Real Estate Investor Insurance: Everything You Need to Know

It’s good to be a real estate investor.

Often, you'll be able to simultaneously capitalize on ongoing passive revenue generation and long-term appreciation in your properties. The risks are minimal. Real estate is an excellent, complementary foil to stock market investments. And it seems like there are many reasons for optimism in the U.S. real estate market.

However, real estate investing is not without risk, and if you want to be successful, you need to be able to calculate and account for those risks.

One of the best tools available to compensate for the risks of real estate investing is insurance. But how exactly should real estate investors think about insurance? And what are the most important considerations for making critical decisions in this space?

In this guide, we'll explore the many different types of insurance that real estate investors should consider and how to approach these types of financial decisions.

Property Insurance

One of the most obvious forms of insurance available to real estate investors is traditional property insurance. If you own a home, you probably have a property insurance policy for it. If you have a mortgage on a property, your lender likely requires you to have an insurance policy in place for it.

Although property insurance policies vary considerably and can be customized in a multitude of ways, they typically serve the same general purpose: replacing or reimbursing you for damaged or lost property.

A typical property insurance policy will protect you against many types of property damage, including property damage from natural disasters, vandalism, acts of God, and more. However, it's important to pay close attention to the fine details of your policy, as not every type of damage is going to be covered. For example, almost any damage caused by your own negligence or lack of due diligence is unlikely to be covered, and in areas susceptible to certain types of natural disasters, you may need secondary or supplementary coverage to account for them.

Also, there are limits to what you can claim. Make sure your property insurance policies cover the full value of your properties, including appliances and other personal possessions you may have on the premises.

General Liability Insurance

It's also important for real estate investors to have general liability insurance. If you fail to keep the property in safe condition, or if you engage in other conduct responsible for injuring a tenant or someone else on the property, you can be held liable for damages. In some cases, these damages can be extremely costly. Liability coverage serves as a shield that can compensate you for these expenses, as well as any legal fees you incurred during the process. Again, it's important to review the details of your liability insurance closely; pay especially close attention to coverage limits.

Umbrella Liability Insurance

For some real estate investors, general liability insurance doesn't offer enough coverage. If you want to be protected for damages above and beyond traditional policy limits, you should consider investing in umbrella liability insurance. This type of policy is so named because it provides you with broad, high-level protection in excess of your other policy limits.

Business Interruption Insurance

Business interruption insurance is another potential consideration for certain property owners. Traditionally, business interruption insurance is used by business owners to replace lost income during periods of downtime. For example, if your business is destroyed in a hurricane, business interruption insurance can provide you the financial stability necessary to rebuild.

As a landlord and real estate investor, business interruption insurance could provide you with income stability in certain catastrophic situations. However, this is not relevant or useful to all types of real estate investors.

Renter’s Insurance

Note that your renters can and should have insurance policies of their own. In fact, many landlords and property managers make it a requirement for their tenants to have some form of renter insurance in place. Renter’s insurance typically protects the personal property of the renter, and may afford liability coverage as well. This way, if your tenants’ property is damaged or stolen, or if they're held liable for damage to your property, they'll have a first line of financial defense.

Master vs. Individual Policies

Also note that real estate investors can pursue master or individual policies. Essentially, that means you can have individual property and liability insurance policies for each of your properties, or you can put together a master insurance policy that covers all your properties at once.

The advantages and disadvantages of these approaches are somewhat intuitive. As you might imagine, having a master policy is convenient and straightforward, but it doesn't allow you the kind of granular customizability that individual insurance policies do. Similarly, individual insurance policies allow you to get exactly the policy you want for each property, but you'll incur more administrative hassles as a result.

Do You Need Insurance?

Do you really need insurance as a real estate investor?

In most cases, the answer is no, but it's strongly recommended.

If you have a loan on a property, your lender probably requires you to have property insurance in place, with specific guidelines for minimum coverage. This is to protect the lender from certain financial risks.

Otherwise, the value of an insurance policy depends heavily on your risk tolerance. If you have a property valued at $100,000, and you can easily tolerate a $100,000 loss, you may not need property insurance for that property.

That said, it's important to remember that there are many different types of losses, some of which can be astronomical in value. Most insurance policies are relatively inexpensive, but they can shield you from devastating losses, including both predictable and unpredictable ones.

Important Concepts and Considerations

These are some of the most important concepts and considerations to bear in mind when deciding what types of insurance you want for your own property investment strategy.

·         High-level safeguards. Insurance is fairly reliable, but it shouldn't be your first line of defense. Instead, it should be an option of last resort, meant only for situations where your high-level safeguards fail. If you want to properly account for and manage risk in your real estate investments, the onus is on you to identify and minimize risks. For example, it’s important to do your due diligence when buying any property. Before finalizing any purchase, you should become thoroughly acquainted with the property, including any defects or flaws that might have. It's also important to routinely inspect and maintain your property so it remains in good condition and is therefore less susceptible to certain types of threats.

·         Overall costs vs. benefits. In your risk calculations, try to include all the overall costs and all the overall benefits. How much, exactly, is each type of insurance policy going to cost you? What is the probability of suffering a loss, and what is the amount of that loss? You can compare these numbers to determine whether it makes logical sense for you to invest in certain types of insurance policies. This is especially important as you begin fine-tuning the details of each individual policy. For example, is increasing the coverage limit by 10 percent worth a 10 percent increase in your premiums? For some people, it might be. For others, it might not be.

·         Coverage types. Don't just assume that your property insurance policy covers every conceivable form of damage, vandalism, or theft. In some areas, certain types of damage are excluded, and different insurance companies operate in different ways. You don't have to be an insurance expert or a lawyer to make sense of this; you typically just have to read the policy. Make sure you know exactly what's covered and what isn't before moving forward with anything.

·         Coverage values. Also consider coverage values. When it comes to property insurance, you should be covered for the maximum conceivable loss. When it comes to liability insurance, things get a little more difficult, as it's hard to anticipate damage liability and legal expenses.

·         Sublimits. Review your policy carefully to be cognizant of any supplements that might be in play. Sublimits are effectively limitations on certain types of payouts, nested within your broader coverage limits. For example, there might be an upper limit to what you can claim after a fire.

·         Layered insurance policies. If your insurance provider isn't willing or able to provide you with all the coverage you need, or if you just want to hedge your bets, you might pursue layered insurance policies. Essentially, this means having multiple insurance policies, often from different providers, covering the same thing. This way, if your damages exceed the coverage limits of one policy, you'll have backups to tap into. Just make sure you properly disclose this to your insurance providers.

·         Competitive pricing. Don't assume that an insurance provider is giving you the best possible price just because you've worked with them historically or because they have a good reputation. The nuances of insurance pricing are very difficult to understand, and they tend to be different among different insurance providers. Always get quotes from multiple insurance providers to secure the most competitive pricing available.

·         Administrative convenience. Don't forget about the administrative hassles associated with insurance. Getting quotes, reviewing policies, making claims, and dealing with paperwork are all time-consuming requirements. Sometimes, it's worth paying a bit more or sacrificing a bit of coverage for the sake of streamlined consistency and efficiency. Ultimately, this is your choice to make.

·         Contractor insurance. We've already talked about how many landlords and property managers require their renters to have insurance policies of their own. It's also a good practice to make sure that any general contractors or subcontractors who do work on your properties are protected by their own insurance policies. Otherwise, you could end up liable for damages resulting from the work they did.

·         Insurance updates. Just because an insurance policy worked well for you a few years ago doesn't mean that it's still working appropriately for you now. Your properties change, your needs change, your risk tolerance changes, and so does the insurance industry. At least annually, you should review all your insurance policies to determine whether your financial needs are met – and consider getting quotes from competitors to see if you can get a better deal for the same package. Don’t be afraid to make frequent changes to your insurance as your needs and preferences evolve.

Real estate investing has a lot of potential, but it can also be difficult terrain to navigate, especially if you're inexperienced.

If you're not sure what types of insurance policies you truly need, or if you don't know how to accurately estimate risks associated with your property investment strategy, it's a good idea to work with seasoned property investors for advice and perspective.

Are you ready for your free discovery call? Contact us today!

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