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Property Insurance for Real Estate Investments

As a real estate investor, there are two specific frameworks you need to think about. The first is your upside, also known as your return on investment (ROI). This refers to what you have to gain from a particular real estate investment. It’s the “fun” framework, and why we all get into this investment niche.

 

The second framework has to do with downside protection. In other words, how do you protect yourself and your investments from everything that could go wrong? And while it’s admittedly not as fun or optimistic to think about, your approach to downside protection will ultimately play a significant role in whether or not you’re successful. 

 

Part of downside protection is procuring property insurance that provides a layer of insulation against various tragedies that could strike without notice. But with so many different types of insurance and various providers, you’ll have to do your due diligence and find the options that make the most sense for you and your situation.

Common Types of Property Insurance for Real Estate Investments

There’s insurance for almost everything. And while you probably don’t need your policy to cover every possible situation, it’s worth getting familiar with all of the different types. Some of the major ones include:

Hazard and fire

As the name suggests, this type of policy covers damage associated with fire and other hazards. Depending on the language of the policy, this type of property insurance may cover damage from water, smoke, lighting, explosions, storms, ice, sleet, snow, etc.

Liability

As a property owner, you have a certain level of responsibility to protect people who live, work, or otherwise enter/visit your property. Technically, if a tenant (or even the guest of a tenant) gets hurt at your property and decides to file a lawsuit, you could be held responsible. They could require you to pay for the injured individual’s medical expenses, missed work, and even their pain and suffering.This is where liability coverage steps in. It can protect you against damages that are brought against you in situations such as these.

Flood

In certain areas, flood insurance is required by mortgage companies. This is usually a requirement if the property is in a designated flood zone or area where hurricanes could produce flooding in extreme situations. You can also opt for flood insurance (even if not required) as a way to further protect against disasters.

Loss of income

As a real estate investor, you may depend on income from tenants to maintain positive cash flow on your property. But what happens if your property is damaged and you’re unable to rent it out for a long period of time? Loss of income insurance steps in and provides you compensation so that you can continue to make all of your payments.

Rent guarantee

Similar to loss of income insurance, rent guarantee insurance continues to pay you even if you’re unable to find a tenant for several months. Plus, in certain cases, it kicks in and compensates you when a tenant fails to pay you. It’s basically a reimbursement that allows you to rest easy knowing you’re going to get paid each month (one way or another).

Sewer backup

This is a very specific type of insurance that protects you against the costs associated with a sewer backup or sump overflow. This is important, as many municipalities require the owner of the property to maintain any part of the sewer line that is on the property. If there’s an issue with the sewer lines that connect to the main lines under the street, the investor is required to cover the costs (which could mean thousands of dollars).

Umbrella policy

Despite having different insurance coverages and policies, there are situations where an investor still doesn’t have enough to cover a liability issue. An umbrella policy is sort of like a “catch all” – kicking in additional financial resources that go above and beyond what other policies cover.

Determining Your Own Insurance Needs

As mentioned previously, it’s unlikely that you need all of these policies. It comes down to how risk averse you are, what specific risk factors your property faces, and how valuable the property is to you and your portfolio. In other words, you’ll have to determine your insurance needs.

 

Start by thinking about what kinds of risks your property faces. This depends on several factors, including:

Location

Is your property in an area prone to natural disasters like hurricanes, floods, or wildfires? Each of these risks will require specific coverage. Coastal properties typically require hurricane and/or flood insurance. Urban properties in high-crime areas may need additional coverage against vandalism or theft. Rural properties might need additional fire coverage depending on how far they’re located from the nearest emergency response station. All of these details matter.

Type of property

Different types of properties face different types of risks. Residential rental properties, for example, require landlord insurance to cover potential liability and loss of rental income. Commercial properties, on the other hand, might need policies that cover larger public liability or business interruption.

Condition of the property

Older properties might be more prone to issues like plumbing failures or electrical fires, which can influence the type and extent of coverage you need.

Importance of Correctly Valuing Your Property for Insurance

One of the most critical steps in choosing property insurance is making sure your property is valued correctly. Underestimating the value can leave you underinsured, which means you won’t have enough coverage to rebuild or repair after a loss. Overestimating can lead to paying higher premiums than necessary.

Replacement cost

This is the cost to replace or rebuild your property without deduction for depreciation. It's important to have a current replacement cost estimate, which can change as construction costs increase or you make improvements to the property.

Actual cash value

This accounts for depreciation and is the replacement cost minus depreciation. Knowing this value helps if you prefer a lower premium but can afford to cover some costs out-of-pocket in the event of a claim.

Key Features to

Look for in the Best Property Insurance

When looking for property insurance, there are several different factors to consider. The most important ones are coverage limits, deductibles, and exclusions and riders.

The coverage limit is basically the maximum amount the insurance company is going to pay for a covered loss. For example, there might be a coverage limit of $100,000 on a property for hazard and fire insurance. You’ll have to determine if that’s enough, based on the replacement cost of the property in a fire incident that damages the entire property beyond repair.

As you likely know, the deductible is the amount that you’ll be required to pay out of pocket prior to the insurance kicking in. The higher the out-of-pocket cost, the lower the premium cost. If you can afford to pay a higher out-of-pocket expense, you might want to opt for this option to save money on a monthly basis. But regardless of what you do, choose a deductible that isn’t going to strain you one way or the other.

Finally, you need to understand what your insurance policy does and does not cover. This includes exclusions and riders. Every policy is going to include certain exclusions that prevent damage from being covered. For example, most standard property insurance isn’t going to cover an earthquake or flood event. (You’ll need a separate policy for this.)

Riders, also known as endorsements, are add-ons that provide additional protection beyond what the standard policy covers on its own. Your insurance broker or provider can walk you through all of the different riders that are available to you (as well as what the additional costs are).

As you analyze different quotes from various insurance providers, these are some features that you’ll want to compare. Typically, cost and risk share an inverse relationship with policies. The more risk you take on, the less the policy costs. And the more risk you shift to the insurance company, the more expensive the policy is.

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