Selecting the Right Insurance Policy for Your Investment Property
Owning a house is undoubtedly part of the American dream. There comes a great sense of satisfaction and pride in being able to call the roof over your head your own. But for many homeowners, property can also be a great investment.
With some of the wealthiest men and women in the world being real estate moguls, it’s no wonder people all over the country are beginning to purchase single family homes for the sole purpose of renting them out. However, one of the most overlooked steps of purchasing an investment property is choosing the right insurance policy.
Choosing the wrong insurance policy can be detrimental to your investment and can even leave you high and dry without any rent money if disaster strikes. The information below will give you the overview necessary to purchase a policy that will provide you peace of mind for your hard-earned property.
Landlord Insurance vs. Homeowner’s Insurance
The first thing you need to know is the policy terminology. Insurance for an investment property (that you do not take residence in) is known as a landlord insurance policy built on the DP3 policy form. It is completely different than the property insurance you take out on your primary house (HO3 homeowners insurance).
The two main types of coverage for landlord insurance are property and liability coverage.
- Property coverage - damage to your physical property, much like your homeowner’s policy.
- Liability coverage - in case a tenant or tenant guest is hurt on your property and you are held liable. This might include medical or legal fees. $500K of coverage is a good estimate for a single property. If you have a higher net worth, consider adding on an umbrella for extra protection.
Business Income Coverage
Also referred to as rent loss protection, business income coverage means the insurance company will cover a portion or all of your rental income in a case where the tenant has to move out of the unit for repairs or maintenance. This is huge! Even though covering all of your rent will mean a higher monthly premium, most successful investors will tell you it’s 100% worth it.
Most polices have a built-in coinsurance clause which often times causes a lot of confusion. Admittedly, coinsurance is one of the most baffling aspects of landlord insurance, but it is vital to understand what it is prior to purchasing a policy
Think of the coinsurance clause as the minimum amount of coverage you need to buy in order for the insurance company to fully cover you when you submit a claim. In other words, if you buy a house that costs $100,000 to replace/rebuild and the policy you are looking at has a coinsurance clause of 80%, you would need to buy coverage for at least $80,000 in order to be fully reimbursed for any covered claims you submit. If you only had $75,000 of coverage, there would be a penalty, and you would face a partial reimbursement.
Clear as mud, right? The main take away with the coinsurance clause is: the lower the percentage the better. Shy away from polices that have a 100% coinsurance clause. Sometimes carriers will even offer to remove the clause altogether for a slightly higher premium. Again, most real estate investors will tell you this is a great idea if your premium doesn’t spike too much.
The Property Inspection
Once your policy is in place, the carrier is likely going to come to your property to conduct an inspection. Here are some things they might look for:
- All stairways have handrails
- All exterior concrete is level and non-hazardous
- Roof is relatively new
- Fire extinguishers and smoke alarms are present
Take the Time to Choose the Right Policy
Real estate investing entails a lot of research and number crunching. So when investors find a house that fits their parameters, they often rush through the process of insuring their property. But all the number crunching in the world cannot protect your investment if you have a poorly structured policy. With the information above, you can confidently shop and customize the plan that works for you. Ultimately, this will set you up for success in your pursuit of becoming the next real estate mogul.
At your service,