Real Estate Investors Association of Greater Cincinnati

Boring? Yes. Vital? Yes. What You Need to Know About Insurance for Your Investments



             One of the most boring topics – to most real estate investors, anyway -- is insurance.  That’s why so many get themselves in trouble when it’s too late to do anything about it. 

             As a real estate investor, you NEED to understand the basics of insurance that directly impacts your business.  Property insurance and liability insurance are the backbone of your business’s asset protection plan. Having a major insurance issue – and not having the proper insurance coverage in place – could easily cause your real estate business to go OUT of business, and take all the wealth you’ve built up over time down the drain with it.

            Our goal, thru these articles, is to provide a better basis to your real estate insurance knowledge so that you can ask the right questions and make the right decisions when it comes to your insurance.

            The first topic, as a basis of understanding, is to discuss “reconstruction value” versus “street value”.  Too often people use street value—what the property would sell for today—to try to determine what value they need to use to insure a property.

            Unfortunately, street value is not really a valid insurance valuation, because the cost of actually fixing or rebuilding the property can be more or less than what the property might sell for. A property with a $200,000 street value might cost $350,000 to rebuild; if you’ve insured it for the $200,000 street value, you won’t get enough in an insurance settlement to rebuild it.           

           The “insurance-based” reconstruction value is a calculated value, based on the features of the building – not on the building location.  Some of the factors used for the reconstruction value include:

  •               the square footage of the building
  •               the number of stories
  •               whether there is a basement or crawlspace or slab
  •               the type of interior wall coverings, type of roof, and on and on.

           All areas and components of the building are considered and values are created to make sure the valuation is correct.

           There are several significant items to consider when discussing the reconstruction value of your investment property.  The first – and maybe most critical – is whether you want the property rebuilt to the style and current condition or if you just want A building rebuilt.  HUGE difference.  

            If you were insuring a house that’s your primary residence, you would most likely want the rebuilt home to be close – in look and feel – as it is currently. That is 100% appropriate.  

            But if it were an investment property, there may be a very different viewpoint, depending on your investment and use of the property. If the property today is a 90-year-old brick 4 bedroom with hardwood floors, but a (much-cheaper to build) frame house with vinyl siding and luxury vinyl tile floors would rent for the same amount of money, you might choose a different insured value to save money on your premium.

            Some of the factors that will need to be considered in creating the valuation:

                    As an insurance agent, I calculate the reconstruction valuation based on what you, the real estate investor, want for the insured value.  I will give you my best estimate, based on the information that I have about the building and your investment strategy. The valuation has to meet your goals, not mine.

                    Your goal, as an investor, is to have the appropriate insurance to meet your goals if there were an insurable loss, but not OVERinsure the property, because that takes money out of your pocket every month.

                    Yes, many investment properties are insured incorrectly—in BOTH directions.  Probably as many buildings are over-insured as there are under-insured. In the event of a major incident at your property, having an incorrect reconstruction valuation could determine if the building is rebuilt with the insurance money, or with your money, or not at all.

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