Any good real estate investor knows how important insurance is. Insurance is one of the reasons I think real estate investing is one of the best forms of investing out there! There are five types of insurance that are especially important to know about.
Title Insurance: Make sure you get title insurance. Title insurance will cost you up to 1% of the loan amount, but most of the time it’s less than than that. It can even be as low as 0.5%. I’m very aggressive about this insurance and the title companies I work with know that!
I had a situation out on the east coast once, where we purchased a property, paid for the title insurance and everything was in order. But there was a lien against the property that the title insurance company did not pick up on. It was a $900 lien for weed cutting placed by the city on the property. I simply picked up the phone and called the title company that issued the insurance. That company had to pay the $900 and satisfy the lien. That insurance was worth it to me!
I knew a person who once bought a commercial piece of property, but he did not get title insurance. After everything was sealed up, he discovered there were seventeen different liens made against the property that were for much more than the property was worth. He got himself into a lot of trouble! That’s why title insurance is so critically important. You should have it on every property.
Hazard Insurance: This is another type of insurance that we always use in our insurance policies. I get hazard insurance specifically with lost rents covered. Once I had a property, a single-family home, that had a kitchen fire. The hazard insurance more than covered the claims that were on it, and we were able to fix it up and sell it. But the lost rents coverage is an added benefit. So while I had to move a tenant out in order to properly repair the property itself, the insurance company paid me 2-3 months of lost rents coverage. This insurance means that I don’t lose any income on that property while it’s being repaired.
Million Dollar Umbrella Liability Policy (MDULP): Even with a LLC, I think it’s important for you to get the MDULP, especially if you have several properties in one area. Remember, you cannot be over-insured in this business. The MDULP protects you when it comes to someone trying to go after you and your assets. And after you become a millionaire, having that kind of protection is going to be important. In most cases, if you’ve built the business right, you’re going to have some cash reserves, whether substantial or not. In addition to that you’re going to have a lot of equity in your properties. Therefore, having this levels of protection is critical.
Worker’s Comp: (or Certificates from your Contractors) If the workers from the company you hire get hurt on your property and they don’t have worker’s comp, then they can actually come after you. Now you can fight if you have the LLC protection. But it’s just a whole lot safer to have them provide their certificates of worker’s comp beforehand.
Flood Insurance: You need to know, before you ever place an offer on a property, if the property is in a flood plain where the government requires you to purchase flood insurance. When we talk about having a $300 cash flow, if you’re going to buy and hold property, you’re going to be required to have flood insurance. Even if you buy and flip, you’ll have to have flood insurance if it’s in a flood plain.
But what investors don’t realize is that flood insurance is expensive and takes out of the cash flow. Most of the time you don’t have to have flood insurance. But whenever you’re figuring your spread of $300 a month, when we talk about PITIM, you need to make sure flood insurance is factored in there. This helps you know if you’re really going to have a positive cash flow.
Not having insurance has led to some costly mistakes for my friends and I! I definitely recommend being over-insured.
Have any questions about real estate insurance? Let me know in the comment section!
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