Insurance

[Mike Bell]

Property insurance seems to always be one of my biggest expenses. Most of my properties are replacement cost. The agent says the cost to rebuild is this number. Which is so much higher then I would ever be able to sell it for. However he says that is what they say it would cost to re-build if it burns down. For example a 4 plea that I could maybe sell for $200,000 he has then insured at 370,000. Is there any way around this. I have tried looking at actual cash value. It saves very little.

[Account Closed]

Your agent is correct that insurance companies require you to insure your rental property at the cost to replace. They do this because they know if they used market value every investor would claim a value lower than the actual value knowing that most claims are not total losses of the property. To prevent this they charge a penalty if you are insured for less than their required amount of insurance. 

As john stated most companies allow you to choose from 100% 90% and 80%. Your insurance rate will be lower the higher percentage you choose. Standard is 80% is rate x 1 90% is rate x .95 and 100% is rate x.9. The insurance adjuster will determine the replacement cost at the time of a claim so lying about the characteristics of your building doesn't do any good.

The best way to get around this issue is the agreed value endorsement. With agreed value you and the insurance company sign a document at the beginning of each policy period stating you both agree on a certain value upfront and that will be considered 100% coinsurance in the event of a claim. If you are considered a quality risk the insurance company will often set the agreed value of as the cost of rebuilding with the most basic materials and appliances. (i.e siding, carpet, linoleum, etc.) In Missouri 90 cents a square foot is a common valuation.  REMEMBER if your entire building is destroyed you will only be given the agreed value regardless of the actual cost to rebuild. 

Its important to note that insurance companies will not do agreed value unless you are considered a "good risk". A good risk is someone unlikely to file claims and will only file claims for large unpreventable accidents. I have found the main ways you can be considered a good risk are: 

1. Well Maintained Roofs: The biggest reason property insurance has increased over the past decade is because of people who let their roofs deteriorate until a hail storm and then have insurance pay for their new roofs. 

2. Proactive Maintenance Plan: If you are routinely fixing small issues when they appear they are less likely to turn into bigger issues. 

3. Written Risk Management Policy: Deadbolt locks and alarm systems, tenant screening, not letting units go below freezing in winter, not allowing grills on balconies, etc. 

4. High Deductible: If you are doing steps 1-3 you are very unlikely to have incidents resulting in smaller claims. Having a high deductible is a way to put your money where your mouth is and show you have confidence in your property. 

5. Good Claims History: Historic results are the best way to predict future results. Insurance companies look at frequency not severity. 

Good Luck!