01 Mar Investment Property Value
When the value of your investment property does not matter. Value Versus Replacement Cost
How does the value of your investment property not matter? This might be true, if you paid an extremely low purchase price for some distressed houses in today’s current market, or maybe its that you are a consistent client of Lamborghini cars. In all seriousness, though, investment properties are probably the biggest ticket items you will buy in your lifetime. So, how can the value of the investment property “not matter”? It sounds ridiculous, but it’s true. The value of your investment property does not matter to one industry segment in particular– the insurance company. The insurance industry cares about your property’s Replacement Cost and not its value.
Properly Insuring Investment Properties:
Determining what amount to insure your properties for is always a very important topic. It is a topic where there are a lot of falsehoods and lost-in-translation myths. Determining the level of insurance to be placed on your investment property is essential to your long-term success, in the real estate industry.
Having too much insurance, and you are throwing money away. Having too little insurance means you are not properly covered. An investment property usually needs to be insured for what it takes to put it back the way it was before the “peril” (fancy insurance term for what caused the loss, such as fire). What does it cost to buy the shingles, bricks, lumber, electrical wiring, and put everything back together?
This figure doesn’t include a permanent foundation, in most situations, or the value of your land. In the event of a peril, the insurance company isn’t covering the dirt or the permanent foundation. That leaves us with insuring what it costs to put the same house, in the same condition, back on the same land and on the same foundation. (No, you can’t profit from insurance, so you are only covered for what it takes to make you whole.)
Determining the Property’s Replacement Cost:
Now, the crux of the conversation is this: the value of your investment property does not matter in a situation where you are determining Replacement Cost. The Fair Market Value of your property is what a knowledgeable and willing buyer would pay a knowledgeable and willing seller without duress.
While your property may be worth $250,000, in a fair market value situation, it may or may not take $250,000 to replace the building, in the event of a total loss. In today’s depressed housing market, it is possible that it may take you $350,000 to replace that house, in the event of a total loss, or in some situations it may only take $150,000 to replace the house.
When making the decision for the replacement amount, take into consideration your location, changes in the market, and inflation costs. A good starting place is to have a professional contractor come out and give you a quote on what it costs, per square foot, to replace your property. Then, work closely with your Insurance Agent to ensure that you are properly and correctly insured.
Wrapping Up: Make Sure Your Investment Is Covered!
While the value of your investment property may not matter to the insurance company, it does matter to you. The decision you make in this situation could greatly affect your property and your pocketbook, if you are not careful. Don’t let another day go by without verifying that you are properly insured. Don’t let Murphy’s law catch you unaware, when you least expect it!
Let Us Help:
Property owners can find experienced insurance agents at Asset Protection Insurance Associates (APIA). We are professionals who can help you protect your real estate with adequate insurance coverage. Let us help you with that!
What We Do:
At APIA, our mission is to build strong relationships with clients by providing exceptional customer service, competitive pricing, promptness in delivering important documents, and responding to questions and concerns. We have the flexibility to meet the unique demands of both investors and financial institutions.
Multiple policies can be a lot to track. APIA has built programs to put all your properties under one insurance policy. We’ve been helping investors save time and improve cash flow nationwide, since 2001. We also work with financial institutions and mortgage services to help simplify the process of REO and force-placed insurance.