Jason Bott has close to 20 years of experience in real estate insurance and is one of the top thought leaders on BiggerPockets, the world's largest real estate hub. Honeycomb’s Laura Moseley sat down with Bott to talk about market trends for 2023, the impact out-of-state investors have had in the mid-west, and what he thinks insuretech will do to the industry.

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Key Takeaways:

  • Insurance premiums are likely to continue to increase
  • Most investors understand that they need to spend more on insurance 
  • The rise of insuretech will speed up the process of getting insurance significantly 

Premium increases and the rise of replacement costs likely to continue in 2023

One of the most, if not the most popular topic at Bott’s office is the continued increase in insurance premiums. “From 2015 to 2018, we had flat renewals for almost all of our clients, [...] but starting in the last quarter of 2018, we started seeing the prices creep up and ever since we’ve had 10%-15% rate increases year over year”.

He further explains that while the first increase didn’t have a big impact on most investors, the continued increase start to put a significant damper on the rental income. C-class properties have seen the largest premium increases, sometimes as much as 50% in a year. As for 2023, Bott says that with inflation, weather hazards and construction costs, this trend will likely continue.

On the topic of replacement costs, Bott says it’s a constant discussion with his clients as they tend to push for insuring for the lower value. “If it’s a single-family property in Ohio that they bought 3 years ago for 70K, it’s now worth 150K with a replacement cost of 250K, the insurance carrier will not insure it for 70K. We’re seeing a minimum replacement cost of $100-$110 per square foot [...] but the other thing that people don’t realize is that we can maybe insure lower, but the rates are going to be higher”. So what’s actually happening here is that the underwriters are debiting the underinsured by increasing premium rates.

Though nobody likes to see a price increase, Bott says that most of his clients understand that with increasing costs, they do need to insure their properties a bit higher.

Carriers taking a conservative approach when it comes to wind and hail coverage

When it comes to the smaller commercial side, anything from 4-12 units, Bott says insurance carriers are pushing for a percentage deductible on wind and hail. “Many times a 1%-2% deductible on wind and hail completely wipes out the cost of replacing the roof.”

He gives an example of a property with a replacement cost of  $1,000,000, paying $10,0000 in deductibles (1% wind/hail deductibles) when filing a roof claim. Especially in states that are prone to rough weather, carriers just don’t want to take that risk on them.

Speed is going to win when it comes to customers' expectations

Even today, the insurance industry at large hasn’t changed much in terms of how they do business for the last 20 years. Insuretech companies like Honeycomb want to make the process of getting real estate insurance for investors by offering an all-digital solution for rental property insurance. “When I got into the business 20 years ago, everything was paper applications, we had to submit it and it sat on everyone's desks, you had to wait for them to respond. Everyone's expectation was that it took a little while. [...] With social media and everything coming in to our lives, I don’t know anyone who has the patience for that anymore.”

The expectation is now to get a quote immediately after submitting a request, and eventually speed is what is going to win. While there is still underwriting that needs to be done in the background, insuretech is moving this into the right direction.

The housing market in 2023

Surging mortgage rates put pressure on the housing market in 2022, but despite the many debates and talks about how the market was soaring, Bott says it’s important to understand that not all properties are affected by this trend. “On the smaller properties, it seems to be a little bit more stable.” As for larger complexes that require a commercial loan, they are predicting a ~20% price drop. “This is just reflective of the industry because you cannot borrow money and still have a cash flow unless those [mortgage] rates come down.”

Short-term rentals have grown 10X in the last 4 years.

While short-term rentals have always been around, this market exploded in the last few years, many thanks to the launch of sites like airbnb.com and similar competitors who made this way of lodging become a mainstream option. Bott says the market has grown tenfold over the past four years, but going forward he says “I’m not sure if it’s going to keep growing, or crash, if we do head into a slight recession in 2023 will they be affected [...] we’ll see”.

Out-of-state investors are changing the game in the midwest

For those who live in an area where real estate is expensive, out-of-state investing could be a lucrative option. Bott says that 10 years ago, out-of-state investors were almost nonexistent, however today they are some of the main buyers in the mid-west. 

The rise of out-of-state investing has created some obstacles though, especially since underwriting is becoming a bit more stringent for those who are not residing in the same state as their investment property. The key is to have strong property management, this really helps with getting good coverage.

Commercial real estate insurance is an expertise 

First-time investors are probably most likely to go with an insurance option recommended by their broker, property manager or other professionals. It’s a necessity nobody’s particularly excited about and typically wants to just get done, but reducing insurance costs will eventually help investors increase their cash flow on the property.

Bott says it’s important to choose an insurance agent that has access to many different platforms and carriers. “Investors often don’t realize that some agents only have access to two-three carriers while others may have access to as many as 25 options.” If you are paired up with someone who is normally your home and auto agent, you want to find someone who specializes in real estate. 

You can watch the full interview here.

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Jason Bott is the Vice President of Robertson Ryan & Associates, the largest independent insurance agency in Wisconsin, and a Top 100 US Agency. Bott is also a leader in the Independent Insurance Agents of Wisconsin (IIAW), and since 2015 he is on their Executive Committee.