Rehab or Rental: What insurance coverages do I really need?

Congratulations on deciding to invest in real estate! Whether you are going to rehab and sell a property or keep it to add to your portfolio as a rental, you will want to make sure you are covered in the event of future liabilities.

As a real estate investor you want to protect your profit and your assets from the moment you acquire your property until the day you close and pass it along to someone else.

Let’s take a look at the timeline of a rehab property:
– Identify the target property
– Due diligence
– Call your insurer about the property
– Offer is accepted
– Close on the property
– Get all permits required
– Begin rehab, work with contractors
– Complete work
– Sell or find tennet

I hope that seeing “call your insurance agent” before “offer is accepted” was not a shock or surprise. You might have heard other investors talk about builder’s risk, a vacant home policy, a homeowners policy and a dwelling policy, but which one do you need?

A standard homeowners policy should cover the following; Coverage for the dwelling (your main house) and attached structures (such as a garage), contents of the home, loss of use for a hotel if you are unable to return to your home, personal liability and medical expense.

A dwelling policy is custom-built on what liabilities you need to cover, adding coverage for building materials and covering no occupancy while no work is going on.

Depending on the type of rehab needed, your agent will need to consider multiple policies.
If it is a cosmetic rehab, including kitchen and bathroom, you can get a policy that will cover home vacancy until the rehab is done and sold. If you are moving walls and dealing with structural issues, you may need a commercial carrier as that is closer to a builder’s risk policy.

Let your agent know how many homes a year you are planning on doing. Some have policies that will cover multiple homes. Most policies are on a per home basis, so ask your agent about what discounts or coverages you need to add. Water damage is always good to add to a policy in case there is flooding or damage from the city line if it backs up in your home.

Communicate with your agent to make sure you understand your coverage and how to make the process simpler and smoother for the next property you work on.

Now, if you are thinking of holding the property and becoming a landlord, you have different liabilities to consider:
– Standard homeowner policies will not cover a rental. In fact, they could deny some coverages if you are renting the property.
– Fire policies will need to be updated to cover any appliances or furnishing you have provided for the rental property.
– When protecting your rental income from loss and minimizing unnecessary expenses, make sure you are not paying to much for insurance.
– Replacement Cost or Cash Value Insurance: make sure you understand the out-of-pocket expenses for both as you move forward.
– Look into liability insurance in case harm or damage happens on your property to a guest or by the tennet.

Your agent will talk with you about dwelling policies. Typically you have DP-1, Dp-2, and DP-3.
– DP-1 is a basic policy covering fire and vandalism.
– DP-2 is broader adding wind, fire, hail and even collison if a car hits the property.
– DP-3 is a special form or open policy. Unless a peril is specifically excluded, it is covered.

Talk with your agent and figure out the best way to move forward with coverage on your property. Requiring your renter to have their own rental policy should be a hard rule that is always in place.

This article was intended to help you be aware of what to expect, not scare you from investing. When done right, having investment properties is a great way to build up income and assets for your future.