Insurance | InvestingInProperties.com
A Lesson From Sandy: Underestimating Soft Costs
With hurricane Sandy about to deluge the Northeast, I think about how many investors undervalue their insurance when they are purchasing any piece of investment property…especially those investors that are just flipping houses. Too often property investors will consider the expenses that only add to the value of a property. I call these the hard costs of the investment. For example, renovations to a kitchen or bath or performing extensive landscaping on the property are things that will have a direct relationship to your overall costs, since they will actually be seen by the eyes of a potential buyer (or tenant).
But it’s also just as important to consider the soft costs of investment property acquisition when crunching all your numbers. These represent the costs not normally associated with “what’s up on the screen,” or rather, what the potential buyer (or tenant) will not see. Hurricane Sandy reminds us that an expense such as proper insurance should not be overlooked when estimating overall expenses. For property investors, underestimating the cost for insurance is simply foolish.
You should be considering getting full replacement cost for property in case of something catastrophic. Say, a hurricane like Sandy for example. If your asset is wiped out because of a flood or fire you do not want to be woefully underinsured. Thinking that you’re only going to hold the asset for a very short period of time in the case of flipping, or that your tenants don’t care what kind of insurance you carry is terribly shortsighted.
Obtain full replacement value coverage
Make sure when you purchase any investment property that you have it properly insured – and that means obtaining full replacement value coverage. It’s extremely important to spend the extra $100 or $200 to make sure that you cover yourself in case of catastrophe. I know it’s not easy to add more expenses when you think you can cut corners since prospective buyers are not going to see this particular expense. But in the light of this current hurricane bearing down on the Northeast, it’s foolish to shortchange and not fully protect yourself financially in the event of a real catastrophe to your investment property. Better to be prepared and be safe than sorry. Always protect your assets and add an inflated figure for insurance to your list of expenses that you’ll have to satisfy on a monthly basis.
Savings through deductibles
Of course you’ll want to shop around for insurance carriers to find the best deal, but again, make sure that you’re looking to get full replacement value for the property. Your investment property is too valuable to risk taking such a huge loss (the difference between full replacement value and market value in insurance parlance) in case of catastrophe. If you’re going to save on insurance the best way to do it is through obtaining a higher premium deductible amount on the house. So instead of a $500 deductible, consider going with a thousand dollars or more for each claim’s deductible amount. This will at least help defray the added cost of getting full replacement value insurance on the property.
photos courtesy of clubfrontier.org, news.cnet.com, ibtimes.com, genins.com, thectrealtyblog.com
Filed Under: Current Events Tagged With: Business, Business and Economy, deductibles, economy, flipping, flipping houses, full replacement value, full replacement value insurance, hard costs, house insurance, house insurance deductible, hurricane insurance, Hurricane Sandy, Insurance, insurance deductible, investment property, investment property expenses, investment property hard costs, investment property insurance, investment property replacement insurance, investment property soft costs, investment real estate, investment real estate insurance, investments, market value insurance, Northeast, property insurance, property investing, property investment, property investment insurance, Real estate, real estate insurance, real estate investing, real estate investing hard costs, real estate investing soft costs, real estate investments, real estate rentals, rental property, rentals, soft costs, tenants, U.S. economy
Property Investing in a Hurricane – Hope For the Best, Expect the Worst
A lesson to be learned from the latest storm…
Given the intense devastation this week due to Hurricane Irene, I must preach the rather trite notion of “be prepared” when purchasing an investment property. Unfortunately, it can’t be stressed enough. You can secure your property with extra flood insurance (if your insurance company will allow it), you can take all necessary precautions to lessen the damage of any potential storm to your investment, and you can (and must) certainly build into your pro forma income statement a generous allowance for emergencies.
But until you’ve waded through your property’s flooding basement in the middle of the night, wondering why you purchased this house, and ruining your decision to having done so, you eventually learn that each property you acquire will be an altogether new learning experience in how best to protect your investment.
So as mentio ned above, before bidding on any investment property, make sure to add a line item in your pro forma income statement as a provision for just such emergencies, like storm related damage. It’s very easy to blow this off, especially when you’re trying to make a deal work on paper before you purchase…That is, until you’re wading through your flooded rental house basement in the middle of a hurricane. Then you’ll ask yourself why you were being so miserly.
And don’t expect insurance to necessarily pick up the costs – some policies don’t allow for flood damage, and even if it is covered, you’ll still have a deductible to contend with too. And then there are the potential demands of your tenants if they have any of their possessions damaged.
Before making your first offer on a property, try to evaluate the likelihood for flooding based on the house site and topography of the property. You know if you’re on the bottom of a hillside, you can run into problems. Same with being situated next to any water source – be it stream, lake or ocean. Make sure you look at the house during or just after a big rain storm, so you can see first hand if there are any issues with flooding or water seepage in the basement area. In addition, check to see if the current or previous owner installed any waterproofing solutions already.
The two most common ways to waterproof a house involve landscaping and/or installing an interior curtain drain (also known as a French drain). Landscaping is the more expensive solution, and can involve not just re-grading the entire perimeter of a house, but installing an exterior curtain drain at the same time around the perimeter. (Of course, always look for simple solutions to a water problem first. For example, if gutters are broken or missing, or if downspouts are emptying directly onto the perimeter, rather than being led out many feet from the house, these can be inexpensively corrected.)
Installing a gravity-fed curtain drain system leading to a sump pit equipped with a sump pump inside the perimeter of the basement is the next best alternative for waterproofing. The main drawback: if the sump pump were to fail. That’s why, in a very flood-prone area, installing a secondary, battery run sump pump is always a good idea. Of course, if power were to go out for an extended period of time, you’re still going to have a problem. Unless you get a back-up generator to run during any power outage…
Whatever you decide, do not bother with basement wall waterproofing treatments that can be rolled on. Yes, they’re inexpensive – but they’re a waste of time. The walls may stay dry, but all that water behind the wall is just going to fall to the lowest points anyway – and will start coming up through the concrete basement floor slab at some point. This is due to all the hydrostatic pressure of the rising water table surrounding the house.
photos courtesy of ibtimes.com, chameleonmarketing.wordpress.com, reopropertyservices.com, travel2austria.com, dsbrody.com, minnesotabasementrepair.com
Filed Under: Fixing Tagged With: Basement, basement flooding, curtain drain, effects on property investing, Flood, flooding, French drain, Hurricane Irene, Insurance, property investing, Real estate, Sump pump, waterproofing