ACV or Rebuild Insurance for Rentals

[Rico Nasol]

So we have a rental property in MO. We're paying cash for it and then going to rehab. All in, we're spending ~$70k with an ARV of $100-110k. The rebuild insurance is $84/month at $170k. The ACV insurance is $56/month for $100k. Both have a $1500 deductible. Which policy should we go with? The house was built in the 50's and the plumbing was upgraded at some point to copper and most of the major items were replaced at some point and time to meet more modern standards. The roof may have 5-10 years left on it.

The $30/month does eat into our monthly cashflow, but want to get the pros and cons of both. I've read that some folks go ACV at 70% of the rebuild cost. Some only do the rebuild policy. My thoughts are, we're in it for $70k. If something happens,we get our investment back and then some and we can always sell the land. That could be totally wrong, so looking for some advice. Thanks!

[Nathan Gesner]

Insurance is a lot like gambling: the house always wins.

They entice you to pay extra by promising to cover the full cost, minus deductible. However, the odds of you filing a qualified claim are slim. They don't anticipate paying out on a claim so the extra money makes you feel good while fattening their bank account.

Let's say you have ten rentals with an average roof age of 15 years. Actual Cash Value insurance is $40 a month less than replacement value. Is it worth it?

A hail storm blows through and five of your rentals need a new roof at $7,000 each.

Total cost: $35,000

Subtract $1,000 deductible for each house ($5,000 total) which means you need $30,000 to replace the five roofs.

Replacement cost insurance pays the full $30,000. However, you paid the extra $40 a month for each house for the last five years which adds up to $24,000. You've paid $24,000 plus $5,000 in deductibles. That's $29,000 spent to replace $35,000 in roof damage.

Actual cash value pays you a depreciated value of $15,000 minus the $5,000 deductible. You get a total of $10,000 to pay for the roofs. However, you saved $24,000 by paying a lower premium for the last five years so you actually have $34,000 towards the roof replacement. 

Actual Cash Value seems like a loser but it's not if you are fiscally responsible. The odds are in your favor that you will never file a claim. Even if you do file a claim, the savings are enough that you will probably end up ahead after it's all said and done. You have to be fiscally responsible and look at it from a long-range perspective.

I recommend everyone crunch the numbers using their personal situation and at least a ten-year window to see how the numbers work for both options.