A number of years ago my father’s garage caught fire and virtually burned to the ground.
Luckily, he did have a good insurance policy for the house and got a new garage; unfortunately, that was not the case with his brand new car and he recovered nothing. The car was a total loss.
Real estate investors recognize the need to insure their real estate investment, or in some cases real estate investments, and undoubtedly have ample insurance coverage in the event something like a fire destroys it.
Nonetheless, insurance can be a very complicated aspect of the rental business to understand, and most people buy the insurance policy without really understanding what in fact they have purchased.
Hopefully, when you set up your policy, you meet with an insurance agent who explained the policies available, and in turn fully understood the policy and your investment property concerns.
But just in case, here are a couple of things about two types of insurance policies you might want to consider.
- Replacement-cost policy. A replacement-cost policy provides the money it would take to replace the building at current standards in the event that the building is a total loss. If your building costs $300,000 to replace, you are awarded $300,000 to replace it.
- Cash-value policy. With a cash-value policy, the insurance company sends out an appraiser to determine a value for the building. Regardless of what amount you insure your building for you are paid what the appraisal states that the building is worth—which can be less than what you insured it for, but never more. In other words, under this type of policy, if you insure your building for $300,000 but the appraiser determines a value for the building at $200,000, you get $200,000. On the other hand, if you are insured for $300,000 and appraiser comes in at $350,000, you only get $300,000.
Okay, but what does a real estate broker and real estate investment software developer know about insurance? Only that it is easy to think you are suitably covered by insurance in the event of property loss and horrible to discover later when you are standing knee deep in ashes that you are not.
My expertise is not insurance and my intention is not to give advice about insurance. I simply want to suggest to my real estate investing friends that if you are not 100% positive that if your apartment building burns down that you will receive the money you are expecting, place a call to your insurance agent today and discuss it.
Real estate investing offers enough challenges without having to having to endure watching your real estate investment burnt and your pocket book right along with it.
