Actual Value or Replacement Cost?

[Joe Delia]

I'm sure there are many topics on this throughout bigger pockets history, however, what are you doing TODAY, and why? What do you see as the pro's and con's of each policy?

This is assuming buy and hold but feel free to open it up to other strategies as well.

In addition, what deductible are you choosing and why?

[Tim Norris]

This may help as well:

Replacement Cost (RC):

Replacement Cost coverage allows partial loss claims to be settled without depreciation.

EXAMPLE – The cost to repair damage of a partial loss is determined to be $40,000.
The deductible is $ 3,000.
The insurance company will pay no more than $37,000. Realize that initial settlement is made with depreciation levied. As repairs are made, the insured
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Actual Cash Value (ACV):

Actual Cash Value settles losses with depreciation levied against the damaged items/portion of the property. Depreciation varies relative to the remaining useful life of that which was damaged.

EXAMPLE – The value of the damage is determined to be $40,000. The damage is determined to be depreciated by 20% (used to simplify the example. Many depreciation reports are lengthy and laborious)...

The deductible is $ 3,000

Step (1): 20% of $40,000 = $8,000 (Depreciation levied)
Step (2): $40,000 - $ 8,000 = $32,000 (Depreciated value)
Step (3): $32,000 - $ 3,000 = $29,000 (Settlement less deductible)

The net settlement is $29,000...

ACV, for many RE investors, could be the most cost-effective option, believe it or not. As most insurers settle claims at "retail" costs, many times even depreciated settlements are sufficient to make repairs due to the ability of most of us to garner labor and materials at less than "retail" costs...something to consider when making the choice between ACV and RC...