What Real Estate Investors Must Know About Insurance and Risk Management
The real estate investment market has seen considerable growth in the recent past. The price of homes is on the rise, and relaxation of many demands and regulations on investors has stirred significant interest from many new economic groups. Lenders have lowered credit score requirements, and waived some previously standard documentation.
For these and other reasons, newcomers have flocked in record numbers to this game. None of this, however, will guarantee a profit on your investment. As you increase the dollar amount of your investment, so do you also increase the associated risk.
It would be wise to become familiar with a few different forms of insurance available to real estate investors.
Title and liability insurance are among the most common. Title insurance is designed to protect against issues that arise over the legal transfer of title from seller to buyer. A title company will search necessary databases to ensure that the property is free associated burdens, so that it may legally change hands. This type of insurance will cover potential economic loss as a result of these and other paperwork, filing, and tax issues.
Liability insurance protects a property owner against injuries incurred on or as a result of using the property. The insurance does not cover the property owner, but rather it was designed for injuries sustained by a third party. So when the door-to-door vacuum salesman slips on his way up your walk, you can rest easy, because your liability insurance will cover his medical bills and any resulting settlement lawsuit.
There are many other forms of insurance, which have been designed to cover any number of possible mishaps. Hazard insurance, for example, will cover damage resulting from earthquakes, tornadoes, hurricanes, flooding, fire (natural), and dozens of other factors beyond human control.
You can buy insurance for chemical spills, fire (from, say, a candle), electrical failures, vandalism or theft, faulty plumbing or wiring, and so forth. There’s even a policy designed specifically to cover large appliance failure.
Landlords may purchase insurance to cover lapses in rent payment, tenant-related damage to the property, and abandonment.
If you finance your property with a loan, the lender will likely require that you purchase mortgage insurance, which pays out to a lender (not you) in the event of default or disaster.
The price of insurance varies according to the degree of coverage desired, and the associated deductible. Read the policies carefully, noting any fine-print issues which may be used later to deny coverage. There is no law requiring that you use a specific insurance company, so do your research first. Shop around, and look for the greatest coverage at the least out-of-pocket expense. Find the policy that is best-suited to your particular needs.
Paulie Sabol, often called the ‘legal bank robber’ for his real estate financing and bank owned foreclosure investing, is a nationally recognized trainer of real estate investors and financial thinker. Sabol, has personally completed 100’s of real estate investments, and helps real estate investors learn to make more money with creative investing. Visit his site at www.reiunion.com/rei.html
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