Greeting New and Seasoned Real Estate Investors!
In today’s article we will cover an exceedingly boring but equally essential topic for landlords: insurance.
Insurance can be complicated and it is often something that none of us spend a lot of time on. What you have to realize is that insurance companies have no problem with you not reading your policy. In fact it works in their favor because if you have a claim one day and you do not have the proper coverage they can deny your claim. As a wise man once said: “Insurance companies are in the business of not paying claims”. And you can hardly blame them, if they paid every claim that came across their desks they would go broke just from the number of fraudulent claims that are submitted each year. But for those of us who are just trying to make an honest buck we have to protect our interests by being educated.
TIP #1 – Make Sure You Have a DP Policy
There are two main types of policies for home, the HO (Home Owners) and the DP (Dwelling Property) and basically the HO is for owner occupied and the DP is for rental properties. This is important because many people become accidental landlords through and number of reasons such as the death of a family member to lack of use in a vacation home. And since these events are typically very hectic and stressful the new landlords forget to inform the insurance company that the property is no longer owner-occupied. If that is the case and something happens that requires a claim then the insurance company may not pay the claim.
TIP #2 – Make Sure Your Policy is for Replacement Cost
There are two ways that insurers pay claims for major structural losses of property: Actual Cost and Replacement Cost. Actual cost takes depreciation into account to give your property a current value, so if the property is many years old then you are not going to get much for it. Replacement cost is the amount it would take to rebuild your home new using similar materials to its original construction. Without a doubt Actual Cost is a horrible thing to have, why even bother with a policy at all?
We don’t mean a Quarter Pounder with Cheese at Mickey D’s we mean a DP3 policy as opposed to a DP1 and a DP2. Without going in to all the details (Google it if you are that interested) we can tell you that a DP3 offers the most comprehensive coverage for your property. It basically means that your property is covered against every peril except the ones that are specifically excluded, commonly flood and earthquake. Don’t let a slick insurance agent tell you how much money you can save with a DP1, in the end you will lose if you have to make a claim.
TIP #4 – In a Flood Zone? Get Flood Insurance
Flood insurance is actually sponsored by the National Flood Insurance Program which is a FEMA program and it means that most flood policies are actually pretty cheap. Be wary of know-it-all neighbors who tell you they have lived there for 30 years and there has never been a flood. Flood zones are there for a reason and if your property is in one it does have a possibility of flood and as we mentioned in #3 even the most comprehensive policy does not cover flood.
TIP #5 – Got a Condo? Get Liability Insurance
Most people feel that if they own a condo then their property is covered by their HOA’s insurance. That is true the structure is definitely covered, and you might want to look over the condo’s policy to make sure it is as comprehensive as possible. But what it does not cover is your liability for persons injured inside your property. So if someone’s uncoordinated aunt slips on a step in your sweet recessed living room and decides to sue you because the tile was not properly installed then you could have a major lawsuit on your hands. Liability coverage is not very expensive if you have assets to protect.
So that’s all we want to hit you up with for now because we are sure your brain is starting to go numb but suffice it to say it is important to have a good insurance agent, who understands rental property insurance. If you have any questions regarding this we will try to answer them and if not we can refer you to a good agent.
Happy investing!