Most investors who come to me are carrying $300,000 in liability on a portfolio worth many times that.
1. Higher liability and excess liability
Let's be honest here, we live in a highly litigious world. The cost of goods and services is at or near an all-time high, so the exposure to a possible large liability loss is as well. Why is it important to have higher liability limits? In most cases your liability coverage on a landlord protector policy, also known as a Dwelling Fire policy, is capped at $500,000 per loss, and in my experience most of my investor clients have come to me only having $300,000 in coverage. An umbrella policy can provide an excess limit starting at $1 million, so depending on your asset exposure you could be open to a large financial loss. Umbrella policies can be as low as around $300 per year.
2. Loss of rents / loss of use
What happens if you have a claim and your tenants cannot reside at the property until repairs are completed? Who pays for that lost income? Loss of rents is critical coverage to ensure your financial commitment to a loan or operating budget is maintained. The most common mistake I see is that the coverage limit is not aligned with the rental cost per unit. Speak with your agent to make sure your rental income is aligned with the loss of rent coverage.
3. Sewer and drain
The backup or failure of a sewer, drain, or sump pump is a major inconvenience not only to your tenant but to you as an investor. The average claim amount in the Fargo–Moorhead area is $7,000 for bi-levels and $11,000 for ramblers. The damage sustained is heavily weighted on how quickly the loss is noticed and how much water the property takes on. Do all real estate investors need this coverage? No, but every property is different, so I recommend evaluating it on a per-property basis.
4. Special Form
What the heck is Special Form? On Dwelling Fire policies, or Landlord Protector, there are three coverage forms: Basic, Broad, and Special. Think of it as good, better, best. Special Form provides coverage for more situations and generally at a replacement cost level, though some items require an additional endorsement.
What should you consider? First, the condition of the property, which may prevent you from having anything but Basic. Second, market value. You may have acquired the property for $75,000, but rebuilding the dwelling could cost $230,000. How risk-averse are you? Do you want to protect your cash in, or the real value of the location and property itself? Third, peace of mind. Knowing your investments are protected at replacement or repair cost leaves you and your tenants happy.
Written by Bryan McClean, Principal Agent & Founder of Insure Logic.