Valuing Your Investment Property For Insurance

Investment Property Safford, AZValuing of an investment property can be difficult. Add in the idea of a different value for insurance and you have a complicated world.

Demystifying Insurance Valuation

Lessons from Goldilocks

The valuation of any asset can be tricky, and who better to understand that than an investor.

I once approached an owner of a property that I liked.  I had heard through a mutual friend, that he was thinking of selling it and I approached him, hoping to close the deal before he put it on the market. The short of it is, I asked him what he wanted for it. His response illustrates the point I am trying to make. “Well…” he said. “I had it appraised, and as an owner occupied unit it is valued at $121,000. As a Rental Property, it is valued at $185,000.” Okay…truth is, he never did answer my question.

The “market” value of a home is in the eyes of the beholder, and thus the negotiation. Obviously we try to be objective by looking at comparables and the price per square foot.  A home can be appraised, but even that can be subjective (funny how they often come out to the same price as what the seller was asking, right? But I digress). Then you have your finance gurus who talk about valuation models that seek to determine the return, and therefore the value. We hear things like “Cap Rate,” and “Discounted Cash Flow,” that are other ways investors valuate properties.

For insurance purposes we care about one thing and one thing only; indemnifying you. We care about what the replacement cost of the home is. What it is going to cost to get you back to where you started. For investors, this means we are going to get the asset back where it was, producing cash flow. Also, we don’t care how much the land cost. The land will still be there to build upon; we only care what it costs us to start installing the walls, roof, floor coverings, deck, etc. We are looking for the replacement cost.

How do you determine that? It could be through appraisal (minus the land value), or through another expert opinion (i.e. a contractor or real estate agent). It could be through a “Cost Estimator Tool” provided by your insurance agent, or a combination of all these sources. The key is to find an accurate valuation and insure the home for 100% of that amount. Not more and not less.

Why? For a couple of reasons:

  1. This is the amount that the company will pay if there is a loss. You already will be on the hook for a deductible. Let’s not complicate things. Let’s minimize your out of pocket expense.
  2. You don’t want to over insure it, you will pay too much for premium and the company will raise its eye when you insure, your $125,000 property, for a million dollars. They will be inspecting it, and will cancel your policy, if it looks like things are not accurate.
  3. You don’t want to under insure it. First off, the most the company will pay is their “limit of liability” or the value you have on your policy. So if you under insure it, you will have your deductible, plus the difference between the replacement cost and what you insured it for, as your out of pocket expense. Finally, if you get too low on the valuation, you start getting penalties. Usually this kicks in at lower than 80%. Some companies will penalize you by saying that if you insure the home for less than 80% they take the claim to an actual cash value world. Others start reducing the amount they will pay of the claim, by the same percentage that you have underinsured the property.

So, when it comes to valuation, remember Goldilocks and the Three Bears. You don’t want too hot (over insuring the property). You don’t want too cold (underinsuring the property). You want 100% of just right (replacement cost). So do some homework, figure out what the home is worth and insure it just right!

To get an incredible quote these coverage sections start our online quote form. To Talk to a licensed agent about this coverage call us at 1-877-784-6787.

This coverage explanation is for illustration purposes only and is general in nature. Coverage explained here may not apply to your policy, State, company, or situation. For more information about how your policy would respond in the event of a loss, please refer to the terms and conditions and declarations page of your policy.

Additional Coverage for Your Home Insurance

Homeowners Insurance policies, whether for your own home or a rental property, are very specific about what they cover, but oddly enough they throw in a couple of “extras” or additional coverage. What are those? Let’s take a look!

Home insurance Safford, AZADDITIONAL COVERAGE

There’s free stuff in my insurance policy? Yes.

So, great news there are only four Homeowners Insurance Coverage parts, so that part was simple, but next comes the complicated part; additional coverage (s). Yeah! Now for any of you that might be catching the sarcasm in that last comment, there are actually some good things in here. Every policy is different so here are some of the most common and important:

  1. Debris Removal – Have you ever seen a fire? Walls may still be standing but completely destroyed. What knocks those crumbling walls down and hauls them away? Debris Removal! See, good stuff.
  2. Trees, plants, shrubs – Not a lot here, but you can usually get coverage up to $250-$500 or so per tree. Obviously there will be limits, but landscaping can be expensive.
  3. Fire Department Service Charge – Sweet, nice that you don’t have extra stuff, like cost of fire department services coming your way.
  4. Collapse – This is an odd place to have this coverage, but it’s nice that they add it.
  5. Glass – Sweet.

Again, there is more to each of these, but nice that they add them and make them available as additions for your homeowners insurance. Start your quote online or call us for an immediate quote 1-877-784-6787.

Manufactured Home Insurance – Why Is It So Expensive?

Seriously, have you ever compared a manufactured home insurance policy with that of a “stick built” home insurance policy? The cost can be crazy. Why? Insurance rates are based on the expected losses, and in short the expected losses from a manufactured home are higher than a traditional home. Let’s look at a couple of examples.

Fire – So while, there is not more of a likelihood that your manufactured home policy catches on fire and the “stick built” home, the damage a fire would cause is much greater on a manufactured home. Remember, if there is significant damage to a manufactured home, you can’t tear down part of the home and rebuild that part, you are looking at replacing the entire home. So the expected losses increase.

Wind – Most companies that insure manufactured homes will ask if the home is “tied down.” This is a big difference between manufactured homes and stick built homes, the foundation. Because of the relative light weight of a manufactured home, it is more likely to sustain wind damage. Rather than the loss of a few shingles, you could lose the whole roof.

Also, with manufactured homes if there are “attached structures” like “Arizona Rooms,” awnings, carports, etc. these can cause significant damage to a manufactured home. Check out the study and Video American Modern did regarding the effects of High Winds on Manufactured Housing. In fact, there are several large insurance companies that will insure manufactured homes, unless you have an attached structure, once they find out you have one of these, you are no longer “eligible” for their program. Fortunately, we have several partners that offer coverage for manufactured homes with or without attached structures.

There are other examples, the point is the higher the possible losses, the higher the insurance costs. Fair or not, insurance is about the numbers.

Insurance For 10 or More Rental Homes

Successful real estate investors understand the concept of Rinse and Repeat. That is, finding a real estate investing method that works for them, implementing it successfully, and doing it again and again–increasing cash flow and building a legitimate business. For those of us that believe the buy and hold rental model is best and hold 10 or more rentals, insurance can flat out be a pain in the butt. Multiple policies, managing renewals, is just not a great way to spend time when you have a business to run. Imagine a SINGLE policy with all your properties listed, ONE payment, ONE renewal, less paperwork, fewer headaches and better prices on insurance. That’s the 10+ program. It has great coverage options including coverage for:

  • Your home and other structure
  • Your business personal property such as appliances and other landlord furnishings
  • Business Income that protects the loss of your rents if you have a covered loss
  • Liability and Medical Payments
  • Service Line Coverage (protection for the utility lines that run to the house)
  • Breakdown Coverage Option (Coverage that can help replace a broken furnace or repair a washing machine)
  • Flexible deductible options for high cash flowing investment businesses

The program is designed for single to six family dwellings that have no more than two stories. While the bulk of the properties need to be these one to six family dwellings, we can also include condos, manufactured homes, and vacant dwellings (for that occasional fix and flip investment) as long as they are not vacant for 24 months. It is easy to see why investors with multiple properties choose to go with this program. It saves money, increasing your cash flow. It saves time, by eliminating paperwork, and provides great protection for your investments! Start simplifying your insurance life with our 10+ program. To get a quote call us to start the process at 1-877-784-8767 today!

Why Protect Your Investment?

When many investors look at insurance, they simply see it as an expense item, something to drive down cash flow. While we are all looking to maximize cash flow, insurance protects the cash flow that can be obtained during the time you hold the investment.

The first thing insurance protects is the house itself, the dwelling as it is often referred. What is covered? The truth is that it varies based on what you buy. In short there are several levels of coverage. The most commonly purchased coverage for rental investment properties is the DP-3. This policy is similar to an owner occupied HO-3 policy in that it is a special form which means unless the loss was excluded, it will be covered. It is the broadest coverage you can purchase for your investment property. Typical losses like fire, theft, wind and explosion are covered under this policy. There are always some exclusions, and some of the more worrisome exclusions include flood, earthquake and landslide. In most cases, this coverage can be procured, but with a separate policy.

So you have the primary cash producing asset covered. Next are the adjacent structures. These include detached garages, sheds, fences, retaining walls, pools and anything that is that attached to the structure itself. For a lot of rental properties, your desire to insure these items may be limited; however, most DP-3 policies include a limit equal to 10% of the value of the dwelling as coverage for adjacent or “other” structures.

The next piece of coverage for landlord properties is the landlord furnishings. This includes appliances such as refrigerators, washers, dryers, microwaves, ranges or ovens, dishwashers, etc. It also includes any furniture provided to the tenants such as couches, beds, etc.

One of the most important coverage for investors is the fair rental value. If your investment property burns to the ground and you then build a new house, you are out the cash flow that you would have had otherwise received while the home is being built. Yet you are still on the hook for the mortgage. How do you protect yourself? With coverage for the fair rental value, this will pay you as if you had a renter occupying the property.

Liability coverage is a must in today’s society. As an investor you have assets you must protect. Many have learned that separating properties from personal assets in the form of LLCs is a great risk management tactic, but it’s not enough. When sued you will want liability coverage that will not only pay for damages you are legally held liable for, but will also pay for your defense costs. Both the damages and defense costs can be extremely high. As such, it is always a good idea to purchase an umbrella policy, which not only increases your limits of coverage, but also provides coverage in situations where the primary policy will not.

Finally there is medical payments coverage. What happens when someone gets hurt and incurs medical bills? Oftentimes the insurance company will actually pay for the medical damages, so as to say, “we have taken care of you, don’t sue us.”” When it comes down to it, insurance is an expense item, but an important one.

When done right it can ensure you can enjoy the cash flow from your investment for a long time to come, regardless of what mishaps occur.

Landlord Insurance Checklist Explanation

Gila Insurance Group has put together a landlord insurance checklist of things you should discuss with your insurance agent. While it’s nice to have the list, the question is why are these so important? Here we will break this down, and explain piece by piece why you need to have these conversations.

Investment Property  ______
Proper Property Valuation  ______
The Form – DP3- What’s Covered  ______
Loss Settlement Option for Home  ______
Deductible  ______
Water Backup of Sewer or Drains Coverage  ______
Earthquake  ______
Flood  ______
Ordinance and Law/Building Code Upgrade Coverage  ______

Proper Property Valuation – Did you know that there are penalties for under-insuring your investment property? There are, and if you have under-insured your home you could be getting a lower payout if you have a claim. On the other hand, over insuring your home costs you money that you don’t need to spend. So how do you get it right? There are cost estimator tools, you can speak with a contractor, appraisals sometimes make sense, but mostly they focus on the market value. What we are looking for here is the cost to rebuild the home. That means we take out the value of the land, and focus on the cost to rebuild the home.

The Form – We have spoken about this at great lengths, and have even put together a form comparison chart, but when it comes to landlord insurance policies, these things matter, and investors tend to try to save money anywhere they can to bolster revenue. Don’t mess up your policy by not getting the “special form.”

Loss Settlement – We talked about valuation and replacement cost already, but there is a second piece to this puzzle. If you don’t have the home insured at replacement cost you could be in for a big surprise if you have a claim. Look the bottom-line on a landlord insurance policy is that if there is a claim you want things replaced, right? So you want to purchase replacement cost. In some cases, that might not be available, so make sure you get a stated value or full repair cost option on your policy, but ensure you understand what is being covered.

Deductible – If you want to save money raise your deductible. How high? How much cash do you normally keep on hand? The deductible is the part of the claim you are responsible for paying. It’s the part you pay first. The question is, if you are handy and unlikely to file a claim, then why have a really low deductible?

Water back up of sewers and drains
 – water backs up in toilets, showers, and sinks. It happens. And when it happens the damage can be great. However, in most situations the damage caused by the backup of sewers and drains isn’t covered, but it can be added. Your tenants aren’t you, and are likely to not treat the house the same way you would, so this becomes a very important coverage for landlords.

Earthquake – This is always an excluded coverage, but it can be purchased. Even in California. It can be expensive, but it worth discussing so that you can make an informed decision.

Flood – Again, always excluded, but can be purchased. The truth is that every house, investment property or otherwise, is in a flood zone, some are just in a “high risk” zone. That said, MANY floods that cause damage every year are not in a “high risk” zone. Ask! It might be more affordable than you think.

Ordinance and Law – Look our politicians do crazy stuff. I have even seen green, rather than golden arches. Crazy! So what does ordinance and law or building code upgrade coverage do? If you have a loss at one of your investment properties, and the municipality requires you to make some upgrades due to an ordinance or law that has been passed in the area, this coverage will pay for the increased cost of to repair or replace the damage/home that occur in order to comply with the ordinance or law.

To get a quote on your landlord insurance property start your quote online, and let us shop for you.

Loss Settlement Options

One of the most important insurance issues you must understand is how you will get paid if you have a claim. Its called the “loss settlement.”

Loss Settlement

I once heard someone say, that “insurance is a complicated business.” Well, at Gila Insurance we try to keep things simple. But, there are a couple of points that frustrate many consumers when it comes to claims. The first is whether or not something is covered, which we address on numerous places on this site, the second is loss settlement, and the third is valuation. Loss settlement is how the company determines what they will pay you in the event of a loss. The HOW, not the HOW MUCH. How much is important, but the how is the best place to start when determining the how much. There are several different ways a company can determine how they will pay you. The good news is that they tell you how their loss settlement options will work, before you have a claim, and you get to choose how.

  1. The Better Option – Replacement cost – This is the option that you’ll want, and the one that most people buy. Replacement Cost pays the full amount that is required to rebuild the rental property, or damaged portion of the structure, with material that is of like kind or quality. In other words, they rebuild it the way it was.
  2. The Cheaper (or worse) Option – Actual Cash value (ACV)- Yes, Actual Cash Value or ACV is a cheaper option, but the problem is that it’s cheaper for a reason. To calculate the ACV of the home, you start with the Replacement Cost; what it would cost to replace the rental property, THEN you deduct for the depreciation of the asset. While depreciation on taxes is one thing… a great thing, depreciation on an insurance settlement calculation is another, and it’s not good. Before we get to a couple of examples; in summary, Actual Cash Value is the replacement cost minus the depreciation.

Some may try to do the math to see if the discount provided for the ACV option makes sense, and for some it may, but on a larger loss the calculation of depreciation will be damaging to small investors. For larger investors with a diversified portfolio, they may be able and willing to absorb the cash hit. However, even larger investors can get hit hard by Actual Cash Value settlement options on larger losses, especially when roofs, walls, flooring etc., etc. are damaged, all at the same time.

Bottom-line, most investors will be better off with the replacement cost option, which also helps to eliminate confusion and complications when there is a claim.

To get an incredible quote these coverage sections start our online quote form. To Talk to a licensed agent about this coverage call us at 1-877-784-6787.

This coverage explanation is for illustration purposes only and is general in nature. Coverage explained here may not apply to your policy, State, company, or situation. For more information about how your policy would respond in the event of a loss, please refer to the terms and conditions and declarations page of your policy.

Landlord Furnishings

LANDLORD FURNISHINGS

A landlord’s insurance policy covers the home and can include insurance for the landlord’s furnishings. This isn’t the renter’s stuff, that needs to be covered under a renters policy, this is your stuff. Coverage for the landlord’s furnishings is important, and should not be overlooked. Why, because even if you aren’t furnishing the home, the value of what you probably will furnish can be significant. Consider this; even if you do not furnish the home there may be a refrigerator, a stove, a microwave, maybe even a washer and dryer. If the microwave is built in to the cabinets then it would be considered part of the building, as would the dishwasher, but those other big ticket items are exactly that, even with those President’s Day Sales Prices. Even on the cheap you are looking at $2,000-$3,000 to replace those items. Maybe that isn’t a big deal, however, given the fact that you will already have a deductible you don’t want to compound your out-of-pocket costs with replacing landlords furnishing. Coverage is relatively cheap, and is worth considering.

Other things to consider, landlord’s furnishings are typically covered for “broad” form coverage not “special” form coverage without being changed. This means your stuff is covered for less than what the home would typically be covered for. If this bother’s you can often change the policy to cover your stuff under a “special” form.

If you are furnishing more than just the basic appliances, it is important to note that theft of landlord’s furnishings will not be covered, so if you are going to rent the home out fully furnished you will want to use other risk management techniques to protect your stuff, whether that be through a large security deposit or in some other way, and never furnish with something you can’t afford to replace.

What is An Insurable RV?

In 13 years of providing RV insurance we’ve gained a bit of experience. By experience I mean we get asked to insure all types of things. So much so that it necessitates a few definitions.

Since we are talking about RV insurance, let’s start with defining what an RV or Recreational Vehicle is. A Recreational Vehicle comes in two general types–Motorized units and Non-motorized units. Motorized units are Motorhomes. Motorhomes are divided into three classes including Class A, Class B, and Class C. Non-motorized units are typically of the towable variety and include conventional travel trailers, fifth wheels, toy haulers and pop-up campers.

That said, not all “RVs” are insurable. So let’s define what an insurable recreational vehicle is.

While different insurance companies have different appetites for risk, most have very similar definitions of what makes an RV insurable. For example most insurable RVs have the following equipment.

  • Refrigeration equipment
  • LP-Gas / Propane System
  • Bathroom Facilities that are “Built in and Plumbed”
  • Cooking Equipment (think kitchen, not a Coleman)
  • Heating/Air conditioning system that is separate from the system provided by the engine
  • Separate electric power system with a 110V-125V hook up
  • Drinkable water supply system

With few exceptions these are required for all insurable RVs. So, let’s talk exceptions to these hard fast rules.

These items are insurable if the exceptions are met:

Class B Motorhomes, or camper vans – While Camper vans are not required to have all of the equipment provided above, they are still required to have a fresh water hook up and a separate 110 volt electric power hook up. In addition a Class B motorhome must include at least two of the following: sleeping facilities, kitchen or toilet facilities.

Pop-up Camper – no requirements

Truck Camper – again, no requirements

If you have an insurable RV and are in the market for RV insurance contact us today at 877-784-6787 or start your quote online today.

This coverage explanation is for illustration purposes only and is general in nature. Coverage explained here may not apply to your policy, State, company, or situation. For more information about how your policy would respond in the event of a loss, please refer to the terms and conditions and declarations page of your policy.

Understanding Perils Insurance

Perils insurance against, what in the world does that mean. Here’s an insurance guy trying to explain the insurance options for rental property insurance.

Rental Property Insurance Coverage – Section I policy Form – Perils insured against.

Demystifying the stuff coming out of your insurance agent’s mouth

Perils insured against…. What does that mean? Let’s see if I can take off my insurance man hat for a second and put on my investor hat. Why? Because I believe this is where A LOT of insurance folks tend to lose their clients. It’s a simple thing, but we often get too caught up in the insurance lingo when we are explaining this stuff. So, here is my best attempt.

A peril is stuff that happens to cause a loss. So, stuff that happens, for which you are insured, is a covered peril.

Okay. Sometimes you will hear an adjustor or an insurance agent say something like, “in the event of a covered loss.” Well, what in the world is a “covered loss?” How could you know? That’s where the policy form comes into play. Policy forms are like a series of hooks on a wall, so we take our policy and we hang it on a form, then every time we read something like “in the event of a covered loss,” we can look at our hook, and we see if it’s covered in the policy.

Okay, so there are essentially 3 types of “hooks” or options for rental property insurance buyers. There are basic, broad, and special forms. That’s easy, but of course you will often hear agents referring to these as DP-1, DP-2, or a DP-3. This basically says it’s a dwelling policy with this kind of form… Now, each form has a list of stuff that gets covered. Basic being the worst and special being the best. Now that I have gone all insurance guy on you, let me break it down visually so that you can understand it.

THIS IS A GENERALIZATION, CHECK YOUR POLICY! THERE ARE THINGS THAT CAN CHANGE THESE LISTS LIKE THE PROPERTY BEING VACANT OR OTHER FACTORS!

Now before you get all crazy and say, “hey Broad has most of what special has, I bet I can save some money,” slow your roll. Let’s look at that last one; Risk of Loss with Exclusions. What does that mean? It means that unless the insurer specifically excludes it, it’s covered. That is a HUGE difference.  In the first two options the insurer will only cover a handful of things, and if it’s not on the list, then it’s not covered. The last option, the special “hook,” says if it’s not excluded, its covered, which leaves hundreds of covered situations with a handful of exclusions.

LONG STORY SHORT? You’re special so get special. It’s as simple as that.

Start your quote online or call us for an immediate quote 1-877-784-6787.