The Ins and Outs of Property Insurance Coverage for Rental Properties
By Nina Hamilton-Lee, B2R Finance Director of Operations
If you had to replace your rental home, would your property insurance policy be sufficient to pay the replacement cost?
A water leak, fire or hail storm could cause unplanned financial distress on your single-family rental portfolio and your forecasted income if you aren’t prepared.
Sometimes rental investors assume that buying property insurance on a rental home is the same as buying insurance on their primary residence, but it isn’t.
Commercial loans require borrowers to have commercial property insurance, not a residential homeowner’s policy.
Borrowers seeking a loan from B2R Finance must obtain comprehensive “all-risk” insurance — also known as special form insurance. All-risk commercial property insurance provides 100% of full replacement cost for loss from any cause except those that are specifically excluded in the policy. For example, the policy may cover perils such as fire, lightning, storms, smoke, vehicles, sprinkler leakage, vandalism, falling objects, snow and ice damage, but might exclude other potential perils such as floods, mold, earthquakes and terrorism.
The insurance policy must have a deductible of less than 5% of the lesser of a) full replacement cost or b) the initial principal balance of the loan if calculated on a per property basis, or 2.5% if calculated on a portfolio basis.
Insurance coverage for B2R borrowers must also include windstorm, business interruption and general liability coverage.
A real estate investor has a variety of insurers to choose from in purchasing commercial property insurance, so we recommend that real estate investors shop around. Investors will want to do their due diligence on the insurance company to ensure it is licensed and creditworthy. You might consider getting referrals and investigating how fast the company is in processing and paying claims.
B2R Finance requires that the insurer of property financed by the company be domiciled in the U.S. and/or licensed in the state where the investment properties reside. The insurer must also meet certain claims-paying standards or financial ratings as specified by B2R in its underwriting guidelines.
There are several different ways that a property insurance policy can be written, so it’s important that real estate investors understand the different types, what they cost and what their lender requires.
Once your policy is in place, it’s a good idea to review it each time your policy comes up for renewal. Discuss with your insurance agent whether any changes or adjustments should be made based on any changes to your rental portfolio.
For specific questions or more information on the property insurance required by B2R Finance, contact Nina Hamilton, Director Operations at nhamilton@B2Rfinance.com.
The information on this page is provided for informational purposes only and does not constitute investment, real estate, or legal advice. This information should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. No representations or warranties whatsoever, express or implied, are given as to the accuracy or applicability of the information contained herein. The information may be modified or rendered incorrect by changes in the marketplace or developments in the law, or for any other reason, and may not be applicable to any individual reader’s facts and circumstances.