Success in High-Risk Scenarios: Tips From an Insurance Specialist, Real Finds Podcast #15 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere, and welcome to the Real Finds Podcast, the podcast series where we interview key entrepreneurs, scientists, and activists who are shaping the commercial real estate industry and, as a result, our world. In today’s podcast, we’ll be speaking with Jeremy Goodrich. Jeremy is the founder of Shine Insurance Agency and host of the Managing Commercial Real Estate Risk Podcast. On the podcast, we chat about risk, how risk influences our decision making, the evolution of the insurance industry, and data-driven methods to get more out of your commercial real estate asset. It’s well worth a listen. Jeremy, thank you so much for hopping on the podcast today.
Jeremy Goodrich: It’s a pleasure. I’m really excited to chat with you and your community about risk management and how we can make great decisions in our real estate world.
Gordon Lamphere: Before we start talking about risk, could you tell us a little bit about yourself?
Jeremy Goodrich: Absolutely. I started my adult career as an elementary school teacher in third and fourth grade, and I did that for 13 years. Then my wife and business partner and I decided we wanted to take a leap. She was working at her dad’s insurance agency, and I was an elementary school teacher, and we decided to start our own agency, Shine Insurance, with the goal of changing the way people feel about insurance. I’m not sure how much of that we’ve done in the last 10 years, but we’ve certainly intended to.
Right from the beginning I focused on real estate. It started with teaching first-time homebuyers how to buy a house. Obviously I didn’t know every answer, so I went to realtors, lenders, appraisers, title companies, and everyone else and asked them about their part of the closing process. I posted all of that on YouTube, which got a lot of followers. Our channel is now the largest independent insurance agency channel on YouTube. I evolved from teaching first-time homebuyers to teaching folks how to buy residential investment properties, and for the last few years, all I talk about for the most part is commercial real estate and all the asset classes and markets associated with it. I’ve grown in the real estate world through the lens of risk management and insurance.
The Biggest Misconception About Insurance
Gordon Lamphere: Congratulations. You have a fantastic podcast and a fantastic YouTube channel on insurance, and for anybody interested in the insurance game or risk at all, please check out Jeremy’s podcast and YouTube channel. We’ll talk about it at the end. What I wanted to talk about first is that there are a lot of misconceptions about insurance. What’s the biggest misconception you’ve talked about on the podcast?
Jeremy Goodrich: The thing we start with is that insurance is just a tool. It’s a tool to get to an end. We have to understand risk management as a whole. Risk management is the act of limiting the risks we can’t control or don’t know about, increasing our awareness of the ones we do know about, and making sure we make good decisions about them. There are three types of risk. One is risks you don’t know anything about. Two is risks you know something about and can do something about. And three is risks you didn’t realize were there until it was too late. What we’re trying to do is avoid that third one.
If there are risks you can’t do anything about, for example, if you’re investing in a market where a large military base is the primary source of people coming to the area, that may be a really high-risk decision if you’re buying a 300-unit apartment complex. You have only one employer in the area. That’s a risk you can’t control, so you have to decide on the front end whether you’re willing to take it. For me, I don’t want to invest in that kind of situation. That’s an external risk.
Internal risks are things we figure out in the due diligence process. We’re looking at the property, seeing if the sewer line is good, seeing if the neighborhood makes sense for the investment strategy we have, seeing if there’s property management that can handle what we’re doing. If the property management is wrong, we can bring in a different property manager. Those are things we can change. But the most dangerous risk is the stuff you could have changed if you’d known about it, but you didn’t know, so you’re stuck with it.
Lessons From a Helicopter Pilot
Gordon Lamphere: You’ve had a lot of memorable and impactful stories on your podcast. I was struck recently by one, I believe it was a helicopter pilot who did very high-risk maneuvers. What are the most impactful stories you’ve had about risk, so our listeners can get a taste for how your podcast works?
Jeremy Goodrich: It’s always stories. We talk about risk management as a decision-making process, and insurance as a tool, just one piece of how we manage risk. The helicopter pilot is a great example. When you’re flying into a war zone and starting to land, and the dust and dirt come up around your helicopter, you don’t have visibility anymore. What do you do to make sure you can land? One thing he said that I really loved is that before you even take off, you want to mitigate. You want to get rid of as much risk as possible. Can we go at night instead of during the day? Can we go after it’s rained, as opposed to when it hasn’t rained in a long time? The military is a great space for studying risk management because there’s so much of it.
His story is about how we get rid of risks we don’t want to have. But at some point, you have to take action, even if there’s risk associated. You’ve got to lift that helicopter off the ground and go get those folks out of the situation they’re in. At that point, you’re managing risk. When the dust comes up around him, his training, his capacity to know where the ground is, and the knowledge that his tires are going to hit the ground even though he can’t see it, that’s his ability to manage risk. There’s story after story like that, so every time I have someone on my show, I really dig into what those stories are.
Four Quadrants of Risk
Gordon Lamphere: I’m sure you’ve talked to a lot of people who are very concerned about risk over the years. We’re not talking about military special ops, but how does the common person look at risk, and what factors could you give them to influence how they manage it?
Jeremy Goodrich: Any time we have a big word, a big thing, we have to break it into parcels to really deal with it, and this goes for any entrepreneur. I’m a business owner, so when I look at the risk associated with my business, I have to break it into parts. One thing I do is use quadrants of risk. For me, there’s physical risk, relationship risk, external risk, and systems risk. Now I’ve broken risk into things I can manage.
Physical risk, that’s the building, someone getting injured, my cars, all the physical stuff. When we’re doing due diligence at the beginning of a purchase process, we use checklists and systems to manage that group of risk. Relationships: I’m getting into a business relationship with someone right now. We know each other and we’re comfortable with each other, but we still both have a lawyer helping, so that if anything happens in that business three, six, or twelve months from now, we know exactly how it’s going to play out and we can still stay friends even if something changes. That’s a way to manage risk. I just talked about external risk, deciding where to invest. And systems is my favorite. In my insurance agency and the businesses I run, all of them have really clear operations systems, and we always hire an operations manager as one of the first five or six hires, because having systems in place is managing risk. So the question was what an everyday person can do, and I think organizing your systems and being clear about the direction of your business is step one.
How Data Is Reshaping the Insurance Industry
Gordon Lamphere: Let’s talk about systems. One of the biggest steps we’ve taken in our business is creating more data-driven systems, systems to plan out ROI, systems to identify potential risk, not only for us but for our clients as well. How has the insurance industry changed with our new data-driven world? Is that something you’ve seen implemented on a wide scale, or are there still a lot of steps to go?
Jeremy Goodrich: A hundred percent. The insurance industry is in incredible flux right now, and a lot of that has to do with the additional data it has. In the past, when I brought a large office building to an insurance company and said, this is a really good opportunity, I think we should insure this building, there was some data we used, certainly actuarial numbers on how many losses office buildings had had across the country, the state, or even the city. But there was absolutely a gut-feeling conversation going on between me, the agent, and the person at the insurance company as we figured out the price that made sense.
Now there’s so much less gut in our industry because of the amount of data. When I go to an insurance company, it’s so much harder to get an underwriter to bend. It’s like, this is a great property, yes, this type of property has a lot of losses, I get it, but here’s why this one is different. Because there’s so much data, that’s harder. For the everyday consumer of insurance, the amount of data present may not be the best thing, because insurance companies are realizing how many losses they have and honing in on where those losses are coming from.
For an asset class like multifamily, insurance companies are saying, we’ve lost tons of money on this asset class for sixteen quarters in a row now, four years, and we don’t want to insure multifamily. Fewer and fewer companies want to insure it. That creates a supply and demand problem, and the price goes up. Texas is an extreme example right now. Florida was an extreme example five or six years ago. Now Texas is following suit, and we’re seeing premium increases at renewal of 100% in some scenarios. Those are somewhat extreme examples, not every scenario. But if you underwrote a five-year business plan with a 10% increase in insurance each year and you get a 100% increase, think about what that does to your NOI. That’s a lot in one answer, but data is certainly affecting insurance.
What Drives Multifamily Insurance Costs
Gordon Lamphere: I’m fine diving deep into the woods on all sorts of topics. We have a very educated, niche audience, and they’re very data-driven as a group. You touched on multifamily, and I’m curious what factors you think influence risk in multifamily the most. It’s a risky asset class in general. You’ve got individuals, not a major corporate entity operating in the facility. How have you seen that shape out over the last five years?
Jeremy Goodrich: Here are the things that affect insurance for multifamily in particular. Number one is the market. Where is this property? If we’re talking about Harris County, Houston, Texas, you might see an insurance price around $1,500 a door. In some parts of Pennsylvania, I have clients where it’s $200 or $220 a door. So the market creates a span from $200 a door to $1,500 a door. That’s drastically different, and the market is the number one thing to pay attention to.
Number two is the age of the property. I just insured a multifamily apartment complex built in 2022. It was just leased up and moving from the development team to a team that’s going to hold it long term. This was in Georgia, where I generally see $500 or $600 a door for a property built in 1980 or 1990. The insurance on this one was $250 a door. If your buildings are 1990 or older, you’re going to see a significantly higher premium than if they’re newer, and if they’re brand new, you’ll see a much lower premium, as in that example.
Obviously, occupancy is a big deal. A vacant property is going to be a lot more expensive to insure than a fully leased one. Then there are crime scores. Insurance companies look at the neighborhood and assess the possibility of vandalism, theft, and things like that. And the last one, the one I try to use most to help folks get over the line, is the quality of the sponsorship team running the deal. If I can show a risk management strategy to an insurance company and say, I know this is a 1970s build, I know it’s only 40 miles from the coast, but here’s the risk management plan and the actual business plan I’ve worked with these folks to put together, and while they have these exposures, they’re a much higher-quality investment team than others, I can get some insurance companies to say yes where they’d otherwise say no. That generally gets you a better price.
Building a Risk Management Plan
Gordon Lamphere: I’d love to follow up on that risk management plan. Location, location, location, but a lot of folks are sitting on a building right now, and in this market it’s very hard to move with high interest rates. What are the steps to developing a risk management plan that could mitigate and lower insurance costs?
Jeremy Goodrich: Connecting with an advisor who can help you do that is step one. I use due diligence as an example all the time, because it’s a clear risk management plan that investors already look for. They know it’s a big moment in their investing journey. What does risk management look like during due diligence? First, you find the best set of checklists, whether from your guru or someone else, or you’ve built your own system over time. You have checklists, you have a process, you go through everything, you get the leases, you see all those things. Part of it is just analyzing a property and understanding where the exposures are. Are my stairs safe? Is my lighting safe? Are my exits safe? Have I chosen as a property owner to put fire-suppression devices over the stove? I’m blanking on what those are called, but I have apartment clients who have them over every stove. Do I have a fire extinguisher in every unit? Do I have lighting in my hallways?
This is all really simple stuff, but if you don’t have a checklist, and if you don’t ask your property management team to review it quarterly, you’re going to have problems. What I do with my clients is review our risk management strategy every six months. It’s essentially a checklist of things we believe are important for our properties. If we had problems in the past, we’re working on those. If we have HVAC units that need to be turned over, we’re dealing with those. If we had safety issues, we’re dealing with those. Your risk management strategy is essentially a checklist of things you’re going to do, or are doing on a consistent basis, to maintain a property, keep it safe, and avoid significant claims, whether from physical damage or from someone tripping, falling, hiring a personal injury attorney, and suing you for hundreds of thousands of dollars.
COVID, Climate, and the Texas Freeze
Gordon Lamphere: I think that very much does it. From my perspective, with fifty properties under management right now, a lot of this falls on the shoulders of your asset management team. If you don’t have an experienced team, you need to hire a consultant and a specialist, because you’re leaving money on the table, if not on the leasing side, then on the insurance side. One thing our asset managers have struggled with is that the last three or four years have been crazy with COVID. How has COVID affected the insurance market? From our end, we’ve seen some craziness, but it could be managed. What have you seen on the insurance side?
Jeremy Goodrich: COVID had a pretty limited effect compared to, say, climate change, which is having an incredible effect. One specific thing early in COVID was the question of whether closures associated with COVID were covered on your insurance policy. For retail and office investors especially, you thought you had a certain occupancy, and suddenly you didn’t, because people weren’t in the office anymore or you didn’t have retail traffic. The answer to that question is a resounding no. Your insurance policy does not cover closures associated with COVID, and there were a fair number of court cases that played that out. If COVID had been covered by insurance, the insurance industry would have crashed and we wouldn’t have one anymore.
What we’re seeing a lot of is the effect of climate change, or the increase in high-level storms. In the past, you’d expect a Category 1-type storm to come through the United States once every three to five years. Over the past four years, we’ve had one every single year. You can say whatever you want about where that’s coming from, but that’s an actual result, and insurance companies are exposed. The February 2021 freeze in Texas, where the power grid went down, was the largest property claim in history, significantly larger than any other. That’s why we’re seeing what’s going on in Texas with property losses right now. So COVID didn’t have a huge effect on the insurance world, but other things certainly are.
Gordon Lamphere: I want to come back to climate change and how it’s affecting insurance, but I have a funny quirk with the Texas freeze. Our website has a passage about pipes freezing and how to deal with it for commercial properties, and we saw website traffic increase 1,000% for about five days during the Texas freeze. I was getting calls nonstop from Texas property managers saying, I’ve never seen pipes freeze before, what do you do? Being a lifelong Midwesterner, there were some easy answers on my end. But in terms of climate change and how it’s affected the insurance markets, are there meaningful steps we can take as property owners or investors, besides saying we don’t want to buy the house right on the beach in Florida? Or is it mostly location, location, location?
Jeremy Goodrich: Great question. Neal Bawa came on my show, and he’s very data-driven, like you. He talked about climate change and said it doesn’t matter what your opinion is about it. If the population believes a given market is going to be affected by climate change, as an investor you have to respond, because the market is going to change. It’s like the stock market when someone gets scared by a bank crashing. It’s not necessarily that there’s any problem with regional banks at all, but people get scared, they feel a feeling, they start to behave a certain way, and now you as an investor have to respond to that. That’s true in commercial real estate as well. When you’re investing in an area, understanding people’s perception of climate change around that space is super important.
As far as what you can do for your properties, it comes back to that strategy. If you’re keeping your properties up, making sure your roofs are replaced when necessary so you don’t have 30-year-old roofs on a bunch of properties, creating those safety measures around your property. Once you own a property in a heavy hailstorm area, you own it. You just have to do the things you can to thoughtfully use your capital to invest in a property in a way where you don’t end up with million-dollar losses.
Flood Zones and Flood Insurance
Gordon Lamphere: You’re a Midwesterner, I can see you’re a Hoosier. We can’t control where tornadoes go, but one thing that affects a lot of Midwestern properties is flooding. Have you seen any enhanced technology, or moves toward more permeable surfaces on buildings, that might be a factor in the commercial space going forward?
Jeremy Goodrich: I haven’t seen a ton. I can speak from the insurance side on flooding, but as far as outfitting properties to navigate floods, especially properties in lower areas, I haven’t seen much, nor could I speak from an expert perspective on it. What I do see with flood, from an investor perspective, is how insurance navigates it. When you’re investing in a property in a high-risk flood zone, your lender is going to require you to carry flood insurance, and a lot of times that’s going to double your insurance cost, because a high-risk flood zone means expensive flood insurance.
That’s back to due diligence. If you didn’t notice a property was in a flood zone, you put $500 a door in for insurance costs, and now you’re getting close to closing and your lender tells you, by the way, you have to have flood insurance, and your insurance agent missed it, which is a problem if they did. Now you’ve got $1,000 a door, your NOI goes down, your cap rate goes down, everything goes down because of that mistake. Flood is something we’re seeing more of, so if a property is in a high-risk zone, there’s more to think about. Most of the time what investors care about is whether they have to carry flood insurance or not. And I’d say too many investors, against my advice, choose not to carry flood insurance if their lender doesn’t require it.
Gordon Lamphere: I would strongly disagree with the folks who think that’s the way to go. In our market, there’s a building I could almost see out my window if I raised my blinds, and that building always holds itself out at a couple of cents lower than other buildings in the market, or even closer to a dollar. The reason is that it’s in a floodplain, and they require tenants to take that flood insurance on themselves. If you’re not working with a good agent or insurance broker who understands how floodplains and flood insurance work, you’re missing out.
The Final Four
Gordon Lamphere: Speaking of missing out, we don’t want to miss the most important part of the podcast, the part where we really get to know you, and it definitely corresponds to your shirt. It’s what we call our Final Four. I’ll say this: my step-grandfather is a diehard Hoosier, so they’ve made a couple of trips. I went to St. Mary’s College of Maryland, and Maryland has made a couple of trips, but certainly my tiny little state school has not. So, one of our favorite Final Four questions: where do you see the future of commercial insurance going? You’re better situated than most to inform us. What do you see five or ten years out?
Jeremy Goodrich: Great question, and for any investor looking at that particular line item, understanding the answer is key. We’re in a really hard market right now, which means insurance companies aren’t interested in growing the way they were five years ago. They want to shrink in certain markets, property and real estate being among them, so we have a supply and demand issue. That’s what puts us in a hard market, and it’s why we’re seeing big increases in premium.
Do I think two years down the road that turns around and we go back to where we were two years ago? Unfortunately, that’s just not how it works. It doesn’t go all the way back after any hard market. What I see for the commercial insurance market is that it’s going to be tough for a couple of years. If you’re an owner, especially in a high-risk area, you have to expect 10% to 20% rate increases as part of what you’re figuring into your numbers. I think it will settle down. Insurance companies will come back. The real estate market is a huge place, and insurance companies can make lots of money in it if they’re not losing it. So I see things settling in the next few years.
Then it’s really going to be all about climate change, or the change in the volume of claims coming from large losses. At some point, does the government have to get involved, as it does with flood insurance? There’s a lot that could happen there. Commercial insurance is a fascinating world, as boring as it sounds, and I think it will continue to be fascinating in commercial real estate over the next few years. But I do think it’ll settle in the next year or so.
Gordon Lamphere: As boring as it sounds, commercial insurance is not only a critical but an expensive and important part of the real estate world, so we’re happy to have you on. Moving to another favorite question of mine: we’ve looked forward, now it’s time to look back. Jeremy, if you had a chance to talk to your high school self as they’re leaving, what would be your one-minute spiel of advice?
Jeremy Goodrich: It’s funny, I remember being 21 in college and thinking, when I’m 25, I’m going to have it all figured out. I’m 46 now, and I still don’t have it all figured out. I’d say be clear in your approach, your systems, and your ethics. Know what you’re going after and continue to systematically go after it in a way that is authentic and speaks to people where they’re at. I was fortunate enough to see that at the beginning of starting this insurance agency, maybe from being a teacher, and I’ve really stuck to it. That’s what I’d say to my younger self, and I feel fortunate to be living that in some way currently.
Gordon Lamphere: Teachers always have an adept sense of meeting folks where they are, because they usually have such a diverse group coming into their classroom every day, so I’m not too surprised. I’ve got a brother-in-law who’s a teacher down in South Louisiana, a phenomenal guy, very adept at talking to anybody and getting to know folks. On that note of getting to know folks, one of the ways we like to do that is to find out what they’re reading. I see some books behind you. Is there a book that has influenced you in the insurance world, the business world, or the real estate world?
Jeremy Goodrich: I’ll go with two, one real estate book and one marketing. I went on vacation a few years ago and took both Brian Burke’s and Hunter Thompson’s books on syndication. I couldn’t believe how sucked into those books I got. This is very dry, in-the-weeds stuff. If you’ve read either of them, it’s waterfalls and cap rates and NOI and IRR. But I was so fascinated by this idea of the passive investor, and I’m a passive investor as well. Those books are ones I’d point out every single time. From a marketing perspective, no matter what kind of business you have, Jay Baer is an author, and a friend of mine, who’s one of the best marketing authors out there. His books Talk Triggers, Hug Your Haters, and Youtility are all really good books on how to speak to your ideal audience in an authentic way, so they don’t forget about you when it’s time to make a purchasing decision.
Gordon Lamphere: Great books. On that note, we’re at our last question of the Final Four, and this is the most important question of the podcast. The whole reason we created the podcast is to find great people and voices influencing commercial real estate. You’re a great voice, and luckily we found you, or maybe you found us. In terms of a voice we should reach out to next and have on the podcast, who would you recommend?
Jeremy Goodrich: One of my favorite real estate investors is Maurice Philogene. He’s well known on LinkedIn, and he’s part of Quattro Capital. All the folks at Quattro are really good at what they do. But Mo is so great because he started as a police officer, worked in the FBI, worked a corporate job, and has been to, I think, 90 countries. He has this incredible story and incredible life. He came on my podcast a few years ago and really hadn’t talked publicly about his five freedoms before. We got into a conversation about his five freedoms, what they mean to him, and how he’s built them into his life. It was inspiring to me, and now it’s inspiring many more people as he continues to tell that story. I’d go follow Mo on LinkedIn and certainly have him on your show if you haven’t already.
Gordon Lamphere: We’ve got to reach out to Mo. If someone wants to reach out to you, what’s the best way to get in contact?
Jeremy Goodrich: You can listen to our show, the Managing Commercial Real Estate Risk Podcast. Or if you’re on the multifamily side, we have a tool at shineinsurance.com/ballpark. Go there, answer nine yes-or-no questions, and you’ll immediately get an insurance ballpark for your underwriting. Of course, they’re just pencil numbers at the beginning, but at least it gives you something, so you don’t have to wait two weeks for an insurance agent to get you a quote.
Gordon Lamphere: Jeremy, that’s awesome. Thank you so much for hopping on the podcast today, and we hope to have you on again sometime soon.
Jeremy Goodrich: Absolutely, Gordon. It was a pleasure.
Gordon Lamphere: Thanks again to Jeremy. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions truly matter and help us continue to provide quality guests. You can follow us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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