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Tips on Purchasing Investment Property Insurance

Writer's picture: Jesse BrewerJesse Brewer


Shopping for property insurance can be one of the most daunting and overwhelming tasks when owning real estate. 



Beginners and seasoned investors alike are often pulling their hair out trying to find not only the right policy for their needs but also being sensitive to the cost since owning investment real estate is a cash flow business.  While there is no exact formula for success in shopping for insurance, there are some steps you can take to not only save yourself some money but also make sure you have the right coverages in place. 


If you are going to have a career in investment real estate, one of the greatest assets you will have is your ongoing relationships with service providers, and a relationship with a great insurance agent is one of them. With a good insurance agent, you can count on them to periodically review your policies when they are up for renewal to ensure you are getting the best deal possible. It will also help you understand just what exactly you need as far as different coverage amounts, types of policies, and other pertinent information.  As with all relationships, it does require some work.  If you are not actively buying property, you can still work to maintain the relationship with the agent by making them referrals and sending them holiday cards.  While it seems kind of basic, these things go a long way, especially currently, with everyone being on the go.  It shows you value the relationship when you take a moment to show them appreciation.  



One good way to keep your insurance costs down is to understand what coverages you need.  Your insurance agent can help you with the options, but you will need to know what is best for you.  Often, investors will take out a policy that is full replacement cost.  This may be because that agency requires it, or the investor simply does not know any better because that is what they are used to for their house.  While this is a personal risk tolerance policy decision, I ensure the amount that covers my entire investment plus some additional in case of a total loss situation and I need to raze the demolished structure.  If there is a mortgage in place, the insurance needs to be enough to satisfy the mortgage, recoup any hard cash I put into the deal, recoup any additional dollars I put in for renovations, and then a little cushion.  This can save you thousands of dollars in premiums, and since this is a cash flow business, I would prefer to have as much cash coming in as possible, all while hedging my investment dollars and liabilities should the rare chance of a total loss.  The risk is that if you do have a total loss, you will not have the funds to rebuild entirely; however, you will have recovered all your investment and still have the lot to sell off or keep and build something new on should you choose to do so. 



While keeping with knowing what coverages you need, it’s also important to make sure you have the right number of coverages for personal injuries.  Things like slips and falls do happen, and tenants can sue, looking for an insurance payout.  While this is rare, it does happen, so you need to make sure you are protected.  There are also a lot of other coverage riders available to you that you may not be aware of and would want.  Things like loss of rental income should a tenant be displaced, code enforcement coverage, which is a rider you can purchase that will kick in should you have a large loss, and local building enforcement requires you to bring the property up to current codes.  This is something you see in older buildings typically, but if you are in this situation, the insurance will only cover “what was existing” even if it is not up to code, and it will be on you, the insured, to bridge the gap.  So, on all my properties, I purchase anywhere from $25,000 to $50,000 of code enforcement coverage just in case I have this happen to me, and yes, I have had to use it throughout my career. 


It is important to also know what insurance companies require you to remedy on a property before purchasing it.  For example, a lot of insurance companies will require you to replace Federal Pacific Electric panels and their stab-lok breakers.  They were manufactured and installed from the mid-1950s up until about 1986, so if you are investing in multi-family and you are newer to the business, then there is a good chance that this is vintage you are going to be looking at.  Insurance companies may require you to replace these since they are known to be prone to overheating and causing malfunctions, and when that happens to electricity, there can be a real concern for a fire and safety hazard.  If you acquire a property and then the insurance company sends an inspector out, they may require you to change these or cancel your coverage. Depending on the location of the panels and other factors, this could cost a few thousand dollars per panel, if you are like me and focus on multifamily properties, you can see how the costs will add up quickly on this.  Be informed and find out what insurance carriers will allow and not allow, and keep in mind just because they allow it now does not mean they will in a couple of years, and if they have a policy change, they can still require you to make a change or deny you the coverage renewal.   



Looking for insurance is a very important step not only in the acquisition of a new property but also in the ongoing ownership.  You need to keep up with new building trends, restrictions on coverages, and property conditions, as well as make sure to eliminate threats that could trigger claims, such as dead trees too close to the property or a tenant with a dog that is considered a vicious breed (such as a pit bull) since there are a lot of carriers that have breed restrictions.  I also recommend paying attention to surcharges and other fees that are outside the policy premiums so that you do not get sticker shock when you see the total of the statements.   I know this sounds like a full-time job in and of itself, but the further you grow in your investing career, the easier, and even more important, this becomes.

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