As a landlord (or a prospective one), you need to protect
yourself against the damages that can potentially occur to
your properties and your overall financial health. Mostly
likely, you won't need all of the forms of insurance I'm
going to describe in this article; however, you should know
what each one can do for you in case you ever have need of
them.
On a general note, I can't stress enough the importance of
having adequate insurance, especially if landlording is
your entire livelihood. Compared to catastrophic losses
(fire, floods, tornadoes, liability suits, etc.), insurance
costs are definitely a bargain! Types of Insurance Title
insurance—this establishes who owns the title and
prevents you from throwing away money on a property that
might legally belong to someone else.
Fire insurance—definitely don't skimp on protection
in this area! Recommendation: insure your properties for
top value, or the insurance company may discount their
payment. For example, if you paid $100,000 for a house and
it's worth $120,000, but you insure for only $100,000, then
that hundred-thousand is all you'll get.
Liability insurance—be sure to have this insurance.
Recommendation: read the policy carefully and note any
exclusions! If necessary, pay the extra money to have
specific exceptions included in the policy. If you do any
building, remodeling, or painting, you may also want to get
a separate contractor's insurance policy
Extended coverage—this is also called "comprehensive"
coverage or a "package policy." It's often offered along
with the standard fire insurance policy, and it's an
investment well worth paying for. This type of coverage can
protect you from damage caused by a variety of
phenomena--hail, windstorms, smoke, rioting, falling trees,
vandalism, freezing temperatures, landslides, accidental
water discharge from burst pipes, and so forth. Tailor the
coverage to your particular geographic area. Earthquake
coverage—always a separate policy. If you live in an
earthquake-prone area, you should definitely have this
policy. Nature's power can destroy your property in a
matter of seconds!
Flood insurance—insurers consider flood damage
different from water damage caused by burst pipes and such.
So, if you live in a flood-prone area, be sure to have this
coverage.
Vandalism/malicious mischief—cheap insurance and
worth the price. It can pay for repairs caused by vandals
who damage or destroy your property.
Property improvements insurance—a standard building
policy doesn't cover damage to such items as swimming
pools, fences, signs, parking lots, and other areas. So,
because weather can badly damage these items, it pays to
have them covered as well.
Business interruption insurance—basically, this is
"loss of rent" coverage. Here's an example: if a fire
damages one of your properties, making it unlivable for a
while, then you'll lose rent until that damage is repaired.
In the meantime, fixed expenses keep piling up! With
business interruption insurance, the insurance company
compensates you for loss of rental income over a specified
period.
Mortgage insurance—the purpose of this insurance is
pay off the balance of your outstanding mortgage if trouble
strikes. Believe me, it's well worth the price. Check
with a lender for the type you need.
Boiler/machinery insurance—this is wise coverage to
have with larger properties. Boiler explosions can have
horrible results. Needless to say, claims can be large for
these terrible accidents, and you definitely don't want to
shoulder the expense. This insurance is also a good idea
because the insurance company will inspect the equipment on
a regular basis. In effect, the insurance company becomes
your partner in maintenance and safety. Other Forms of
Insurance to Consider Management insurance--if you manage
properties, get management insurance so the insurance
company handles any lawsuits for you.
Umbrella policy--it's called "umbrella" insurance because
it's designed to give liability protection above and beyond
the limits of other insurance policies; that is, it kicks
in when the liability on other polices has been exhausted.
Depending on the insurance company, you can get an umbrella
policy with an additional one to five million in liability
protection.
Workers compensation insurance--a definite must if you have
employees and/or contractors working for you. Where
accidents are concerned, it's better to be safe than sorry.
This insurance also protects you against frivolous lawsuits.
Legal Protection--legal protection is a kind of insurance
so it pays to have the services of an attorney for two
reasons: To handle lawsuits. To handle insurance companies
reluctant to pay in the event of covered damages.
If you find a personal lawyer too expensive, consider using
pre-paid legal services. They're inexpensive, charging a
monthly fee in the range of $10-30 a month. Check with the
American Prepaid Legal Services Institute for a partial
listing of plans and services. Or try Pre-Paid Legal
Services, Inc. for coverage of civil cases or work-related
criminal cases.
Key Point: Don't be "penny wise and pound foolish." In
other words, never skimp on insurance; your property
investments are too valuable to worry about saving a few
dollars on premiums.
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment and the creator of the renowned "Buyers
First Program" who's been in the business for more than 30
years. Sternberg's deals have totaled over $750 million and
he's been to the closing table more than 1,500 times. For
more, visit http://www.askjacksternberg.com
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