INSURANCE 101 FOR THE NEW REAL ESTATE INVESTOR
Investors who look to real estate for passive income are finding the marketplace has made its turnaround and realize that there are abundant profits to be made. While there is a significant amount of due diligence that must take place prior to your first purchase, your insurance requirements are fairly straightforward depending on how your property will be titled and then used.
In every case, the real estate investor will want to mitigate liability and property risk by transferring them to an insurance company. The insurance you need will always be based on the use or status of occupancy of the property which is typically one of the following:
- Remodel and Sell
- Hold and Sell
- Residential Rental
- Commercial Rental (retail or office)
The method of ownership has a significant effect on how the property is insured in regards to the type of policy that can be used. For example, a home purchased by an individual can typically be insured on a personal policy such as a homeowner’s policy or dwelling/fire policy. Depending on the insurance carrier, you may be able to add your investment property to your regular homeowner’s insurance policy. Many of the standard insurance carriers have a limit on the number of properties they’re willing to insurance, but for the new investor, their personal policy would be the easiest and most affordable way to insure multiple properties. The first step should be to call your current agent or broker to see if they can accommodate multiple properties on a single personal policy.
Generally, if you elect to title your investment property under an LLC or S-Corp, your agent or broker is going to use a commercial policy that can also accommodate either single or multiple properties. Some insurance companies offer a master type policy that is used for insuring 10 or more properties where the insured (typically an LLC) can add or remove properties as needed.
The coverage needed for your real estate investment is going to be pretty much the same no matter what type of property you purchase, what it’s used for, and how it’s titled:
Dwelling/Building Coverage – This coverage pays for damages to the building or the cost to rebuild it if there is a total loss. Your limit should be as close to the replacement cost as possible, While still weighing the market value and the deductible should represent what you can afford to pay out-of-pocket after a claim.
Contents/Business Personal Property – Pays to repair or replace damaged property you own Such as refridgerators, washers, lawn moweers and other building materials you may keep at that location. This coverage is especially important for furnished rentals.
Loss of Income – The loss of income coverage reimburses the policyholder if they are unable to collect rent when the property has to be temporarily vacated due to a covered peril, such as a fire or storm damage.
Liability Insurance – Liability coverage protects the named insured (name the policy is titled in) against liability claims and actions brought by a third party. The coverage will pay for defense costs, settlements by the insurer, and judgments awarded by the court.
Optional Coverages – Some landlord policies will also allow you to add additional coverages for an additional premium. This can be a separate line item such as Machine Boiler, or an endorsement that adds a package of additional coverages.
The good news for property owners is that all of the coverages listed above are typically offered as a package deal in the Landlord’s Insurance Policy. For property owners requiring liability limits higher than those offered in the Landlord’s Policy talk to your agent or broker about an Umbrella policy that can extend your liability limits to as high as $20 million at a very affordable price.
Below are the recommended coverages based on the property use and type. Whether the policy will be written on a personal insurance form or commercial insurance form depends on how the property is titled.
Remodel and Sell (policy type: builders risk)
Hold and Sell (policy type: vacant home/dwelling fire)
Flip (policy type: vacant home/dwelling fire)
Residential Rental (policy type: landlord’s package)
- Rent Loss
Commercial Rental (policy type: BOP/commercial package)
- Rent Loss
Written By: Jason Bott