2 Tips and Advice About Rental Property Insurance – Today we’re gonna talk about investment properties, and we’re gonna dig in. So if you don’t own any investment properties and you’re just thinking about buying one, you have a couple, or you have 200, if you wanna understand insurance, we’re gonna break it down for you, real simply, real easy, right now.
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2 Tips and Advice About Rental Property Insurance
Property insurance basically has three types. The first is :
Homeowners insurance.
Simply put, that means that you are going to be living in the house that you own. The second type is:
Tenant-occupied houses.
Probably what most of your investment properties will be. This is when someone’s living in the property that is not you. And the third is:
Vacant properties,
Properties that don’t have anyone living in them at all. The first type, homeowners insurance, is not what we’re gonna talk about in this article. Because there are other parts to read homeowners insurance
Let’s talk first about the second type, which is tenant-occupied. First of all, you really need to have a lease with your tenants. You need to have a lease set up, probably have an attorney put that together for you so that your tenants have signed something and agreed to how they’re gonna take care of the space, what they’re gonna pay for, what they’re not gonna pay for, all those kinds of things. Why that’s important when it comes to insurance is that insurance claims are based on those lease agreements.
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It’s super important that you have those in place when a claim happens, because the claims adjuster, the people that are working on the claim itself, is gonna look at that lease agreement as a way of deciding who’s responsible for whatever it is that happened, especially if it’s a liability claim. So having a lease agreement is super important. Let’s talk about the actual coverages. So there’s basically two types of insurance coverage on your investment properties.
Property coverage
That is simply coverage for the structure itself. If a fire happens, if a tornado happens, if something happens to the structure of the home, we’re going to take it back to the way it was before, we’re gonna rebuild it or fix the damage based on the property insurance policy that you purchase. So the first kind of coverage you have is property. The second kind of coverage you have is:
Liability
This is coverage for bad things that happen to other people because of your property. So if someone tripped on the front steps, or if there was something that happened on the property, someone was hurt, and they either needed medical attention or they hired a personal injury attorney, and either way, your property insurance policy has liability coverage there to help deal with that situation.
In my opinion, you wanna have at least $500,000 of liability coverage on your policy. If you have more properties, which means more exposure to bad things that happen, I would increase that to a million, and maybe even have a one, two, or three million dollar liability umbrella on top of that. Really depends on how much exposure you have, how many properties you have, and what your comfort level is with your liability coverage, how much coverage you wanna have.
You can never really go too high on liability coverage, because if something bad happens, you wanna make sure that you have enough liability coverage on your policy to deal with even the worst-case scenario.
So you have property coverage, coverage for the structure, and liability coverage, coverage for bad things that happen to other people because of your property.
Those are the two types of coverage we’ll talk about. Let’s start with property. We want to insure our building for the amount of money it would actually cost to replace it. Now, this may have nothing to do with the amount of money you bought it for, in fact, if you got a great deal, it’s probably going to be higher than the amount that you bought it for. In general, property insured from between $125 a square foot to even up to $200 a square foot for super, super nice properties.
So that’s the ballpark that you wanna be in, but you definitely wanna talk to your insurance agent and talk through the property coverage limit, the building coverage limits for your property, and make sure that they’re properly insured. This is a great place to talk about the coinsurance clause.
A coinsurance clause is really kinda insurance-geeky, and I won’t dig too deep into it, but basically, if you under-insure your property, if you don’t insure it for the actual amount that it would need to be replaced, in a claim, even a small claim, they’re going to penalize you in that claim situation and actually give you even less money than they should if you haven’t properly insured the property. So a coinsurance clause is generally a percentage of what the house should be insured for. So if you see a 100% coinsurance clause, that’s kinda concerning.
That means that you’re gonna be penalized if you under-insured at all, if you under-insured at all, that coinsurance clause is gonna come into place and penalize you. Most of the time, when I put policies in place for investment properties, I wanna see a coinsurance clause of 80%. Which means there’s some wiggle room there. We’re gonna insure for at least 80% of the replacement cost, and properly, we should insure all the way to 100% of the replacement cost.
But because that coinsurance clause is set at a lower level, we’ve got a little bit of leeway there, so that we don’t get penalized in a claim situation, even if it turns out we were a little bit under-insured.
So if you have a coinsurance clause on your policy, 80% is what you wanna see, and if you have 100%, you’d better make sure that you actually are insured to the replacement cost of the property, or you’re gonna end up in trouble in a claim situation. So we’ve got building coverage, the coverage that it’s gonna, coverage for actually replacing your house, and then we wanna beware of that coinsurance clause as a part of making sure that our building is covered properly, and our claims are paid in the best way possible.
OK, couple more types of coverages we wanna talk about. One is called : business income coverage.
You’re making money off of these properties, right? You’re getting a certain amount of rent from the renters each month, probably. If that house were to burn down, and it was gonna take a whole year to replace that house, then you wouldn’t be getting income anymore. The renter doesn’t have to pay rent if that property isn’t there for them to live in anymore.
And so you lose income because of that. So not only are you having to rebuild this space, but you’re losing income that you would have had if the bad thing hadn’t happened, if the fire or the tornado or whatever happened hadn’t happened.
And so I suggest that you have building income coverage on your policy, or, excuse me, business income coverage on your policy, and you have that for the amount of money you would make off of that structure. So if you’re getting rents of $10,000 per month from a given structure, then you wanna make sure your business income coverage is set at $10,000 per month.
Now, there’s lots of little details on business income coverage, not gonna go too deep into it right now, but definitely make sure you have business income coverage on your policy. There’s lots of other types of coverage on the policy.
There’s cyber liability, there’s equipment breakdown, there’s all different kinds of little things that I’m not gonna dig too deep into, because this article is just generally about investment properties.
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So you definitely wanna talk with your insurance agent and ask, what do I have? What don’t I have? And make those decisions. If your insurance agent included something that, ultimately, you don’t wanna have, that’s OK.
You talk it through with them, you decide to remove it, no big deal.
So talk through the property insurance coverage, talk through the liability coverage, make sure the coinsurance clause is at about 80%, if not lower, make sure you have business income coverage on your policy, and you should be all set.
Last thing I’ll talk about before kinda going to the next step is, you’re gonna have a deductible. My suggestion for properties, if you have multiple properties, is at least $2,500. You don’t wanna make a bunch of small claims. It’s gonna make your insurance premium go up anyway.
So have at least a $2,500 deductible, and if you have lots of properties, you might even have a $5,000 or $10,000 deductible on your insurance policy, making sure you don’t make those small claims and get yourself in trouble with your insurance premium going up ’cause you had two, three, four claims in the last couple of years. That’s definitely what you wanna avoid, so having a slightly higher deductible, $2,500 at least, is a smart idea on investment properties. After you put the policy in place, oftentimes, the insurance company’s gonna wanna come out and take a look at it.
And there’s a few things that they’re looking for, and might suggest you make changes about, so I thought I’d just point it out. If you have any stairs in your house, either outside or inside, they’re gonna wanna have a hand railing on those stairs.
If you have a sidewalk that has cracks or different levels, they may want you to level it or figure something out about that. If you have older roofs, they may decide to either change the coverage on the roof to what’s called ACV coverage, a lesser coverage, or they may even say, you know, the roof’s too old, there’s probably gonna be a claim soon, and we don’t wanna insure the property.
So you would have to replace the roof or find another insurance company who’s willing to insure a house with an older roof. So roofs, furnaces, hand rails, the fact that there’s fire extinguishers in the house or smoke alarms, if you have a sprinkler system in your apartment complex or something like that, that’ll be a positive as well.
Just all those kinds of things are parts of how the insurance company’s gonna take a look at the property after the policy’s been put in place to make sure that it’s up to the standards that that insurance company expects when they’re insuring a home.
So that’s pretty much it. If you are looking to invest in properties, it’s a great investment, they’re a wonderful way to invest your money and make money on top of that over the course of time. Lots and lots of people invest in properties. I hope you learned a little bit about property insurance in this article. Ask me the things I didn’t talk about, and I’m more than happy to describe those to you.
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