Selecting the Right Insurance Policy for Your Investment Property
Owning a house is undoubtedly part of the American dream. For many homeowners, after upgrading to a new property, their first house becomes an investment property.
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 to tenants. However, one of the most overlooked steps in buying an investment property is choosing the right rental home insurance policy.
Choosing the wrong insurance policy can be detrimental to your investment and can even leave you 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. Homeowners Insurance
Insurance for an investment property that you rent out to a tenant is known as a landlord insurance policy built on the DP3 policy form. It is entirely different than the property insurance you take out on your primary house -- the HO3 home insurance policy form.
The two main types of coverage for landlord insurance are property and liability coverage.
- Property coverage - physical damage to your property from unforeseen weather events
- Liability coverage - a tenant or tenant's guest is hurt on your property, and you are held liable. Liability might include medical or legal fees. $500K of coverage is a prudent liability limit for a single investment property. If you have multiple properties or high net worth, consider adding an umbrella insurance policy for extra protection.
Business Income Coverage
Also named 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 -- assuming those repairs are required because of a covered loss in your insurance policy. Even though covering all of your rent will mean a higher monthly premium, many successful property owners will tell you to buy this coverage.
Most policies have a built-in coinsurance clause, which causes confusion. The coinsurance clause is the minimum coverage limit you need to carry for the insurance company to fully cover you to your policy limits when you submit a claim. If you buy a house that costs $500,000 to replace or rebuild, your coinsurance clause will state that you need to carry at least $400,000 in dwelling coverage - 80% of your replacement cost. If you are insured to less than 80% of your dwelling, you will be partially responsible for costs from the claim you submit.
Shy away from policies that have a 100% coinsurance clause. Certain carriers will even offer to remove the provision altogether for a slightly higher premium. Again, most real estate investors will tell you this is an excellent idea if your premium doesn’t spike too much.
The Property Inspection
After securing your insurance coverage, your property will undergo a home inspection by the insurance company. Here are some items they will look for:
- All stairways have handrails.
- All exterior concrete is level and non-hazardous.
- The 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. When investors find a house that fits their parameters, they often rush through the process of insuring their property. All the number crunching in the world cannot protect you from a poorly structured insurance policy.
At your service,