Landlord Policy for 4-Plex

5 Replies | St. Louis, Missouri

I'm under contract right now for a 4-family in South City. My objective with this landlord policy is to protect my investment, whether there is a partial loss or total loss. I've narrowed it down the choice between two carriers and there's a significant price difference between the two, as one offers replacement cost and the other actual cash value.

Purchase Price:202,500
Loan Amount: ~$160,000
Option 1: $1500/year
Coverage Amount: $205,000 - ACTUAL CASH VALUE
Includes: Liability, Earthquake, Loss of use
Option 2: $2,800/year
Coverage Amount: $500,000 - REPLACEMENT COST
Includes: Liability, Earthquake, Loss of use
I can't decide which policy is more appropriate to protect my investment. Opinions and advise is greatly appreciated. 

Our philosophy is to insure for property value only. It is unlikely that you will try to rebuild a building in south city. If something happens, insure it for enough to pay your mortgage and maybe a little more.

I agree with @Matt Conrad .  I only insure for just enough to cover the mortgage.  If the place burns down I will pay it off and find a new building.  If you would not walk away and wanted to rebuild, then you would want to choose replacement cost.

I would go with the cash value policy. It's unlikely you would rebuild a south city 4-plex for the cost they're going to make you insure it for. With the cash value at least you can pay back the bank and walk away and the savings on premium is significant. Make sure you adjust the cash value amount as your property goes up in value so you will recoup some equity as well.

The downside is in the case of a partial loss, i.e. one unit gets burned out or a tree falls and knocks in a wall, if you get paid out 25% or 33% of the $200k, that might not be close to enough to cover extensive repairs on one of these old buildings. Make sure you have adequate reserves.

Last thing is earthquake. I don't carry it on my home or rental properties and wouldn't unless I owned them free-and-clear and even then it's a maybe. The premium is very expensive and the deductible is usually a large % of the property's value, like 20-30%, so you could be on the hook for $40-50k worth of damage before the policy even kicks in. These properties are nearly 100 years old, so they have already withstood probably thousands of minor quakes, so you're basically insuring against a catastrophic total loss due to an earthquake which is an EXTREMELY rare event, even with the New Madrid fault and all that. If "the big one" hits and levels your 4-unit, you and everyone else in St. Louis is going to have 9th Ward in New Orleans during Katrina-level problems and you'll probably get bailed out by FEMA or some other federal disaster fund. With a mortgage, the bank actually owns the building and even as over-regulated and anal as they are, they don't make you get earthquake insurance, so if they're not worried about it (and they worry about EVERYTHING) then neither am I.

This is just my 2 cents, I am not an insurance agent/adjuster or a seismologist. Do what's best for you and your family, but just some things to think about.