If you are a US real estate investor, then getting your property or properties insured should be a top priority. Not only is it a requirement for most lenders, but taking out the right insurance policies could possibly save you from financial loss and even ruin down the road.
Let’s look at the three main types of insurance that every real estate investor needs:
1. Title Insurance
Title insurance is a form of insurance that protects both the buyer and the lender from potential losses due to problems with the property title. Most lenders will require real estate investors to purchase title insurance anytime you are buying, selling, or refinancing real estate.
Often, problems with the title aren’t caught until after the sale is finalized. There could be a lien on the property or the deed could have been incorrectly filed. Without title insurance, all financial liability falls on the shoulders of the investor.
Title insurance is paid as a one-time lump sum payment when you close on the property, along with the closing costs and other fees. It covers things like liens, back taxes, encumbrances, and any other defects with the title.
2. Liability Insurance Commercial Package
Commercial Package insurance is divided into 2 parts – Liability & Property.
Liability is the part of the policy that defends you and pays any expenses arising out of a person tripping and falling on your property. (There are some exclusions based on several scenarios so ask your broker. See below for more examples). Property is the part of the policy that pays for the claims arising out of a fire, smoke, flooding from a burst pipe and loss of your rental income in the event you can collect rent due to a covered claim.
There are a few different types of insurance for your purchase of a property. Make sure your broker knows EXACTLY what you will be doing with your property. Insuring it as occupied when its not or under construction and your claim can be denied.
Comprehensive liability insurance is one of the most important things real estate investors can have. This type of insurance protects you if someone is injured on your property.
Liability insurance is essential even if you don’t yet have any tenants. Otherwise, if an uninsured contractor hurts themselves on the job, you could be held financially liable. And all it takes is one lawsuit to devastate most businesses financially.
Liability insurance is typically paid monthly, and the total amount will depend on the level of coverage you need. It will cover bodily injury, property damage and will even pay for damage done by pets.
3. Flood Insurance
Flood insurance covers damages and losses related to flooding due to tidal waters rising. Regular flooding due to a broken pipe is covered under your Package Policy. And there are two main types of flood insurance you can purchase:
- This policy is offered by the National Flood Insurance Program (NFIP). It’s available to anyone across the U.S. who lives in a flood plain. The policy is offered through a private insurance company, but FEMA sets the rates and terms.
- You can also purchase private flood insurance. These policies are sometimes more comprehensive than what the NFIP offers. A private plan may be a good idea if you live in an area that’s high-risk for flooding.
In general, homeowner’s insurance does not cover flooding, so it’s a must-have for all real estate investors. You’ll typically pay an annual premium for the insurance.
The Bottom Line
As a real estate investor, you need to make sure your property is covered if the unexpected happens. Hopefully, this article has given you a good starting point and helped you understand the type of coverage you need.
You can work with a private insurance company to determine your coverage and purchase your policies. However, keep in mind that your lender might offer more cost-effective policies.