re getting paid. And I believe that. Have you, Brian, because it’s been a while, so I think that you have to put your tenants have to have a certain amount of credit, they have to be a decent renter. You can’t go in and get, you know, a tenant who has 200 credits or hasn’t worked for five years and throw them in there and then put in a claim. They are going to protect themselves.
Brian: I have filed a claim. It’s been a couple of years. But, yeah, you do have to provide the insurance company with your tenant screening reports, because they’re not going to accept just anybody. I mean, they don’t want you to just take someone off the street who’s willing to sign a lease for an absurdly high rent, even though they’re nowhere near qualified to actually afford that rent. But their standards are pretty low. I mean, you know, their minimum credit score is I think it’s in the 500. I mean, it’s really low. So, you know, as long as you screened these tenants, you’re probably not going to have a problem. And their study is very transparent about their minimum requirements for, you know, for income. You know, there’s a minimum rent to income ratio, which, again, is pretty generous. I think it’s a minimum ratio of like one to three.
Deni: Right. And, you know, that’s up front. When you’re screening your tenants, you already have these criteria. So, it’s just something else that you can use to go by.
Brian: Yeah. And then you have to provide them with a copy of the lease. And this is all when you open the policy. Which by the way, you renew the policy each year as you sign a new lease, you know, whether you’re renewing a lease with an existing tenant or signing a new lease with a new tenant. So, you provide you provide the tenant screening reports on the lease agreements when you buy a policy or renew your policy. And then when you file a claim, I don’t think I think it’s a two-minute online process from whatever know, you go online, there’s a couple of questions you have to fill out. Confirm any late fees that are due, any utilities, you know, back utility payments that are due to you. That’s really it. And you said that under the dates, of course, you know, when the defaults started and then as you go through the eviction process, you do have to keep the insurance company updated. Right. And send them a copy of the judge’s decision at the eviction hearing and that sort of stuff. But it’s really minimal. There are also a lot of paperwork.
Deni: I think there is a waiting period before you get your first payment. It’s like two weeks or.
Brian: Well, right. It’s not like they’re going to overnight you the rent check, right. The minute that you submit your claim. But it’s not long. It’s a week or within a couple of weeks you’ll have you’ll have the rent check and then, you know, they’ll keep paying it every month until you have a new tenant in there who’s paying. It’s pretty easy; easier than you would think.
Deni: And it keeps your rent steady.
Brian: Bada dum dum! All right, so that is that’s one type of insurance. Now, a lot of people get confused because there are several other types of insurance that landlords deal with, one of them being rental property insurance, which is also known as landlord insurance. And don’t tell us about, you know, what that is. And just to clarify how that’s different from rent default insurance.
Deni: Well, that’s not really protecting your rents per say, but is protecting the any liabilities against the landlord for slip and falls or any of that kind of thing. Fires, damages, anything that has to do with the building usually itself. Are people hurting themselves in that kind of thing? Most mortgage companies will require it.
Brian: Right.
Deni: And if you own the property outright,
Brian: Still have
Deni: Insurance. Exactly. But you know what I can tell you just a real quick story of somebody that didn’t. And there was snow. It was in Philly. There was snow and a man slipped and fall. And the person who I was managing for had to pay big bucks out of it.
Brian: Yeah. So that wasn’t even a property damage thing. That was a liability. Yes.
Deni: Yes.
Brian: So, yeah. I mean, you know, I’ve had properties catch fire and I’ve had massive storm damage. So just like you need homeowner’s insurance to protect your home in case of damage to your home, you need landlord insurance to protect your building, your rental property. Now, one big difference is that rental property insurance does not cover the tenants’ belongings inside the property, the way that homeowner’s insurance does cover your personal belongings. Like Deni said, rental car insurance covers the building itself and it covers it usually offers some liability protection for you as the landlord. Now, renters should get their own renter’s insurance, which does cover their personal belongings. Yes, against losses, against theft, against damage. If the building burns down due to an electrical issue that covers the renters’ belongings and renters, insurance can provide the landlord with a little bit of liability protection as well. For example, if your tenants dog attacks a neighbor, the neighbor can go after the tenant knowing that they have insurance that will foot the bill. If the tenant doesn’t have insurance, they might go after you knowing that you have more assets than the tenant does. There is some liability protection there.
Deni: Be really careful with the dog thing, too, because if you’re a landlord who allows a dog and that’s against, you know, on those lists that they have and then it could be that you are. Yeah, you might even be footing the bill right now.
Brian: By the way, we did add a link in the comments here to a partner of ours, a company called Sure. That does offer very competitive rental property insurance policies. And they do offer renters insurance policies as well, not that you will be buying that, but landlords should be requiring their tenants to buy renters insurance coverage and should provide the landlord with proof of coverage when they sign a lease agreement. And the other way that that renter’s insurance protects you as a landlord is if there’s a problem at your property and it becomes uninhabitable temporarily, the renter’s insurance will usually house the tenants. They’ll put them up in a temporary accommodation. And that means you don’t have to pay for that, whereas you might have to pay for that based on your state’s laws. If the property becomes uninhabitable when the tenants on a lease, you might be footing the bill for that tenant in the hotel room or somewhere else. And those bills add up really fast.
Deni: And making the tenant get this type of insurance to me is priceless because I can’t tell you how many times over the years, you know, a roof has leaked and ruined a sofa or something like that. And the tenant immediately says, what are you going to do? Are you going to replace this? And it’s nice to know that I have, a clause in my lease saying, no, you’re supposed to have this.
Brian: Yeah, yeah. They have somewhere someone else to go hassle for the money. And, you know, there are a couple other things you can do as a landlord to protect against rent defaults beyond just buying rent default insurance. So, what else should be doing, you know, really quick here to protect themselves against rent defaults?
Deni: Definitely screen, obviously. I mean, we talk about that all the time. You want to make sure not only that their credit is good, but, you know, check out how long they’ve been at their place of employment because especially nowadays, that’s important. And another thing is that I’m finding out is really important is check their bank statements. You can ask in most states and make sure they have a cushion so that if something happens like this pandemic, that you’re not going to be, you know, the one suffering along. Yeah, it’s just one less thing you have to worry about because, you know, you have a responsible renter who has emergency savings.
Brian: Yeah, absolutely. If you if you do want to buy rent for insurance, you need to run those tenant screening reports anyway. Right. So that’s true. You know, these all-work hand in hand to protect you and to protect your rental income. And then, you know, people also need to sign a lease. Right. So, yes. You know, absolutely. Yeah. And, you know, we talk quite a bit about a lot of the clauses that need to be included in lease if you actually want to get real protection out of it. But yeah, so then you give them a few quick thoughts on, you know, what do people need to know about a lease to make sure they’re protected?
Deni: Well, I mean, I had said it before earlier that if you have in your lease that you require or you strongly suggest that they have renter’s insurance and if they don’t, you are not responsible for their personal belongings. That’s a protection against you in case something like this happens. Absolutely. You don’t have to worry about it. So at least helps with that with eviction and whatnot, especially everything that’s going on right now. If you’re in a state, Pennsylvania is one of them where you can get a waiver of notice. So, then you can just go right to court without having to send the official notice. As soon as they lift this ban, you can just rush to the courthouse. You don’t have to send notice.
Brian: Before the backlog.
Deni: Yeah, that’s also helpful. And you got to check your state. You know, not all states allow you to do it, but it definitely gets you to court quicker. And then you want to make sure that you can collect attorney’s fees, attorney and court fees and back rent. All that should be spelled out in in your lease, because one of these days you’ll be able to get to court and get this money from them.
Brian: Hopefully in August. And, you know, by the way, we will be doing an entire episode about the end of the eviction moratorium at the end of this month, at the end of July. You know, we were joking earlier, but we actually do believe the Bush administration when they say that this was the last time that they’re extending this eviction moratorium. So, you know, we’re going to sit down. I’m going to talk through all the implications of the end of the eviction moratorium and what landlords need to be prepared for before August 1st. So that’s yeah, the last Tuesday in July. I sat down with this morning to talk through that and all of the implications of that. Deni, anything else that you want to go over regarding rent default insurance or any other types of insurance that landlords should be having to protect themselves.
Deni: Check your policies as well on the property insurance, landlord insurance, whatever you want to call it, look through your policies. Don’t assume anything because you don’t want to have that surprise when somebody tells you, oh, no, that’s not covered. So, check your policies.
Brian: All right, guys. Well, let us know what you want to hear about in the coming weeks. We are here for you. And on that note, happy Tuesday. Have a great week. We will see you next Tuesday at 2:00 p.m. Eastern, 11:00 a.m. Pacific. Have a good one.
Deni: Have a great day
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