
Sticking to the Budget
We’ve all been there. You craft a meticulous budget, feeling all sorts of proud. Fast forward a few weeks, and that initial enthusiasm starts to wane.
Buying your first home or investment property is exciting but can easily get overwhelming. From finding the perfect house, scheduling inspections, finding a mortgage lender, the last thing on your mind may be property insurance. It does not have to be hard, these next few tips will help you figure out the basics to ensure you’re getting the best coverage for your property!
First time buyers fall into one of the following categories.
First time homebuyer (whether multi-family or single family – Owner will be living in the house or one of the units.
Each will require property and liability insurance policies, however different policies are needed, depending on the occupancy of the property.
The following are some basic items to keep in mind when looking to purchase an insurance policy.
First, it is always a good idea to check the rating on a company that you intend to do business with. You generally want to go with an A rated carrier. The most widely respected service in the insurance industry is AM Best – http://www.ambest.com/, you can search by carrier to see their rating and financial strength.
The coverage amount needed is the cost to rebuild the property in the event of a complete catastrophe. This amount is not calculated based on the market value of the property, since you still own the land that the building is located on, even if the property were to be completely destroyed.
For example, in areas with a strong real estate market, the market value of the home can be $1 million, but you may only have to insure it for $700k, because that is what it will cost to rebuild the home in the event of a total loss.
Replacement cost (RC) is the amount it would cost to replace an item if it were brand new, as opposed to actual cash value (ACV), which is the depreciated value. For example, you purchase a couch for $700 and use it for 5 years. If you want to sell it, you may not be able to sell it for more than $250. If you don’t have replacement cost and the couch was destroyed in a fire, you are only going to get the current value of $250 from the insurance company. If your policy has replacement cost, the insurance will give you the full amount of $700, which is what it will cost to buy a brand new couch.
Most insurance policies have a deductible. A deductible is thee amount the property owner is responsible to pay toward the damage, before the insurance carriers pays towards the property damage. Once the damage exceeds the deductible, the remainder of the property damage will be paid by the insurance company.
As a property owner, you are responsible for maintaining the property. If there is an injury or property damage to a third party, due to your negligence in maintaining the property, you are responsible. Most insurance policies will provide liability coverage on the policy. Liability coverage is typically provided with limits of $100k to $1 million. This coverage will pay for your legal defense and indemnification, should you found liable.
As a condo or co-op owner, your insurance requirements are different from a standard home owner. In most cases, the condo association has a master policy which insures the common areas of the buildings. The individual unit owner is responsible for the interior of their unit, along with the personal property inside the unit, such as the kitchen, the bathroom vanities, the flooring, light fixtures etc.
The association will have by-laws, which will determine what the unit owner and what the association is responsible to insure. Its recommended to review the by-laws prior to purchasing a policy, so you are aware of what your responsibility to insure in your unit.
When a property is under renovation, whether it be a home, commercial property, you may need to purchase additional coverage, or a separate policy completely, for the renovations. Depending on the extent of renovations, duration of project and percentage of the building that will be vacant, different policies may be more applicable. It’s best to discuss this with your insurance broker the specifics of your project, so the appropriate policy can be purchased.
Rental properties require different insurance than an owner-occupied property.
Owner occupied properties generally need a standard home policy and rental properties typically require a Dwelling Fire policy. Dwelling fire policies are usually offered for 1-4 family rental properties. It is very important to provide the accurate occupancy of the property to your insurance professional, so they can provide you with the most suitable policy.
This article is designed to provide fundamentals of what you should be discussing with your insurance professional. Lots of other items factor into the insurance coverage needed for your situation.
Each will require property and liability insurance policies, however different policies are needed, depending on the occupancy of the property.Be sure to reach out o a qualified insurance professional to help you with your insurance needs.
Chesky Klein
Principal at Oak Tree Insurance Services LLC
Brooklyn, NY
Valery is a 30 something millennial, Latina, entrepreneur at heart, first time mama, real estate investor, bookworm, board game enthusiast, and dreamer.
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