Rental Property Insurance, Fair Rental Value Coverage, Yes or No?

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

Thank you for your response, Fred. You said pretty much exactly my thoughts on this matter. But it's always nice to hear it come out of someone else say the same thing as well. Appreciate you taking the time!

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

Risk??? Try a fire in the upstairs gutting the LR+Kitchen, and water damages to the lower unit. Sad story of the Loss Payee micro managing the restoration, but Lost Rents coverage was sweet during the process.

As I have a 6-unit complex, the mortgage would have still been paid and just zippo for profits for that year as a result, but - - what would be your status for 12 months of no rents?

Jacob Sampson

Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes

10y

Insurance is just a gamble. You are betting against the insurance company. Personally, I don't get the fair rent option. In 11 years and 18 units I have had exactly 0 times that I would have needed that.

Eric H.

Insurance Agent · San Antonio, TX · Member since 2016 · 100 posts · 36 votes

10y

If you have a loss that renders your property uninhabitable, you will not only loose the cash flow... You will also still be responsible for the debt service. If that is a situation you are comfortable with fair rent is your option.

Investor · Houston, TX · Member since 2014 · 242 posts · 81 votes

10y

Originally posted by @Eric H.:

If you have a loss that renders your property uninhabitable, you will not only loose the cash flow... You will also still be responsible for the debt service. If that is a situation you are comfortable with fair rent is your option.

He doesn't have this issue because he paid cash for these properties. I guess if you think you can sock away that $800/yr to cover the lost income for 12 months...

Eric H.

Insurance Agent · San Antonio, TX · Member since 2016 · 100 posts · 36 votes

10y

@Tim Shin I missed that these houses were free and clear, thanks. Still Texas property taxes may be a consideration unless offset by depreciation.

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

Thank you J Beard, Jacob Sampson, Eric Harris and Tim Shin for your input! This is exactly what I needed. Wanted to hear both sides of the option, good and bad. Thank you for taking the time. I have some decisions to make now!

Billy Smith

Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes

10y

Wow this looks like a agent talked you into something, drop it .

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

@ Billy Smith. When these policies are written up (at least around my parts), agents seem put this in automatically for rental houses. I don't think anyone is doing anything malicious, but, I'm siding with you, I don't think that it is always necessary either.

Jason BottPro Member

Insurance Agent · Nationwide · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Lindsey Leavitt Few comments.

Insurance is the transfer of risk to the insurance carrier in exchange for your $. If you feel you are comfortable with the risk &/or you can afford to retain the risk, then you should not buy the coverage.

You should apply this way of thinking towards all your insurance.

Example, If this coverage is $2 per year per building, its probably a good use of your allotted insurance cost. It it's $100 per year per building, you have a $1 to $13 ratio and that is too high to pay for passing the risk over to the insurance company.

Different insurance carriers charge different rates for coverage's, so what might make sense with your previous company, may not make sense with the new one.

Jennifer T.Pro Member

Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes

10y

Although I hear you on the "bigger fish to fry" if one of the houses was uninhabitable for one year, the insurance would pay for itself if one of the houses was uninhabitable for even just one month ($800/year for all houses vs. an average of $1350/month of rent on one house). A much more likely event. Of course, most years, nothing will happen at all to trigger that.

I'm not necessarily saying it is worth it to buy the insurance, but more pointing out it is much more common to see an event happen that makes a house uninhabitable for 1-3 months, and the insurance would more than pay for itself in years when that happens.

Jim Adrian

Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes

10y

I would not get this coverage based on owning the house out right. Now if you had a mortgage, then a different story. Now if the house sits empty for a few months you are mainly loosing profit. Hopefully your business model has enough reserve cash to expenses for at least 6 months. What is the likely hood that all 4 houses are out of service at the same time? I would bet this is slim. If you lost a house and had to rebuild you are looking at 5-7months of build time frame.

Investor · Houston, TX · Member since 2014 · 242 posts · 81 votes

10y

Originally posted by @Jim Adrian:

I would not get this coverage based on owning the house out right. Now if you had a mortgage, then a different story. Now if the house sits empty for a few months you are mainly loosing profit. Hopefully your business model has enough reserve cash to expenses for at least 6 months. What is the likely hood that all 4 houses are out of service at the same time? I would bet this is slim. If you lost a house and had to rebuild you are looking at 5-7months of build time frame.

I don't know the answer but it still seems like cutting off your nose in spite of your face. $800/yr on multiple properties when just about anything can happen to one to make it uninhabitable, I mean the insurance would pay for itself in line a month or two.

Jim Adrian

Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes

10y

@Tim Shin

I understand the question as option within the insurance policy vs not having a policy. By all means I would get an insurance policy for the major things. But do I need to pay myself while the house is out of service when I don't have a mortgage or any large bills to cover? No I don't. If there is a fire or natural disaster the insurance will kick in to cover the repair damages. If you lost one house for 6 months to rebuild/repair from damage, can you manage losing ~$7200 (6x$1200 est) profit? This goes back to her business model which we don't know. Yes it would suck to lose this much in profit but would this destroy her? Probably not as the other 3 units are picking up the slack to cover expenses.

Investor · Houston, TX · Member since 2014 · 242 posts · 81 votes

10y

Originally posted by @Jim Adrian:

@Tim Shin

I understand the question as option within the insurance policy vs not having a policy. By all means I would get an insurance policy for the major things. But do I need to pay myself while the house is out of service when I don't have a mortgage or any large bills to cover? No I don't. If there is a fire or natural disaster the insurance will kick in to cover the repair damages. If you lost one house for 6 months to rebuild/repair from damage, can you manage losing ~$7200 (6x$1200 est) profit? This goes back to her business model which we don't know. Yes it would suck to lose this much in profit but would this destroy her? Probably not as the other 3 units are picking up the slack to cover expenses.

But it only costs $800/yr to maintain that $7200 which is still a positive $6400. Which is better than just $0. I suppose you're suggesting that the likelihood of becoming inhabitable is low. But to lose $7200 in profit at $800/yr would require you to pay this insurance cost for over 9 years for it to be a loss. A lot can happen in 9 years.

Scott Hohensee

Investor · East Amherst, NY · Member since 2016 · 14 posts · 18 votes

10y

Several years ago I had a fire in one of my units, the water and smoke damage was extensive the whole building (two unit) had to be gutted and rebuilt. after spending two months of going back and forth with my ins co I finally settled on an amount sufficient to rebuild the building. I acted as the general contractor doing much of the work ourselves, and farming out such work as electrical, insulating, all new windows and drywall.

We spent six months putting this building back into service, well the insurance co said they would only pay 3 months loss of rents because that was the industry standard for that amount of work. and as I said 2 months was spent negotiating for a sufficient and just amount of money for repairs. I had even consulted my lawyer and he said it would be to costly to fight them, and I should probably try negotiating as I did for the initial loss. well I did just that and got them up to 4 months and considered myself lucky.

6 Reply

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

Thanks again for all the responses! I'm reading them all and considering each one, even if I don't respond directly. @Scott Hohensee, thank you for your input as well! This is what I was looking for. To see if anyone has dealt with this situation directly. Sorry for the damage to your property, and for the headache the company gave you trying to get what you assumed was due to you, no questions about it. Helps to hear every side of the argument. Appreciate you taking the time!

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

And @Jim Adrian, your last response is my train of thought as well. My model is able to cover losses in case something happened to one of my houses. We set aside enough for each house for a worst case scenario. Like others have said and you pointed to, it has to be a gamble that I feel comfortable with. Appreciate it!

Investor · Houston, TX · Member since 2014 · 242 posts · 81 votes

10y

Originally posted by @Lindsey Leavitt:

And @Jim Adrian, your last response is my train of thought as well. My model is able to cover losses in case something happened to one of my houses. We set aside enough for each house for a worst case scenario. Like others have said and you pointed to, it has to be a gamble that I feel comfortable with. Appreciate it!

All to save $800/yr?

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

@Tim Shin Don't get me wrong, I know it's a gamble. And I feel that me just saying this is pressing my luck on the matter. The fact is, that over the last 4 years we have owned the houses, they have never been inhabitable. My family owns several more rental houses, and even with several flooding issues, they have never been uninhabitable. I know we've been lucky, but I think this time I will take my chances. (and if it comes back to bite me in the butt, then I will confess up here as a warning to others!).

I do actually really appreciate your concern. If anything, it may be able to help steer someone else in that direction.

Roy N.Pro Member

Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes

10y

Originally posted by @Lindsey Leavitt:

@ Billy Smith. When these policies are written up (at least around my parts), agents seem put this in automatically for rental houses. I don't think anyone is doing anything malicious, but, I'm siding with you, I don't think that it is always necessary either.

Lindsay,

When we were starting out and highly leveraged we had this coverage. Even now, when we are making a big stretch that could tax our reserve capacity, we will put this coverage on the new acquisition(s) until we get our reserves back in-line and our debt south of 60%.

OP

Investor · Deer Park, TX · Member since 2016 · 15 posts · 7 votes

10y

@Roy N. What a great way to think about it! If we ever need to finance a house or two in the future, then I would definitely include this coverage. At least, like you said, until you recover a good portion back from it. Thanks!

Roy N.Pro Member

Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes

10y

@Lindsey Leavitt

It's a general business practice - insurance is for those events/outcomes the business cannot handle out of pocket without placing the operation of the business at undue risk.

{BTW: Sorry for the misspelling above}

Investor · Houston, TX · Member since 2014 · 242 posts · 81 votes

10y

Originally posted by @Lindsey Leavitt:

@Tim Shin Don't get me wrong, I know it's a gamble. And I feel that me just saying this is pressing my luck on the matter. The fact is, that over the last 4 years we have owned the houses, they have never been inhabitable. My family owns several more rental houses, and even with several flooding issues, they have never been uninhabitable. I know we've been lucky, but I think this time I will take my chances. (and if it comes back to bite me in the butt, then I will confess up here as a warning to others!).

I do actually really appreciate your concern. If anything, it may be able to help steer someone else in that direction.

Best of luck to you @Lindsey Levitt. I understand your position but really don't understand the math of the savings. But I suppose and savings helps.