Home Insurance (ACV vs. RCV)

[Nicholas D.]

I'm hoping to close on a duplex near the end of this month for 50k cash. The area is lower income, and many of the homes are older (1920-1940's). This property is no exception, it's believed to be built in the 1920s.

An insurance broker spoke with me and tried to get me to purchase a replacement cost value based insurance, rather than actual cost value. I am being told by a local landlord in the area who owns lots of similar properties to the one I'm closing on and he recommends only going with actual cost value due to the age of the buildings in the area, and the fact that the majority of them are 80k or less and are owned outright with no mortgages. I'm aware mortgage companies have requirements for insurances however.

The difference would be around $750 vs $250 a year for insuring the property. The local landlord said all he insures is enough to replace the amount he paid for the property and enough to clean up and backfill the hole on the property if it were to burn down etc.

When I explained to the broker that I wasn't interested in replacing the home, but rather insuring the 50k I paid for it, and enough to clean up the land. I would then repeat the process of buying another property with that money, rather than attempting to rebuild the duplex.

If any landlords have similar properties to this, I'd like to hear your thoughts on this matter.

[Sergey A. Petrov]

All depends on your risk tolerance. I also noted you were using the term “actual cost value”. The C in there stands for cash so “actual cash value”. Say you buy something today for $1k but that something is absolutely worthless in a year. In 6 months it is worth $500. 

If you lose that thing in 6 months your ACV company pay you $500 (cash value in six months). With RCV (replacement cost value), you get $1k or a brand new replacement of that something 

If you lose that thing in a year, your ACV insurance pays you $0 (the thing is now worthless). Your RCV insurance still gives you $1k or buys a new replacement thing 

$500 per year sounds like it is worth it in my book unless everything in the house is brand new and has a long remaining useful life otherwise your entire investment is at risk if there is a fire tomorrow. Back to your personal risk tolerance - are you willing to accept that risk or would you rather pay $500 more in insurance premiums? The answer varies wildly from individual to individual