Actual Cash Value vs Replacement Value Insurance

[James Maher]

Are there any kind of formulas typically used when determining if you want your landlord policy to cover replacement cost vs actual cash value?

I am looking at 6 properties right now.  On some of them, my purchase price is significantly lower than the actual cash value.  Also, the cash value on some of them is much lower than what it would cost to replace.  I'm just trying to get a general feel of what most people do.

[Derek Lacy]

The problem with this question is it's a risk tolerance question.  There is no right answer.  

Here are the facts.  If you choose replacement cost you will absolutely pay more for coverage.  If you choose replacement cost and IF there is a claim, you will pay less out of pocket.  Now reverse and repeat for Actual Cash Value (less for coverage, paid more out of pocket IF a claim occurs).

So now we're to the proverbial glass and is it half full or half empty.  By nature an investors will weigh more to half full, why?  Because if they didn't have that optimism, they would probably be still on the sidelines.

So it comes down to how well will you sleep knowing you are potentially out of pocket a large sum on a $250,000 house (replacement cost, or to put it more easily a mid-century ranch in middle america that has 2200 square feet).

@Larry Turowski hit the nail on the head.  So you get that bad call, there was a fire, not bad, but not good.  The property manager says the fire was contained to the kitchen and the contractor says they can repair it for $60,000.

What did that contractor just tell you?  Replacement cost.

What is Actual Cash Value?  Replacement cost minus depreciation.

So now the adjuster comes out and he uses the standard depreciation (I see it all of the time at 40%, they use complex calcs, but it basically always shakes down to a stones throw of 40%).

Now the adjuster is telling you the check he will write on the $60,000 in damages is $35,000 (assuming a $1,000 deductible).  Can you afford the $25,000?  Can you sell the house as-is and break even?  Can you tear it down, walk away and get another house with the $35,000?  

It's risk tolerance, so if you purchase stocks, are you a guy that picks a company and buys into it, or do you buy a mutual fund?  What's the right answer?