Whether you are flipping houses or buying rental condos you will need to understand insurance to protect your investment. Buying the correct insurance is key and you should be discussing your properties with your insurance agent to make sure you have the coverage you expect. As an investor you have several decisions to make regarding your insurance that can vary from amount of coverage to type of coverage to length of time. If you were like me, prior to becoming a real estate investor all you did was call an insurance agent and tell him you need insurance on your house. What I didn’t realize at that time was that my mortgage company required a certain amount and type of coverage and worked with my insurance agent to make sure it was handled. Therefore I never discussed the types of policies/coverage with my agent until later when I became an investor. On all of these policies you will have the opportunity to choose coverage amounts and deductibles. I always recommend you analyze the value and cost of each and when in doubt error towards more coverage and lower deductibles. Below I will breakdown the basic insurance information on the most common types of real estate investments-rental condo, rental house, and a flip house.
If you are purchasing a condo to rent – either short-term or long-term you most likely will be dealing with a HO6 policy. HO stands for Home Owners. This is a specific type of policy that covers your interior and has a few basic coverages – furniture, fixtures, liability and loss of income. These are the primary policies you should discuss with your agent to make sure you are getting the appropriate amount. The most overlooked of these policies is loss of income. This will pay you for time that you are unable to rent your condo due to damage and during the repair time. Additionally questions to ask your agent about your HO6 policy are the following: Does this policy cover flood? Does this policy cover wind driven rain? Does this policy cover water backup? Living on the Carolina coast and having to deal with the occasional hurricane makes these coverage types even more important. Since your homeowner’s association will likely be covering your exterior and structure and the basics of your condo it is important to make sure you have increased your HO6 coverage to account for your luxury flooring or granite counter tops as most HOA coverage only accounts for the basics.
On a rental house pay attention to many of the same things I just mentioned on a rental condo. Make sure your coverage is adequate and pay attention to Loss of Income or Loss of Use. Also pay attention to the additional questions – especially flood insurance. Remember every house is in some type of a flood zone whether it is increased risk or not is what sets the rates. In our area the X flood zone is the cheapest and typically mortgages on these properties do not require flood insurance, however I recommend you obtain it anyways as if the unthinkable happens you can rest easier knowing your covered. Houses in the higher risk flood zones will require an elevation certificate to price the policy. This certificate is a service provided by surveyors who measure the bottom elevation of the house in relation to sea level. In the event your house is a vacation house that will be rented by lots of different people I always suggest increasing your liability coverage in case someone is hurt on your property. Once you purchase your insurance coverage be prepared for the company to perform an inspection of the property. After this inspection they may send you a list of repairs that are required for your insurance coverage. Do not delay in performing these repairs as keeping your property in good condition will keep the cost of your insurance down.
If you are insuring a flip property the insurance coverage is very different then those highlighted above. First you can choose a shorter time frame for your insurance, for example 3 or 6 months rather than the 1-year coverage on most rentals. These policies are typically written as special coverage and are classified as a vacant property. You will not have the same benefits as your home insurance policy so make sure you discuss the details with your agent. These policies may or may not include water backup and may have limited coverage related to damages. The insurance companies view these policies as more risky due to the fact that no one is living in the house making sure everything is functioning properly. Additionally the chance of someone breaking into the house or vandalizing the house increases. However for the investor you may save money by only buying a limited term of insurance on these properties rather then the full year. On bigger repair properties I usually start with a 6-month policy whereas if we are only performing a small rehab, I may only buy 3-months. Most of these policies have a 3-month minimum earned premium which means you are not getting a refund if you sell the house during month one. Also the savings between a 1-month policy and a 3-month policy is so small that I recommend you always buy the 3-month in case something gets delayed or falls thru in a closing.
In closing I recommend all real estate investors build a good working relationship with their insurance agent and don’t be afraid to ask the agent questions about their coverage. Also remember if someone tells you they have a lower cost it might be because they are providing you less coverage. Insurance is like most purchases, you get what you pay for, so find a great agent, work with them to insure your protected.
Author: Nick Sowers (Partner)