When you take the step towards beginning your property investment journey, it’s important to arm yourself with the necessary information that will help protect you in the event of a disaster down the road. Hazard insurance is an important piece of this puzzle, protecting you from paying for significant damage out of pocket. There are different kinds of hazard insurance that apply to investment properties and personal residences differently, so we took the time to break down the information you need to understand.
Basic Building Coverage
To start with, it’s important to understand how basic building coverage is tabulated. First, insurance companies look at the square feet of a building to estimate costs to rebuild. Next, they look at the cost of the material used to construct the building. For instance, wood is less expensive than stone or brick. Generally, the valuation for basic building coverage does not have to do with how much the property is worth, or how much you still owe on the property. Some investment property owners may request for the coverage cap to be raised to cover more damage, but this results in a higher annual cost.
Another important aspect of the hazard protection picture you need to consider is liability coverage. Liability coverage helps protect you from financial loss should an injury arise from an aspect of your property. It is recommended to have liability coverage of at least one million dollars per occurrence. However, you should note that most insurance companies set an aggregate for each coverage term, typically a year. This means the amount that they are willing to pay out within a coverage year, typically up to two million. It’s important to note that liability coverage limits are typically higher for non-owner occupied investment properties, due to the fact that you’re not constantly there to inspect conditions.
As you can see, there are limitations to how much your insurance will cover. And when worse case scenarios happen, this can not be enough to cover everything. That’s why we recommend also including an umbrella insurance policy. Umbrella insurance comes in to assist you with coverage when your regular policy is exhausted. Umbrella policies have the benefit of covering multiple buildings, and they’re not as expensive due to their usage as backup policies to protect you when your regular policy can’t. It’s important to note that umbrella insurance only works to assist liability coverage, not the physical building or its contents.
Loss of Rent Coverage
For investment property owners, there are also insurance options that help cover rent that is left unpaid in the event of fire, flood, or other weather damage. Always make sure your hazard policy has a loss of rents writer, sometimes known business income. If a fire or flood happens, and tenants are forced to move out, loss of rent coverage can help subsidize your income until renters can move back in, or new tenants are found.
Ordinance of Law Coverage
Another aspect you will not find in your homeowner’s insurance that is important to have included in your investment property insurance is ordinance of law coverage. Ben Frederick Realty primarily deals with converted dwellings across Baltimore City. Many of these dwellings were converted into apartments over 40 years ago. In the event that disaster strikes, such as a building fire, and you’re forced to rehab the building, you may need to bring it up to current code. Making advancements such as sprinkler systems or interconnected alarm systems can be very expensive, but ordinance of law coverage can help you manage these costs. Always make sure it’s included in your investment property hazard coverage.
In the event that you do use your hazard insurance, you will be required to pay an insurance deductible. Having a higher deductible can lessen the annual expense of the policy. However, when you file the claim, you’ll have to pay more upfront to meet your deductible. If you feel you can afford the higher out-of-pocket cost, we recommend raising your deductible. If you feel you can’t, stick with a lower deductible but higher annual fee.
It’s important to explain to your tenants what insurance covers and doesn’t. We reccomend including a statement in your lease instructing tenants to acquire Renter’s Insurance, and well as a simple statement reading: “tenant understands that owner’s insurance does not cover tenant’s furniture or possessions.” This is a simple hazard insurance disclaimer to include that helps to ensure both owner and renter are protected in the event of an issue.
Reviewing Your Policy
We believe that it is important to review your insurance policy at least once every three years. Oftentimes, we see insurance companies enter into the investment property market, only to slowly pull back over time. Instead of simply canceling your policy, insurance companies may just steadily raise the rate. Reviewing your policy will help you identify this trend and allow you to shop around for better rates.
Hazard insurance is an important aspect of real estate investment. We hope this information will help guide you to make smarter decisions about your hazard insurance choices for your properties. If you’re looking to expand your investment portfolio, or get started on your investment journey for the first time, don’t hesitate to check out the latest listings from Ben Frederick Realty.