Insurance: What Type Do I Need, and How Much Coverage is Enough?
In general terms, no matter what type of investment you may have, it’s always advisable to protect it in the most appropriate way possible. If you own a car or a house – both of which are investments – you’ll obviously want to take pains to maintain and insure them (regular maintenance on your car, for example, is a form of insurance). As a real estate investor, it’s doubly important that you protect your investment, because unexpected things do happen and it’s always better to be safe than sorry. An unplanned-for contingency can have disastrous consequences and, more often than not, completely derail any plans you had for making a profit or worse, cause you to actually lose money on your investment. Obviously, this is something the smart investor wants to avoid, but in our experience many investors aren’t aware of a few particulars about obtaining insurance before they set up their policies, so this week we’re going to take a look at some common questions.
Before we start talking about the details of coverage, there are a few things you want to keep in mind when shopping for a policy. Even though as an investor you probably have an enormous amount of things to worry about on any given day – trust us, we know – it’s important to treat insurance as a priority rather than an afterthought. Should something go wrong, you’ll thank yourself for doing your due diligence. First of all, it may be better to go through an insurance broker rather than an agent, for the sole reason that an agent represents one carrier while a broker writes policies for several different carriers and may be more suited to handle multiple policies should you need them. Insurance is ridiculously complex and one plan simply may not fulfill all of your needs, nor will one carrier necessarily have the different plans and coverage that you need. Each case is different, as we’ll discuss in a minute, but it’s important to understand what you need and which plan or carrier can meet those needs.
Speaking of different policies, not all plans are created equal, meaning that most are very specific to certain needs depending on your situation. For instance, if you’re renting and holding your investment property, you’re going to need landlord’s insurance. This is obviously not the only coverage you’re going to want, but it’s unique to investors who are renting, and includes things like lost rent, pets, tenant damage, and liability. For vacant properties as you renovate them, you can get vacancy insurance, which covers any damage that is unique to vacant properties such as break-ins, renovation, etc. While we’re on the subject of renovation, builder’s risk policies cover liabilities, injury, and damage if you’re utilizing contractors to renovate a vacant property, especially if you need skilled labor like welding, plumbing, electrical work, or structural renovation.
So how much coverage is enough? What contingencies do you need to plan for? Again, everyone is different, but the following types of coverage are the most common:
Damage:
Damage coverage is the most obvious choice here, and applies to just about any type of policy. Again, you want to protect your investment against anything that may diminish its profitability, and having to replace the roof because a tree limb fell on it is definitely going to eat into your profits. Likewise, if you have a landlord’s policy, you’re going to want to insure your property against any damage that may be caused by tenants.
Lost Rent and Pets:
These two are grouped together because they really only apply to landlord’s insurance. For lost rent, which is intended to cover your costs should a tenant fail to pay rent – which, depending on the location, could turn into a yearlong ordeal of no rent payments before the tenant is able to be evicted – so you’ll want to set your coverage for the gross amount of rent you expect to collect over the term of a lease, updated each time a new lease is signed. For pet coverage, you’ll want to include that in your landlord’s policy provided the tenant does not have renter’s insurance that covers pets.
Liability:
Liability insures you against legal action that may be taken against you as the owner of the property, and it can apply in many different ways. As long as you own the property, anything that happens on it, whether it’s a tenant being injured or a contractor falling down the stairs, is a potential liability on your part. You’ll want to ask an insurance broker for the correct amount to insure against, and always make sure you own your property through a limited liability entity such as an LLC.
Flood:
Even if your property isn’t located in a flood zone, you should at least consider flood insurance if the property is anywhere near water. Flood damage is often not covered on most plans and needs to be added in separately, but it’s almost always worth doing because flood damage can be potentially devastating. On the upside, if the property isn’t located in a flood zone the cost of flood coverage is likely to be cheaper and you can rest a little easier at night knowing you’re covered in the event of disaster. While flooding is rare, Nashville in 2010 and Hurricane Sandy on the East Coast prove that it does happen outside traditionally recognized zones, sometimes with financially disastrous consequences.
Finally, we want to touch on a few last points that are often overlooked. When choosing your policy, consider a high deductible because A.) you’re unlikely to file a claim under $5,000 in most cases, and B.) you’ll save money on your premium by going with a higher deductible. Another common mistake we see with newer investors is failure to insure the property under the same name as the actual holder of the deed. When you insure your property in any capacity, you must insure it under the same name as listed on the deed as the property’s owner. You can easily avoid this mistake by owning your property as a limited liability entity and insuring it under that as well.
From all of us at Get It Right Solutions, everyone have a safe and happy Thanksgiving, and be sure to follow us on Facebook for more information on the art of real estate investment!
– Get It Right Solutions