I'm closing on my first investment property next week (a 6-unit residential property) and I'm shopping for an insurance policy. For commercial units what factors should I be considering other than the obvious policy cost and deductible when selecting a policy? Thanks in advance...
@Amad Osman More than cost you should be concerned with coverage. You want to get replacement cost coverage. It will cost more but if a fire or other catastrophic loss was to occur you will be glad you have it. You want to make sure the coverage you get is enough to actually rebuild the property in the event of a fire and not simply cover the cost of your mortgage. Again this costs more, you need to evaluate cost vs coverage and get a good balance between them. Go heavy on liability. If you have a primary residence and are buying the rental in your personal name get insurance for both properties with the same company. Find one that will allow you to "stack" your liability coverage. This means your liability coverage from property A will also cover property b when property b's liability coverage runs out. You will also want to get at least a $1,000,000 liability umbrella policy on top of that. I go heavy on liability coverage.
Make sure it also covers any personal property that you have at the property such as refrigerators. Get your tenants to get their own renters insurance and have them sign something confirming that they understand your policy does not cover them and that they should get their own coverage. I have this as an addendum to my lease.
@Amad Osman thanks for the vote
@Michael Badin thanks for the advice. This will be under my LLC. I was surprised to see the rebuild cost as high as 2.5 times the purchase price. I was also surprised to see one agent quote a rebuild cost $100,000 less than a competitor. I wonder if an inaccurate estimate by the insurance carrier could come back to bite an owner in the event of a disaster that would require a rebuild.
@Amad Osman being under the LLC you will not be able to stack unless you have other properties under the LLC, but it is a good idea to have it under your LLC. Get the umbrella policy.
Each insurance company will have a different quote on what it costs to rebuild and the costs could be wildly different. Cost to buy and cost to build are very different. When someone builds a communities they are getting materials at a much lower cost then when you build a single property. If the property is older the cost could skyrocket. I have a property that is only worth about $260,000 but the rebuild is nearly $700,000 due to the materials used. It is an older building and the materials used are mainly stone.
What you can do is use their estimate initially then get a contractor to get you a more accurate bid to rebuild, then submit that to the insurance company and use that for your limit.
Yes, having inaccurate rebuild can bite the owner. It’s so bad the state of California now requires all insurers explicitly inform insurance buyers of under insurance penalties in the policy.
Also the form is very important. Make sure you have Special Form coverage. Replacement is the value, the form is what describes what you are covered against.
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