Insurance Requirements for Rental Property
Cleveland, OH · Member since 2019 · 114 posts · 40 votes
I’m a newbie so I think this question is appropriate. I’ve received different answers from different people so here it is. For rental properties ... do lenders require your insurance to cover replacement value of the structure or just a typical “landlord” policy? I have been told if you have a loan on your rental property you need to insure it for the replacement value.
However, my agent that I use for insurance on my primary residence is telling me that all his REI clients have a landlord policy that just covers their loan amount or the fair market value of the property. The market value is usually much less than the replacement cost so there's a big difference in premiums.
What my insurance agent is saying makes more sense because why would a bank require you to have coverage beyond the amount they are lending you? Obviously I will be checking with my bank and other lenders but I was just curious if anyone had a definitive answer.
Just to provide an update for anyone interested...
I connected with @Damon Rucker on a different thread and he was paying something like $210 per month for insurance. This is what started me on this subject because the few real estate investors I know are paying around $75 to $100 per month. So I contacted my agent to get a price quote for a deal I was analyzing. This particular property was quoted at $80 per month but relatively close to what I had heard from other people. Damon messaged me yesterday to tell me he contacted my agent and was pleased to find out that he could insure his property for much less than $210 per month. I also talked to another investor I work with yesterday. He has multiple properties with mortgages all insured for a little over what the ACV is. His properties are all duplexes valued between $60K and $100K and his insurance runs him about $75 per month.
I think how your insure your property is really up to you as an investor as long as the insurance covers any amount you may owe lenders. Of course I would want more insurance than what I owe on the property (at least market value plus 20%) but in my opinion replacement cost is not worth the premium. Especially when you are dealing with sub $125K properties built prior to 1960. The replacement cost could easily be double what the actual market value of your property is depending on when it was built. So when deciding to go with ACV or replacement cost coverage you really have to consider what you owe on the property, what the market value is, and how that compares to replacement cost. Just my opinion as a newbie.
Chris, I forgot to address this post in regards to ACV versus RC. Just want to add to your comments to make sure you know what your risks are with ACV.
The insurance carrier and claim payout has no relation to how much you owe the bank.
RC vs ACV example for the investor above could play out like this -
Building insured for $60k on ACV, has an $80,000 fire. There is not enough building damage for the property to be razed, so it needs to be fixed. 50% depreciation can apply if the building has not had major updates the last 20 years. In this case, you would have enough insurance limit to get your $40k, but still need to come to the table with the other $40k.
With a Replacement Cost policy, you would get $60k of the $80k claim. Still $20k out of pocket, but less than the $40k.
My main concern with investors taking on ACV is that their agent has not walked them through all of the claim examples for the investor to make an informed decision. Many times the additional risk with ACV is glossed over without putting pencil to paper and putting a true $ figure to what the loss could be.
Once you really know what is at risk, you may find that on a certain smaller property, $100 of premium savings is only $7k of additional risk, while on a larger building $300 of savings gives you $50k of risk.
Wow. That sucks. I am sorry to hear that. Thank you for sharing your experience. $200K is the appraisal plus 25%. Was this planned or just a number you felt comfortable with? I guess that proves that if you are not insuring for replacement value then you should always go more than the appraisal or market value. Like I said previously... I would never just insure for the amount of my loan and would always add a percentage to the market value.
It sounds like you will be covered or at least close to. If you get lucky you may be able to make the repairs for less than the insurance estimate. I am not saying this happens all the time but I had a roof claim on my primary residence. The insurance company came out and did their evaluation and got pricing. They sent me a check for something like $7K. I bought the materials and hired contractor to do the work (labor only since I purchased the material). Labor and materials ended up being like $5K. I know what you have going on is much more money and a much different scope of work so I don't know that this is something that would work for you.
Hope everything works out for the best and good luck!
Thanks everyone for commenting and sharing your experiences. I'm glad I started this discussion because I certainly learned some things. Hope it helped some of you out too.
Thanks Chris. I think we’ll be fine. We also had on our policy approximately 20k for Code updates. Looks like we were over insured in this case, but not sure you can ever have enough. Kudos to State Farm. Not sure if it would have gone so well with a different insurance company.
Awesome! Glad to hear that. Coincidentally my roof claim was also through State Farm.