So, you’ve found a property that you are considering purchasing and want to run the numbers on it to make sure that your offer makes sense financially.
If you are using the deal analysis system we provide to our Real Estate Investor Bronze Members or a similar tool that calculates your cash flow on the property, you will need to know the cost of insurance for the property. While experienced investors can usually quickly determine a ballpark estimate of what insurance will be based on properties they’ve already purchased, new investors will often wonder what number to use.
Insurance for a rental property is not usually the same as it is for the property that you live in yourself, so if you happen to live in a similar home, using your own home’s insurance numbers may not be a good idea.
I wish I could tell you a great website that you could go to in order to find insurance quotes for estimating rental property insurance, but I do not know of one. Perhaps, one of our readers will share one with me by posting a comment below and I can update this article with that information.
To make matters worse, a couple of months ago I saw a report on insurance prices that confirmed what I had long believed to be true: insurance rates vary widely depending on the company you buy from. How widely? If I recall the report correctly, prices for the same policy varied from several in the $500 range to several in the low $2,000 range with dozens of data points. All for the SAME coverage!
So, the best way I know of for getting insurance quotes for your rental properties is to actually pick up the phone and call several insurance agents to get quotes. Furthermore, I encourage you to do this process with each property so that you can keep your pricing competitive. I’ve been lazy in the past and relied heavily on my one or two “go to” insurance companies, but I really should be aggressively comparing rates in order to save money where I can. I do have this task on my “to do” list, and recommend that you make a regular habit of pricing insurance with different companies every time that you pick up a new property.
Until my next post,
James
P.S. I have special, time and money-saving forms for requesting insurance quotes that we give as a tool to our Real Estate Investor Bronze Members. This is just one small benefit of becoming a Real Estate Investor Bronze Member today.
When I discuss in other articles some of the benefits of investing in real estate – like appreciation, depreciation, leverage and equity build-up – I often assume that you will have break-even cash flow. But is that realistic?
Well, yes and no.
First, let’s define what determines cash flow for a property. Cash flow is the difference between income from the property – usually rent – and expenses on the property. Expenses usually include taxes, insurance, management, maintenance and any debt payments. While taxes, insurance, management and maintenance can vary a little, what is largely within your direct control is the amount of the debt payments. How so?
Well, you control how much cash you put towards the purchase and how much of the purchase price you finance. If you put more down, your payments will be less. If you finance a larger amount, your payments will be more and you are more likely to have negative cash flow. If you look at negative cash flow as a function of down payment, you could think of negative cash flow as a deferred down payment that you are making over time.
So, can you assume that you will have break-even cash flow? Most people would argue that unless you are putting a large amount down, you are likely to have negative cash flow on a property when you first buy it. I would tend to agree, but what happens over time as rents go up? Well, you have some expenses that rise too – like taxes, insurance, management and maintenance… but usually the largest of your expenses on your property is still your mortgage payment. If you have a fixed mortgage payment, you should see an increase in cash flow over time.
So, while you may have negative cash flow when you first purchase a property, you should see significant positive cash flow as rents tend to rise over time. That is why I feel very comfortable making an assumption that your property can have break-even cash flow over a 30 year period when looking at the other benefits of real estate investing. It is a way to simplify the discussion to see how one benefit looks.
Of course, if you want to see how all the variables interact, I strongly encourage you to try the investment simulator game. You can try various real estate investing strategies in a fun interactive game format to see exactly how income and expenses can change over time and how they affect your investments and net worth.
Until my next post,
James
P.S. There are some great strategies for overcoming negative cash flow through creative deal structuring that we teach to our Real Estate Investor Bronze Members in our training materials and consulting sessions. Sign up today to learn those strategies and have us analyze your deals with you to create positive cash flow for you in your real estate investing business.
