From natural disasters to tenant negligence, a lot can go wrong for real estate investors. Once a house has been damaged, the bill for getting your money-making assets back in tip-top shape can easily start to cut into your profits. The right insurance, however, will make sure your investments (and wallet) are protected to the fullest extent.
One thing that’s important to note: all real estate investments aren’t the same, and your goals as a real estate investor play a role in determining the type of coverage you will need. For example, an investor with plans to rent out a unit may need insurance to cover a tenant’s failure to pay or a policy that provides income if the rental property is damaged and temporarily can’t be rented out. You wouldn’t worry about that if you were simply planning to flip the house, but if you have employees working to renovate your properties, you may want to invest in workers’ compensation insurance instead.
The type of investment property will also factor into your insurance concerns. For example, a multi-unit building will likely cost more to insure than a single-unit building. With the right insurance policies in place, your rental property is more likely to weather any storms. Here is an overview of some types of policies that are available and how to determine if they might be appropriate for you.
Hazard insurance is your typical homeowner’s insurance policy that covers structural damage to a house from such risks as fire and storms, as well as theft. The average cost of homeowner’s insurance nationwide is $1,083 a month and rental property insurance averages 25% more than equivalent home insurance policies, but some states are more expensive than others. Savvy real estate investors looking to make the most profit from renters might purchase property in a state where insurance costs are low and rental prices are high.
For example, the average cost of homeowner’s insurance in California is approximately 10% less than the national average. Yet, San Francisco is one of the most expensive cities, making affordable neighborhoods potentially profitable places to buy a rental property.
You may be able to add endorsements, or optional coverages, onto your hazard insurance policy. For example, you might add sewer backup insurance to your policy, which would cover damage from water that backs up from a sewer or drain. You’ll want to keep those additional coverages in mind when looking at your total cost to insure the property.
This type of coverage protects you if someone suffers a loss on your property. For example, if a visitor falls and gets hurt or someone’s belongings are damaged or stolen from your rental property, your liability insurance would cover the cost if a lawsuit is brought against you, as well as any damages you’d be ordered to pay.
Your hazard insurance will not cover any damages incurred as a result of a flood. For that reason, if you live in a designated flood zone or an area that is prone to extreme weather, consider buying this type of coverage. Floods are the most costly natural disaster in the country, according to the Federal Emergency Management Agency (FEMA), costing the nation on average $8.2 billion per year. If that’s not enough to worry you, consider that one mere inch of water inside your property can cost approximately $27,000 in damage, according to FEMA.
Loss of Income Insurance:
If you’re investing in real estate with the intention of renting out the properties, you’ll likely be depending on the money collected in rent for cashflow. But what happens if a disaster leaves the property uninhabitable to renters? Loss of income insurance can protect you from some disasters by ensuring that you are compensated if you are unable to rent the property due to catastrophic events like storms or fire damage. However, many loss of income policies only cover specific losses outlined in your policy, so read it carefully or check with the insurer to find out where your coverage may fall short.
Rent Guarantee Insurance:
Not only can a real estate investor lose rental income if a disaster makes the property uninhabitable, but he or she can lose rental income if a tenant skips out on the rent. One way you can avoid an unexpected interruption in income is by purchasing a rent guarantee insurance policy, which will reimburse you if a tenant fails to pay up.
Rental Property Insurance:
Sifting through multiple types of insurance policies can be challenging. If you’re a landlord, you may benefit from a landlord insurance policy or rental property insurance, which will bundle together various coverages that most landlords would need. For example, a typical rental property insurance policy may include hazard insurance to cover the building, liability insurance, and loss of income insurance. One thing that’s important to note: rental property insurance typically does not cover your tenants’ belongings if something happens to the property. Your tenants would need renters insurance for that. While there are no laws requiring tenants to buy renters insurance, landlords have the legal right to require it as long as it’s written into the lease.
Builder’s Risk Insurance:
If you’re renovating a property with plans to flip it or later rent it out, builder’s risk insurance will protect you during the construction phase of the project. In addition to covering the structure of the property and the equipment during the work phase, some builder’s risk policies may cover loss of income from rent or sale of the property if the construction project is delayed.
General Contractor Insurance:
Say you plan to buy several properties to renovate and resell, or maybe even renovate and rent out. Rather than hiring a third-party contracting company to handle the renovations, you may decide to expand your own business so that it can handle the construction aspect of the business itself. If you decide to go this route, general contractor insurance will protect you from risks that can occur during the renovation process, such as workers’ injuries or damage to equipment.
If your real estate investing company has employees that are working on houses or keeping your business running, there is always the risk that those employees could get hurt on the job. A workers’ compensation policy would cover medical expenses for that employee and protect you from lawsuits if the employee sued the business for causing the mishap.
Once you have your insurances in place, what happens if your real estate business is sued for an amount that exceeds your coverage? An umbrella policy provides you with additional liability coverage that goes above and beyond what your standard policies offer.
Investing in real estate can be profitable and rewarding, but like all businesses, it has its risks. The right insurance policies can ensure that real estate investors are prepared if it doesn’t go as planned.
This article has been contributed by Callie McGill from ValuePenguin.