7 Important Types of Insurance for Real Estate Investors
Buyers of real estate investment property should be aware of the risks associated. Consider these seven types of insurance.
Investors may risk damage to their properties, injuries to people on those properties, title problems, and other concerns. This article identifies seven types of insurance that Texas real estate investors may need, either to cover themselves and their businesses, or to cover their properties or projects. It also describes the insurance coverage that real estate agents, developers, and appraisers should have in their professions.
A typical homeowner’s insurance policy (that would be used on your primary residence) usually won’t fully cover true investment properties. That’s where different types of landlord insurances come in. Texas does not require real estate investors, as a matter of law, to get any type of coverage. But the risks make insurance worth the expense.
Types of landlord insurance coverage
Image by Paul Brennan from Pixabay
For real estate investors, insurance serves two main purposes. First, it covers investment properties against various kinds of damage. This includes physical damage, such as from a storm, fire, or accident. Second, it protects the investors themselves from liability for accidents and injuries that may occur on their properties.
Many landlord insurance policies will cover a combination, if not all of the types of coverage listed below. However, you also have the option to pick and choose which types of coverage you want by piecemealing several policies.
1. Commercial real estate insurance
A commercial real estate insurance policy is meant for commercial property. If you are buying a duplex or single-family home as an investment property, commercial insurance is not for you. Commercial property is a space used for business purposes rather than a living space. The exception to this rule is for residential properties with more than five units.
At least some level of commercial real estate insurance coverage may be a condition of a loan agreement. Insurance for these properties can be offered in bundles that cover physical damage to a property from weather events, accidents, criminal acts, and even vehicles and data breaches. It may also provide some liability coverage for injuries occurring on the property.
2. Flood insurance
Flood damage is not part of a standard real estate insurance policy. Lenders may require investors with properties located in designated flood areas to get flood insurance through the National Flood Insurance Program. This depends on your lender and whether the property is located in a flood area.
3. Hurricane insurance
Photo by Guilherme Christmann on Pexels
Homes and businesses on or near the Texas Gulf Coast may need additional insurance to cover hurricane damage. Many commercial and residential policies do not include damage from wind or hail for coastal properties. The Texas Windstorm Insurance Association offers coverage for these types of damage.
4. Hazard insurance
Tornadoes, fire, hail, fallen trees, and theft are often covered by hazard insurance. It’s usually part of a homeowner’s or landlord’s insurance policy. If you choose not to have a broader landlord policy, you may still want to get hazard insurance.
5. General liability
Liability insurance covers expenses on another person’s behalf, such as your renters or business tenants. When a person suffers an injury because of a dangerous condition on your property, you may be liable to them for damages. This is known as premises liability. Generic landlord insurance policies may provide some liability coverage, but investors may want to obtain additional coverage through a general liability policy.
6. Real estate umbrella insurance
All insurance policies have a maximum amount that they will pay for a claim, typically known as the “policy limits.” Umbrella insurance provides supplemental coverage in case damages in a premises liability claim go over the limits of someone’s other policies.
If, for example, an injured person cannot recover all of their damages from an investor’s landlord or general liability insurance provider, they can continue to seek compensation from the investor themselves. Umbrella insurance provides additional coverage in that situation, protecting the investor from losses. It goes above and beyond your current policy limits.
7. Title insurance
First, what is real estate title insurance used for? In rare cases in which there is a dispute to the title of the property – as in, who legally owns it – the insurance will help pay for defending against the lawsuit. Sometimes, clerical errors (typos) will happen on the title, in which you may have to go to court to fix it. Additionally, a previous owner’s unpaid property taxes may cause the county of the residence to attempt to seize the property. Title insurance helps in the scenario as well. Again, these situations are rare, but they’re extremely messy.
Most Texas real estate transactions involve title insurance, although it is not a legal requirement. Lenders insist on title insurance in order to protect their own investments. For investors, title insurance is important in case any problems with the title to the property arise after closing. This might involve people or businesses asserting a legal claim to the land, unrecorded easements or other interests, and unreleased liens on the property.
What about mortgage insurance for investment property?
Private mortgage insurance (PMI)’s main purpose is to offset the risk a lender takes when offering a loan with a low down payment. When investment properties are purchased through traditional mortgage lenders, a 15-20% down payment is nearly always required. As a result, private mortgage insurance (PMI) is not attached to a loan for a true investment property.
A gray area appears when an investor rents out rooms in their own primary residence. This is a case in which you can use the home for business activities while having put less than 15% down.
It should be noted that some lenders – namely private lenders offering hard money loans – will provide loans with down payments of as little as 10%. Plus, they don’t charge mortgage insurance. Efficient hard money lenders can pre-approve loans in 24 hours, and close them in seven days. Plus, credit scores are not as important for qualifying compared to traditional lenders. The drawbacks are higher interest rates and short loan terms. But these loans are valuable for fix and flip projects, as well as to give investors time to find longer-term financing.
Read more: How to Get a Hard Money Loan: 5 Requirements
How much does real estate investment insurance cost?
The cost of most types of real estate investment insurance will depend on factors like the location of the property, the claims history of the investors, and any other specific factors that could increase or mitigate the risks in a particular policy. The only forms of insurance that have reasonably predictable premiums are the following:
Flood insurance: ~$60-180 per month. The rates are set by the National Flood Insurance Program.
Title insurance: ~0.25% of the purchase price. The rates are set by state law and managed by the Texas Department of Insurance.
C.L.U.E. insurance reports for real estate
Real estate investors who are interested in residential properties might benefit from running a Comprehensive Loss Underwriting Exchange (C.L.U.E.) report as part of their due diligence process. This report compiles information on homeowner’s insurance claims made on residential properties during the preceding seven years. This can let investors know if a property has a recent history of damage claims. LexisNexis, a company that collects and compiles information on a wide variety of matters, provides C.L.U.E. reports in exchange for a fee.
Does a real estate developer need insurance?
Real estate developers may be involved in planning developments, preparing the land, and renovating existing structures or building new ones. They face a wide range of potential risks. The following types of insurance coverage can help them mitigate those risks:
General liability: Protects against premises liability claims from clients, subcontractors, and others.
Builders risk: Protects against damage to construction equipment, building materials, and structures, including weather and criminal acts like vandalism.
Professional liability: Protects against claims that may arise on the “business” end of the development process, such as project management.
Errors and omissions (E&O) insurance: Protects against claims arising from clerical errors and other mistakes in matters like obtaining building permits.
Environmental liability: Protects against liability for certain claims in areas deemed to be environmentally hazardous.
What types of insurance must real estate agents carry?
Real estate agents must have a license from the state in order to work in Texas. While they are not legally required to carry insurance, they are obligated to hold to their profession’s ethical standards. These coverages are good ideas for real estate agents and also for appraisers:
General liability insurance
Professional liability insurance
Capstone makes buying real estate easier!
Untangle yourself from the red tape and delays that big banks put buyers through. Capstone Capital Partners offer fast and flexible private financing for a wide range of Texas real estate projects. Better yet, our experienced team of Texas investors and lenders handle your loan from application through servicing. Get to know your dedicated team and stop being treated like a number. Close fast with a hardworking lender you can count on!
Take the next step by answering some easy questions about yourself and your next project!
