Muscle Shoals, AL · Member since 2013 · 16 posts · 3 votes
Closing on your first two rental properties today and having questions about the insurance. Our agent is quoting one house with a cash value of 55k and the second with a cash value of 45k. We have 41k in the deal. How do you suggest we cover it? With the actual cash value or just enough to cover the loan so we have lower premiums?
Your mortgage company will probably dictate you get insurance for the amount of the purchase and list them as additionally insured. They will want to make sure they are covered for the money they are loaning.
Your mortgage company will probably dictate you get insurance for the amount of the purchase and list them as additionally insured. They will want to make sure they are covered for the money they are loaning.
I try to insure on replacement value depending on square footage. Up here in the Northeast construction costs are high and I don't mind paying a little extra in case something comes up.
Quick thought - if you would like to replace and own in an area pledge by weather events, then go with the replacement value. Keep your eyes open for other deductions you're entitled to. I'll be you could make up the difference between ACV vs. RCV premiums by chasing deductions.
Which option you take should be based upon your strategy for the individual property. Replacement Cost (RC) coverage allows you to recoup the depreciation that is initially levied against the claim settlement. Actual Cash Value (ACV) coverage does not. However, most of us in RE do not pay "retail" for labor/materials. Accordingly, many times the initial settlement, with depreciation levied) is still enough to repair damages. "Reconstruction Cost" is not Replacement Cost. It should indicate the value it would take to rebuild the property in the event of a catastrophic/large loss. If your strategy in the event of such a scenario is to pay off whatever debt may exist, then raze and sell the lot, then an insured value that is of "reconstruction cost" may be costing you too much premium. In other words, if you ultimately would repair partial losses, but sell in a "total" loss (after garnering the insurance benefit), then "over-insuring" doesn't make much sense. You should really address this issue at the "business model level", so you don't end up giving the insurance company more than the need to cover what you really have at risk. Keep in mind, the co-insurance requirement may hold you to certain levels of insured value, whether you like it or not (with many/most insurers). As such, we use the policies without such "co-insurance requirements" when applicable.
Coinsurance is imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of the property. The penalty is based on a percentage stated within the policy and the amount under reported. As an example (assuming policy is written on a Replacement Cost basis, also):
The reconstruction value of the property (as determined by the insurer) is: $250,000
The Coinsurance percentage requirement is: 80 %
The Limit of Insurance for the home is: $ 100,000
The Deductible is: $3,000
The amount of loss is: $40,000
Step (1): $250,000 x 80% = $200,000
(The minimum amount of insurance to meet your insurance requirements - assuming the policy required 80% co-insurance)
Step (2): $100,000 ÷ $200,000 = .50
Step (3): $40,000 x .50 = $20,000
Step (4): $20,000 - $3,000 = $17,000
The insurance company will pay no more than $17,000.
The most commonly issued coinsurance percentage is 80%. For this reason, with "traditional" companies, like State Farm, it is vital that values of property are accurately reported and updated annually to reflect inflation and other increases in cost.