Today, we’re talking with Drew Maconachy, specifically about the insurance side of real estate investing. He clues us in on the most common questions investors ask him, how to possibly get lower insurance costs, and some policies that you may not actually need on your insurance. Tune in to learn about the common insurance pitfalls real estate investors fall through and how to avoid them.
Drew Maconachy Real Estate Background:
- Co-owner of Maconachy Stradley Insurance, insuring thousands of doors across North America
- Consulted his customers on over $30 million of insurance purchases
- Partial stake in 11 nursing homes
- Based in Akron, Ohio
- Say hi to him at: maconachystradley.com
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever. We don’t get into any of that fluffy stuff.
With us today, Drew Maconachy. How are you doing, Drew?
Drew Maconachy: I’m doing well, Joe. Thanks for having me on.
Joe Fairless: I’m glad to hear that, and it’s my pleasure. Best Ever listeners, we have a special segment for you. Because today is Sunday, we are doing Skillset Sunday. And here is the skill that you will acquire from Drew – you will learn the common pitfalls that we as real estate investors fall into from an insurance standpoint. It’s not talked about very often, but it needs to be.
So Drew is the co-owner of Maconachy Stradley Insurance, which ensures thousands of doors across North America. He’s consulted customers on over $30 million of insurance purchases. He’s also got a partial stake in 11 nursing homes as an investor, so he’s coming at it from an investor’s perspective. And he’s based in Akron, Ohio.
So with that being said, Drew, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Drew Maconachy: Sure. First of all, thank you for the introduction. It’s really simple, right? So my family, we’re all insurance people. My dad owned an insurance business, my uncle owned an insurance company, my sister’s a reinsurance broker… So if your last name’s Maconachy, there’s a pretty good likelihood that you’re in the insurance business. So—
Joe Fairless: That’s great for SEO over a lifetime.
Drew Maconachy: Yeah, exactly, right?
Joe Fairless: Too bad the internet wasn’t around 50 years ago.
Drew Maconachy: Yeah, that would have been very helpful. You’re right. So I’m kind of the runt who has just the insurance agency, but I’ve always been interested in real estate; my first job out of college was in the real estate space. It was in 2007. Obviously, everybody listening knows what happened then. But we were refinancing skyscrapers in Los Angeles, so that was a quick lesson for me. And then jumped into the family business here of insurance, and then in 2015 I gained 50% equity in this current business. So that’s great.
My day-to-day, I talk to real estate investors across the country, helping them navigate the increasingly complex environment that is insurance-related to apartment buildings, essentially. So I’m sure all your listeners are seeing rates go up, and we are trying to combat that in a myriad of ways. So that’s my spiel.
Joe Fairless: When real estate investors reach out to you, what are common questions that they ask you?
Drew Maconachy: How can I get my cost cheaper? That would be the most common question.
Joe Fairless: Tell me your thought process when you hear that question, and then how do you answer it.
Drew Maconachy: Typically, what I do on an introductory call, I say, “Okay, well, tell me a little bit about your building. Do you have aluminum wiring versus copper wiring?” Right now, that’s a huge thing. So a lot of time—
Joe Fairless: Real quick, are we talking any specific type of commercial real estate? Are we talking just residential? What primarily are you talking about? And does it matter that we have to make that distinction or not?
Drew Maconachy: Frankly, it doesn’t really matter that much.
Joe Fairless: Okay.
Drew Maconachy: But the area that I do the most work in is apartment buildings; A, B, and C class, typically, apartment buildings across the country; I try and work on buildings that have 50 or more units, and that’s my sweet spot.
Joe Fairless: Got it. Okay, sorry. Please continue. You ask about the wiring—
Drew Maconachy: Yeah, so I do a kind of a quick call of, “Tell me the ins and outs of your building? What type of wiring do you have? What type of panels are those wires connected to?” There’s four or five panels that were created in the ’70s that have turned out to be very, very toxic, not in a pollution way, but they happen to catch on fire spontaneously.
Joe Fairless: That’s a problem.
Drew Maconachy: Yeah, exactly. The insurance companies have wised up to that. And if you have those panels, you can still get coverage, but it’s 30-50 percent more expensive. And that’s just one example. There’s 10 different things we could talk about. But that’s one example to say, “Okay, if you have that, here’s where your cost differences would be if you would get those panels removed and replaced and updated.” And I leave it up to the investor to make a business decision. Does it make sense over the long run? If I’m going to hold this building for 20 years, does it make sense for me to make this investment in the building, and is it going to pay itself off?
So typically, that’s what I’m doing if they ask that question. If the question is, “How do I save money?” the other question they ask is, how often does your broker bring you new quotes? That answer should be probably every year, in most cases. Every other year is the longest amount of time you should go without your broker bringing you multiple quotes, or testing the market at least.
Joe Fairless: So do you have a system where something automatically generates multiple quotes for your current clients? How do you track that?
Drew Maconachy: Yeah, that would be nice if such a thing existed, but no, we go through and manually generate new quotes. I talk to underwriters 25 times a day.
Joe Fairless: Literally?
Drew Maconachy: Yeah, literally. When I get off this podcast, I’ll be picking up the phone and talking to underwriters about three deals in Texas that I’m working on right now. And they have to be underwriters from different companies.
The best way to drive down pricing in any aspect of life is to provide competition and then use the leverage created by that competition to lever them against each other to drive pricing down.
So that’s my big point is, if you’re not getting multiple quotes or not testing the market, then your agent’s not using a very powerful tool of leverage to drive your pricing down. And if I know that it’s a really good opportunity for me, those are the type of accounts that I jump on myself, instead of passing to a team member.
Joe Fairless: Is there a second place most commonly asked question, when they initially reach out to you? Or is the first question about how do I get cheaper rates just above and beyond everything else, and nothing really is second place because they’re all last place compared to that first question?
Drew Maconachy: They are all last place compared to that first question. I’m trying to think of — frankly, the other question is (this isn’t going to help your listeners much, but) “Are you able to help me? I’ve got a project in North Dakota”. right? I do a lot of marketing, I try and do a lot of helping people through means like this. So I get a lot of people that reach out to me and say, “Hey, can you help me in Rhode Island?”, states that you’re probably not commonly thinking of.
Joe Fairless: And what’s the answer to that?
Drew Maconachy: The answer to that is, yes. We’re licensed in 43 states right now, and if the opportunity makes sense in one of those states that I’m not licensed in, it’s just a matter of money. Do I want to pay the insurance department of that state whatever it costs to get licensed? So yes, I can help the right accounts all over the country.
Joe Fairless: Why wouldn’t you be licensed in all the states?
Drew Maconachy: Insurance is kind of unique. There’s no national insurance commissioner’s office; it’s run by the states.
Joe Fairless: Okay.
Drew Maconachy: So it’s kind of like being an attorney where you have to pass the bar in every state, but it’s not nearly as cumbersome. But if I don’t have business—and I’m trying to think of a state; I think actually North Dakota is actually a good example. I’m not sure I’m licensed there. There’s no reason for me to be licensed there if I don’t have any business there.
Joe Fairless: Right. Okay.
Drew Maconachy: So it just saves me that 300 bucks in licensing fees a year.
Joe Fairless: Let’s pivot slightly and let’s talk about the common pitfalls that real estate investors fall into as it relates to insurance.
Drew Maconachy: Sure. So a common theme of this podcast so far is Chasing Dollars, right? We’re trying to get the premium as low as possible, which makes sense, right? As the premium goes down, your net operating income goes up, and the multiple that you can sell your building for goes up. So I totally understand the logic of trying to drive premium down, but there’s costs; the cheaper the product, the less coverage is involved, right? So we want to make sure that we’re not cutting off our nose to save some dollars.
So probably the most common mistake that I see is on the valuation front. So there’s three different ways to value a building in the eyes of an insurance company – that’s replacement cost; so your building burns down, they write you a check to rebuild your building. That’s replacement cost. That’s very good.
There’s actual cash value, which is that replacement cost number minus physical depreciation; not taxable depreciation, totally different. So if you’ve got a 75-year-old building, the insurance company is going to come in and tell you, “Alright, the usable life of this building was 30% used up, 60% used up”, whatever. They’re going to make up a number and they’re going to subtract the depreciation from your replacement cost and give you the difference. So it’s a really bad valuation method. If you don’t have to use it, I strongly urge people not to use the actual cash value valuation process, because it puts the power into the insurance company’s hands.
Joe Fairless: Why would they use it?
Drew Maconachy: To save money. It’s cheaper and you can save 6-8 percent by using actual cash value versus replacement cost. And the reason for that is because the insurance company is going to give you less money in the event of a claim.
Joe Fairless: Yeah, the insurance company will go light your building on fire one night and pay you some cash.
Drew Maconachy: Yeah, exactly. So the third and final is the best, and lenders are starting to wise up to this, and that is agreed value. So what agreed value is, is it’s replacement cost; your building burns down, we’re going to give you the money to rebuild the building, except they agree that your valuation is correct.
So unlike replacement cost—replacement cost has a co-insurance feature, meaning if you, the investor and the owner of the building undervalue your building purposefully—and the reason you would do that is because it is that replacement cost limit times a rate equals your premium. So if you reduce the replacement cost, your rates are going to stay the same, but it would reduce your premium by that percentage.
So over the years, the investors had wised up to that and were undervaluing their building saying, “Hey, if I get a million bucks out of this building, it would cost me a $1.2 million to fix it. But my note on the building’s only 800 grand, so I can get a million and I can walk away.” That was the logic and that was happening, the insurance company has wised up to that and put a coinsurance penalty, meaning they want you to value your building correctly.
So agreed value takes out any potential argument between the owner of the building and the insurance company so that you don’t get hit with a coinsurance penalty.
Joe Fairless: Okay. At what point is that value assigned? Is it at the beginning, when you’re signing up for your insurance?
Drew Maconachy: Yep, you got it. Every time you get a quote, it’s going to have a building limit. That building limit is the number that I’m talking about. And that building limit — if you have a lender, in most cases, it’s going to be either replacement cost with coinsurance or replacement cost with agreed value. So the actual cash value really comes into play a lot on cash purchases, where you don’t have a lender, and you tell your insurance agent, “I want the cheapest quote, regardless of coverage.” That’s what they’re going to give you at that point.
Joe Fairless: Got it. Okay.
Drew Maconachy: So your lender will protect you a little bit from yourself in that standpoint, but that’s not always the case.
Joe Fairless: Okay, so replacement value is good, agreed value is better. But do you see agreed value going away?
Drew Maconachy: No, I see it coming more into the fray, because the lenders are requiring it more and more. And the reconstruction costs, that’s what everything’s about, right? So the reconstruction costs in Ohio are different than the reconstruction costs in Texas. Labor is more expensive in Ohio than it is in Texas; it’s cheaper to rebuild a building in Texas.
Now, I don’t need to tell you this, but these reconstruction costs are going through the roof throughout the country, due to labor shortages and lumber shortages. So I’m really afraid right now of co-insurance. We’re reviewing every policy that we have that has a coinsurance penalty on it. And mid-term – it’s called endorsing – changing the policy to agreed value so that we can get rid of co-insurance.
Joe Fairless: That makes sense. And you’re kind of hedging your bet or your losses proactively in that case.
Drew Maconachy: Yeah, correct. And I’ll be as quick as I can about this, but co-insurance – let’s say you undervalue your building by 30% and you have $100,000 claim; the insurance company is going to give you $70,000. They’re going to take the proportion that you are undervalued on your building and give you a payment on your claim of the balance, right? They’re going to apply that ratio to any claim payment. So if you are 50% undervalued, you’d have $100,000 claim, you’re going to be holding the bag for 50 grand.
Joe Fairless: That’s a problem.
Drew Maconachy: It’s a big problem. So it can be very punitive. And what concerns me right now is we were really thoughtful 11 months ago when we signed this policy up, and lumber costs were x, and now they’re 3x, and your replacement cost went up by double, right? So we had good intentions when we put this policy in force, but the fact is, the reconstruction costs have gone up—you would know better than I would, but I would say 30-50 percent in some geographies, especially if it’s a frame building. So even though we had good intentions, we can still get caught by this co-insurance penalty. So internally, we’re doing that and our office is trying to get rid of any policy that has co-insurance on it.
Joe Fairless: Let’s talk about any other pitfalls that you see real estate investors fall into. Are there any other ones?
Drew Maconachy: I would say the biggest is you’re buying a $3 million building and the lender says, “Here are the lender requirements”, and those lender requirements are shared with me and they say, “Match these lender requirements, don’t do anything more.” So what’s the problem with that?
Well, you have to remember, the lender only cares about getting their money out of your deal. They don’t care that you had to put 30% down or whatever the number is, and on a $3 million deal, you’ve got 900 grand of equity into this building – they don’t care about your 900 grand, they care about the 2.1. So that is my biggest pushback that I get. I’m like, “Wait a second”, you’ve got to actually pay attention to this because if the building goes up and we only insure it for $2.1 million, but the value of the building is 3 million bucks, you’re going to lose out on 900 grand to save yourself 1500 bucks a year.
Joe Fairless: Right.
Drew Maconachy: It is crazy how often I see that, and I understand it, because you have to go through that extra thought process of, “Wait a second, this lender, they don’t care about my equity, they care about getting their self out of my building.” So I would be very aware of that. When you see a lender requirement, talk to your agent about it and make sure that you’re not just hitting their bare requirements so that you can keep your premium as low as possible. Make sure you’re protecting yourself and not just your lender.
Joe Fairless: What bells and whistles on an insurance policy are a little too excessive? I’m not saying this is one, but terrorism coverage for example. If you’re in Akron, Ohio, should you have terrorism coverage on a property? That’s a specific question I know about terrorism coverage, but are just generally also what are some bells and whistles where you’re like, “Alright, that’s that’s a little too much”?
Drew Maconachy: That’s a great question. Terrorism is a good starting point. So your property policy will exclude a terrorist act. And the reason for that is because actuaries create all these rates, and actuaries can’t figure out how often there’s going to be a terrorist attack.
Joe Fairless: Right. Right.
Drew Maconachy: So if they can’t model something, they’re not going to cover it. You can model for hurricanes, you can model for storms, but you can’t model for terrorist attacks. So that’s why it’s not included. The government has come in and essentially created a program that pays up to a trillion dollars per claim on a terrorist claim.
But to your point, in Akron, I would point that out. It’s not my decision to make that call, it’s my decision to inform you and say, “You don’t have terrorism coverage unless you buy this bolt-on policy. So if you are afraid of your building getting hit by a terrorist attack, then you need to buy this coverage.” It’s cheap, but to your point Akron’s got 300,000 people. Let’s talk about Smithville, in the middle of the cornfields… Yeah, I think at that point, you’re probably pretty safe forgoing terrorism coverage.
One thing to note, though – it’s not just what you’re thinking of, right? A plane flying into a building. Terrorism coverage is when there’s an act of terrorism. I’m an insurance nerd, so I remember this very clearly… But when all of the rioting was going on in Portland, Oregon, the Trump administration was going to declare that an act of domestic terrorism. In that instance, if the building owners who had buildings down there didn’t have terrorism coverage, they would have been on the hook to fix it themselves.
Joe Fairless: Wow.
Drew Maconachy: So that’s one of the big caveats of that to make sure you’re paying attention to, but it’s kind of a unique side, a little tangent that I went on there. But—
Joe Fairless: No, that’s an interesting example.
Drew Maconachy: Again, that’s why it’s just so important that you’re leaning heavily on your agent. Your listeners, your audience are great real estate investors, but they’re not insurance experts. So find an insurance agent that knows what they’re doing and that’s really experienced in the space and lean on them heavily, make them part of your team, so that you are not having to try and figure this out and the lending out and everything, and maintenance… Surround yourself with a really strong team so that you don’t even have to think about this stuff. That’s my job.
Joe Fairless: I came up with a terrorism example. But now it’s your turn. So what are a couple, as you call bolt-on things or policies that it could be a bit excessive in most cases?
Drew Maconachy: Sure. Flood coverage is a great example. Flood is excluded on all standard policies. You can buy back flood; it’s expensive, and your agent and 10 seconds can tell you what type of floodplain you’re in. So you could be in a 10,000 year floodplain. Well, the coverage is expensive and you’re not likely to ever have a flood issue.
There’s pollution coverage that you can buy. Legionnaires’ disease can grow in HVAC systems.
Joe Fairless: Yep. I saw that Cold Case Files episode.
Drew Maconachy: Yep, that’s going to be excluded on a standard policy. It happens once every blue moon. So there’s exposure to everything, but every exposure has a cost of insurance to it. So what I say is consider yourself insuring that. Take that risk and put it on your own balance sheet instead of transferring it to the insurance companies.
Ordinance and law, which this is funny that I’m saying this, because anybody who’s listened other things I’ve been on, I’m a huge proponent of ordinance and laws. So quickly what it is – if you have a loss in your building and your building is out of code, but it had been grandfathered in, in order to get the zoning commissioner to come out and reopen your building, you’ll have to bring your whole building up to code, due to them being on your property.
I had a customer who had an old building, a building built in the ’40s. And he only had a $25,000 ordinance and law coverage, and in order to bring his building up to code, it was 850 grand. So he ended up eating just over $800,000 in a claim. I didn’t insure that building, that was before he came to me, but I had quoted it for him and I was 1500 bucks more expensive than his current policy, and that was just one issue with his policy.
But take this one with a grain of salt; if you have an old building, ordinance and law coverage is a must. But if your building is built since 2005, if it’s 15 years old, the coverage is expensive; it can be anywhere from 3-15 percent of the premium. So if your building is new, it’s not very likely that there’s a whole lot of out-of-code issues with your building. So that would be a good area to save some money. So between that and flood, you could cut out probably 10% as you’re going through it.
Joe Fairless: As we wrap up, anything really quick that we haven’t talked about that you think we should as it relates to common pitfalls that real estate investors fall into?
Drew Maconachy: Really good question. Right now on a general liability, the property policy is the cost driver. 95% of the premium that you pay in is to property coverage. So that’s where all your cost is.
But on the general liability side – slips, trips, falls, fights, forceful evictions, anything like that, that’s going to fall under your general liability policy. And the insurance companies are really starting to carve back coverage; they’re not standardized policies anymore. So a lot of them have pulled out or greatly reduced the limit for an assault and battery issue.
So assault can be anything, right? This is where if you have a tenant that hasn’t paid and you knock on their door, and they say they’re in the shower and they were naked, and they say you assaulted them by coming into their — whatever, right? And there’s a lawsuit around that – you’re not going to have any coverage for that if there’s no assault and battery coverage. And I would say on most policies now, it is not included or it’s at $25,000 kick in sub-limit, and that’s not going to be enough… Because first of all, they’re going to pay for your attorneys to defend you, and then if there’s a settlement, they’re going to do that as well. So I would be very thoughtful about how you purchase a general liability policy to make sure that assault and battery is covered.
Animals are excluded a lot on general liability. So if you’re allowing animals in and there’s a dog bite, and the animals are excluded from the policy, you’re going to be on your own to cover that claim. We’ve all seen horror stories on the local news about an animal in an apartment building ripping in somebody’s face, right? So be very thoughtful about buying a policy that has that excluded.
I think those are probably the two biggest ones that we haven’t touched yet that I would really pay close attention to. And literally, it’s $100 of annual premium to get those things included. So a lot of bang for your buck.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Drew Maconachy: On Facebook, I’m pretty active. I try and do videos. I’ve been bad lately, but they can follow me on Facebook. And I’ve talked about all these things on my Facebook page before, so they can jump on and look at old videos. That would be a great way to learn about it. Or if you get in contact with me, we’ve got a newsletter that goes out, it highlights topical issues that are going on in the insurance industry as it relates to real estate investors or investing.
So reach out to me via email or Facebook Message, whatever. However you want to get in touch me, that’s fine. I assume you’ll tag my contact information to the podcast, Joe.
Joe Fairless: Drew, what’s your email?
Drew Maconachy: Yeah, it’s dmdrewmaconachy@macstrad.com.
Joe Fairless: Drew, thank you for being on the show, talking to us about common pitfalls that real estate investors fall into and giving many specific examples of those pitfalls, and what we should do; not just, “Here’s how you make mistakes,” but “Here’s what to do to correct those mistakes.”
So thanks for being on show, hope you have a best ever weekend and talk to you again soon.
Drew Maconachy: Great, Joe. Thank you.
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