Real estate investment is a gamble in and of itself — may be that property will appreciate in value, and maybe it won’t; maybe you can flip that house for a quick sale, or maybe there are unforeseen complications that could turn it into a money pit.
In short, it’s enough of a risk to your financial well-being as-is without accounting for natural disasters, liability problems, or other complications. Here are some of the types of insurance that no real estate investor should ignore.
1. Hazard and Fire Insurance
Standard homeowners insurance will cover things like smoke and fire damage, damage from the weather (snow, sleet, ice, high winds), damage from vehicles, and theft or vandalism. One thing you should be aware of, however, is that certain hazards won’t be covered by your typical hazard insurance. If the area where your property is located is prone to certain kinds of hazards, then you may have to take out a separate policy for those hazards (more on that below).
Other things that aren’t typically covered by homeowners insurance:
- Vandalism and/or freezing pipes in vacant dwellings
- Defective construction or maintenance
- Industrial smoke and pollution
- Damage to foundations from ice and water weight
2. Flood and Earthquake Insurance
Where you live plays an important part in what your insurance will cover. For example, flood and earthquake insurance aren’t covered by most standard homeowners insurance. The same often goes for hurricanes, typhoons, wildfires, and other natural disasters. In such cases, you aren’t necessarily out of luck — it just means you’ll have to pay for separate coverage, which will mean a higher premium.
3. Liability Insurance
Most of us are already familiar with liability insurance — it’s mandatory for car insurance almost everywhere in the United States and protects you from being liable for injuries or damage that take place on your property. This is particularly crucial for anyone investing in real estate.
Keeping your property safe from natural disasters, vandalism, or other outside damage is one thing — but being responsible for medical bills because someone got hurt on your property can be another thing entirely. A property owner is responsible for keeping their property safe, and even a trespasser could theoretically sue if they get hurt on your property. Liability coverage will make sure you don’t end up on the hook for something like a slippery walkway, fallen tree, or another unforeseen hazard. This is important not just to protect your tenants, but also maintenance and construction workers.
4. Landlord Insurance
Suppose you rent out your home or a property you own for an extended period of time. In that case, you should definitely look into dedicated homeowners insurance, as your typical homeowners insurance does not cover this. Landlord insurance will protect your rental property, as well as liability should something happen to a third party while they’re on the property. This includes things like medical bills, property damage, and damage to some of the belongings inside the property.
5. Loss of Income Insurance
If you’re merely planning to flip a property, then you should have no real need of loss of income insurance. On the other hand, if you plan to rent out the property, loss of income insurance will make up for any lost income should the property become uninhabitable due to damage from a fire or other disaster. This can help avoid a major impact on your finances while you perform repairs to get the property habitable so you can start making income from it again.
6. Builder’s Risk Insurance
If you’re building your own home or other property rather than buying, builder’s risk insurance should be a vital part of your plan. This kind of insurance protects against damage from things like hail, lightning, fire, vandalism, and other mishaps during the construction process. These things typically aren’t covered in a standard policy, and coverage can vary widely from one insurer to another. Builder’s risk insurance isn’t just for construction, either — it’s also good for protecting your finances during a major renovation project.
7. Partnership Insurance
Many real estate investors will go into business with a partner, but not all partnerships will last through the ownership of the property. Partnership insurance is designed to provide liquidity to a business should one of the partners become deceased, essentially buying the deceased partner’s half from the next of kin (or whoever inherits that half of the property). This way, the deceased’s heirs receive what they’re owed from the property, without the surviving partner having to pay for it out of pocket.
Investing in real estate can be financially and personally rewarding, but more than one investor has fallen prey to disasters or circumstances that were no fault of their own. Don’t let yourself be caught by surprise, and know which types of insurance you’ll need before you fully invest your money.