Often, discussions of a sound real estate investing strategy overlook a core component of success: Being properly insured. While researching insurance may not be as sexy as finding out about the latest local market trends or looking into creative ways to repurpose your commercial rental space, it’s important your business and your properties are properly insured.
While some types of insurance are required by your lenders or the local government, there may be important insurance products you’re not buying for your property or business. You should have a thorough knowledge of the different types of insurance products available to real estate investors, and know which ones you need to safely and successfully lease your property to residents or tenants.
Types of insurance necessary
Virtually every real estate investor knows some kind of physical property insurance is a must-have. But what about personal liability insurance? Do you think you might benefit from a terrorism insurance policy? Flood insurance?
While some insurance policies are universally necessary and beneficial for people in the investment industry, there are other policies that may be well-suited for one asset, but not necessarily needed at another.
Think through every possible scenario that could occur at a given investment property. Then, identify and purchase an insurance policy that protects your interests against them. Some of the types of insurance you’ll need to consider for your property include:
•Fire and hazard insurance: The most basic type of property insurance, this type of policy will cover damage to your physical investment asset in case of a fire or natural disaster that damages or destroys the property. You should never go without fire and hazard insurance. In fact, it’s required by most lenders.
•Flood insurance: If your property is in a designated flood-prone area, or if you’re worried about potential flooding in the future, purchase flood insurance for your investment asset. This protects you against any damages incurred by catastrophic flooding. Bear in mind, flooding caused by external water is usually excluded from general homeowner’s insurance policies.
•Liability insurance: You’ll need two liability insurance policies—one for your physical property, and the other for your property rental business. This policy will help you protect yourself against liability for any injuries, deaths or other personal damages occurring on a property you’re renting to someone.
•Terrorism insurance: You likely won’t need terrorism insurance for your investment property. However, if you’ve purchased a property in a dense, urban city center, like downtown Toronto, or if you’re located near governmental facilities, it may be advisable to purchase a terrorism insurance policy for your investment asset.
•Loss of income insurance: This type of insurance policy protects you in the event you’re unable to generate income off of your rental property. Loss of income policies typically pay for your business’ financial commitments for a period specified in your policy details.
•General contractor insurance: If you decide you’re going to handle improvements and renovations to your property in-house, you’ll need to register as a general contractor. Registering as a general contractor, however, requires you to purchase a general contractor insurance policy.
How to find the lowest rates
Between all the different types of insurance policies you may need to take out on your investment property, the monthly or yearly premiums you pay to your insurance companies could start to eat into your profit margins. That’s why it’s so important you learn how to shop for the best possible insurance rates.
It’s worth noting, the cheapest policy is almost never the policy with the best value. Rather than searching for the policy that costs the lowest amount, identify the policy that offers you excellent coverage at a reasonable rate. Here are a few tips to help you identify the best insurance rate for your real estate investment:
•Identify asset insurability: Firstly, you’ll have to identify the insurability of your investment asset. Take into consideration the age and condition of the building, its location and the number of insurance claims filed for it in the recent past. These factors impact your rate and the availability of different insurance products.
•Consider higher deductibles: If you’re looking for ways to cut down on the amount you spend on your monthly insurance payments, consider purchasing a plan with a higher deductible. While this means you’ll have to pay more out of pocket in the event you use your policy, it will help you improve monthly and annual margins.
•Customize a policy: Your insurance policy may include coverage you don’t need, or you may want a higher deductible for some aspects of your coverage. Most insurance companies work with you to customize a plan that meets your specific needs as a property investor. Be sure to talk with your agent about ways to maintain excellent coverage while reducing your premium.
•Ask for discounts: If you opt to buy several types of insurance products from a single insurance company, they’re likely to offer you some kind of discount on the cost of your policies. Additionally, insurance companies may provide you with discounts based on the length of time you’ve held a policy with them, the number of properties you insure or your credit rating. Be sure to ask if you qualify for any discounts—especially when bundling insurance.
Spending the time and money necessary to adequately insure your real estate asset helps you ensure your financial interests are protected, regardless of what the world may bring. While purchasing comprehensive insurance solutions for your investment property may be costly, it’s always better to have them on-hand, in case something catastrophic were to happen.
Shopping for insurance is far from a fun experience, but it’s a necessary one. And, in the event something bad does happen to one of your properties, you’ll thank your past self for being diligent in selecting the right coverage. Remember, real estate is an asset—insurance is meant to protect it. Getting the right insurance means safeguarding yourself against loss and setbacks.