Investors – Are you getting enough Property Insurance coverage?
Property Insurance: although it’s not one of the most exciting things to talk about, it can be one of the most important things to private money investors and private money lenders. I’m talking about property insurance. Just like any other member of your collaborative real estate investing team, it is important to take time to find and vet out a well qualified insurance agent. It can be well worth any time spent because without the proper insurance you could be talking the difference between making good money and losing money on your next project.
Lending Categories:
From the lender’s perspective property insurance can be broken down into two main categories:
The first is typical conventional owner-occupied and/or long term lending. Lenders in this arena typically want to protect amortized unpaid principal lent to borrow, as well as their future income or interest payments.
The second category is private money lenders lending money on short term non-owner occupied properties. This category of money lenders are most often concerned about protecting their entire principal balance because the loans are seldom amortized. They want to protect their interest due on the loan and may also be concerned about future profits if the loan is set up with an equity sharing or profit sharing component.
As a money lender we really need to watch this closely because typically borrowers, Brokers, agents and bank officers may well overlook this need and only opt to place coverage on the current unimproved value of the property. It is important to place adequate insurance so it will cover the future value (or after repair value – ARV) of the property. This value is best determined by getting an ARV or after repair value appraisal. Remember, insurance coverage typically only covers replacement cost of the building, home, business etc.
What property insurance covers:
Peril: It is an event that causes damage to the property and is sudden and accidental. Examples are fire, lightning, wind, hail, vandalism, left, snow/sleet/ice, flood, and earth movement. In some cases geographic concerns such as freezing, ice, weight of snow, hurricane and tornados can be issues.
Vandalism and theft are probably the most concerning to private money lenders. Insuring against these peril can be very expensive. Most standard dwelling policies require that the property be occupied.
Named Peril, Broad Peril and Open Peril are several of the options available with the Named Peril policy being the most common. When lending on rehab or new construction the property most often doesn’t have anyone living at the property so look at your policy closely because without specifically adding the named peril such as vandalism and theft on properties most policies have vacancy exclusions.
Again, please be sure to take the time to find a well qualified insurance agent that will help you decide the best coverage so you can build your strong collaborative real estate investing team!
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