HMW #120: The 3 insurance products every real estate investor needsSep 21, 2023
Read Time: 5.75 minutes
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New investors love to to worry about losing everything on a single investment. And I mean everything. Can this happen? Sure? Will it happen to you? Most likely no. If you are reading our blogs, listening to our podcast, and following us on our social media, then you are pretty well versed on how to run a successful investing business that reduces your chance of getting in a bad situation. And remember, there is risk in not investing too.
However, thankfully insurance products are also available to help mitigate any remaining worries you may have. I (Alan) am going to break down 3 must-have insurance options. I'm not saying only these three are the only necessarily ones to have, but having these choices should help you sleep well at night.
Are you saying that because we are correct or because I'm boring? Listen, I'm not one to make insurance exciting. I'm actually not sure anyone can do that. But you do need to know the basics and let's start with this one:
All lenders require insurance.
You can only avoid insurance in real estate investing if you:
- Buy in all cash.
- Do owner or seller financing deals.
- Like to live on the edge and invest like a madman (or madwoman).
Ok, a little off topic. Are you paying attention? Wait... are you trying to confirm to me that you are indeed a madman and like to invest without insurance?
Ok, got it. You are eccentric and I'm happy for you. Then this blog entry is for the rest of us.
Insurance 1: Property insurance required by lender
Mortgages are a part of real estate investing and you have to abide by their rules. And their rules are to have sufficient dwelling and property coverage to rebuild the home in case of a catastrophic event. These policies generally have liability coverage as well (in case someone gets injured). If not, you'll get liability coverage separately.
This is the insurance you get on your primary home as well. And if you ever turn you primary home into a rental, notify your insurance company and there will be a change in insurance premiums and coverages as they make the switch. Because you are no longer living in the home, your coverage no longer needs to protect your stuff. You just need to protect the building and the fact a tenant lives there marginally increases the risk to damage, and thus your insurance coverage.
Umm, I'm just going to continue with no comment.
Insurance 2: Umbrella Insurance
Umbrella insurance is how you can best protect yourself when investing in your name and not in an LLC. And for the record, we recommend starting out with investing in your name rather than starting new LLCs on your first investment.
Aptly named, umbrellas cover everything above and beyond your default limits and coverages on your existing policies. This includes injuries, property damage, some lawsuits, and personal liability situations. Also it's fairly cheap.
This is highly recommend insurance for all real estate investors and often costs less than $20 per month.
I'll take that as you are ready for the third type of insurance. Don't worry, so am I.
Insurance 3: Tenant-Paid Renters Insurance
In every state (except Oklahoma) you can include in your lease that your tenants are required to have renter's insurance in order to rent from you. This is great because you don't have to pay for it and it helps reduce your liability.
It's a cheap policy for a tenant to have and it covers their personal items in case of damage. And with this it also reduces your exposure to lawsuits and it pays for relocation of the tenant incase the property becomes inhabitable.
Is it a necessary win-win in every way for both the landlord and tenant. So be sure to include this in your leases! And I'm sure you have some ice cream related response to this too, don't you?
Maybe real estate isn't for you.
- Lender-required property insurance is unavoidable.
- Add umbrella insurance for extra protection.
- Require renter's insurance in your lease.
- Go easy on the ice cream.