For anyone involved at any significant level of real estate investing, insurance will be an important factor. While this is a step of the process that’s expensive and can seem like a hassle, it’s a vital part of succeeding with your investments.
At Froerer, we’re here to help with any and all insurance questions. Here’s a primer on the basic types of insurance you can get, liability coverage, and penalties you may incur in certain situations.
When it comes to real estate, there are two primary kinds of insurance: Actual cash value policies (ACV) or replacement cost policies.
ACV situations are common in situations where a home requires some fixups or maintenance – in fact, in some of these scenarios, the ACV will be your only option. In these cases, the insurance company will cover the amount you paid for the property, minus the value of the land it’s on. All ACV policies will cover small losses, though their additional coverages will vary. For buildings that may undergo major structural damage, ACV insurance can be pretty limited.
A replacement cost policy, on the other hand, is preferable in most cases. It comes with more comprehensive coverage in general, including coverage for the full cost of any covered loss minus your deductible amount. To qualify for a replacement cost policy, the property will have to be in good condition.
With most policies, the possibility of what’s called a coinsurance penalty will exist. This is a penalty if you come in more than 20 percent under market costs – say your home will cost $200,000 to rebuild, and you’re insured for under 80 percent of this, or under $160,000. Any claim you make in this situation will be paid out at that same ratio, not at a different one. Ensure you’re up to speed on the value of your home is being replaced at in these kinds of scenarios.
Most standard limits for liability coverage are at benchmarks of $300,000, $500,000 and $1,000,000. In most cases, we advise shooting for the higher coverages – it usually doesn’t cost much more to get them, and they provide much more value. Also, for rental situations, we recommend that all renters be required to carry renter’s insurance so that your liability coverage isn’t the only one on the hook.
For more information on real estate insurance, or to find out about our residential or commercial property management services, contact the pros at Froerer today.
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