I am preparing for a presentation called Warning: The Dangers and Risks of Real Estate that I am giving later this week. Members will be able to watch the recording of it once I do the presentation and post the recording at the link above.
In the presentation I go through each type of risk associated with real estate and then, systematically look at ways to mitigate or completely eliminate each risk.
One of the first things, and easiest, is evaluating the insurable risks… the risks that you can purchase insurance to transfer the risk from you as a Nomad to the insurance company in exchange for an insurance premium.
Insurance risks can be broken down into two major groups. First, the insurable risks that are most commonly insured then the list of risks that are insurable but we don’t often insure against them.
Commonly Insured Risks
- Personal Injury
These are the easy risks that you typically do buy insurance for when you buy insurance as a Nomad. If you’re getting a mortgage on the property, insurance for these risks may even be required by the lender before they even give you a loan. And, if for some reason, you stop paying on the insurance, they may force a policy of their choosing on the property (usually one that is much more expensive than you could get) and add it to your mortgage payment.
This insurance covers you in case there is a fire, lightning strike or hail damage to the property. Sure you’ll likely need to pay a deductible, but it prevents you from suffering unlimited losses.
Many of these policies include insurance against vandalism, personal injury and liability should a covered event occur at the property as well.
Again, these are the most common insured risks.
Less Commonly Insured Risks
There are other risks that you can get insurance for, but most people do not. Here’s a list of some of the risks you can get insurance for, but most Nomads will not.
- Loss of Income
- Rent Guarantee
Let’s take a look at each of these since they’re much less common.
Loss of Income
With insurance that covers loss of income, you’re insurance company will pay if something happens to your property where you’re unable to rent it. This type of insurance is much more common with businesses where the insurance company will pay should something happen (like a fire) that prevents the business from operating and producing income.
You can voluntarily buy flood insurance, but few people rarely do. It may be because it often has a fairly high cost. In some cases, if you’re located in a flood zone and the lender requires you get flood insurance before giving you a loan, you may be required to buy flood insurance.
It is extremely uncommon, but you can actually buy insurance that would cover rehabilitating your property should a tenant decide to cook meth in it. Rehabilitating a property that has been contaminated with meth can be an expensive process… easily in the tens of thousands of dollars. Insurance for this risk tends to be expensive and most Nomads will not opt to purchase it. They’ll instead take extra special care in screening and selecting tenants to reduce this risk.
Again, uncommon… but you can get insurance that will cover paying rent should your tenant not pay. Since this tends to be expensive insurance, most Nomads will opt not to get this insurance either.