How To Protect Your Investment Property

Over the years, Mark and I have talked at length about picking the right real estate investor insurance policy—something we see overlooked by both new and experienced investors alike. You should consider going beyond just choosing a basic policy; adding other types of coverage that are often deemed optional could give you more business security. On this point, Mark is emphatic. His first recommendation? It’s one that’s on everyone’s mind since Hurricane Harvey: flood coverage.

If you look at the Gulf Coast along Texas, in Harris County or Brazoria County, five out of six of those $100K-plus homes didn’t have flood coverage. And the reason they didn’t was that they didn’t realize the property was prone to flooding. The flood zone map said they weren’t, in many cases.

Flood definitions are defined by the National Flood Insurance Program (NFIP) and vary according to how the government has mapped regional flood zones. Except that these maps, Mark explained, are outdated. This puts real estate investors at a disadvantage. If you don’t realize your investment property is in an area prone to flooding, you won’t necessarily think to have adequate coverage before disaster hits. Making this determination is as easy as making a call to your insurance agent.

An investor can have their agent pull a flood zone determination, which will cost them $7-10. They should do this every year, especially if they are in an area like Houston or Dallas-Fort Worth or an area that’s really expanding with a lot of construction because that means concrete covering up the dirt that used to absorb the water.

But, even in cities like Sacramento, California, which one would not necessarily associate with flooding, the risk is there as well. The Sacramento Valley is protected from the rivers that make up the San Francisco Bay Watershed by a series of levees—several of which have a high chance of failure according to recent news articles. The region’s sunken geography, growing population, and ongoing development have only increased the vulnerability to flooding. With scenarios like this in mind, Mark cautions:

I recommend that everybody get a quote for flood insurance, regardless of where the investment property is. It costs nothing for investors to get a quote on the premiums for flood coverage. Buy the insurance or not, but at least you know and can do a cost-benefit analysis. Investors should look at the risk and budget accordingly.

He also urged real estate investors to consider earthquake insurance. Outside of California and along the west coast, this option is often ignored. Mark points out, however, that “it’s something that people ought to look at in states that go up the Mississippi River.” Of course earthquakes, like floods, can happen even where they don’t typically happen. So it’s not a bad idea to think about expanding your coverage no matter where you live.

Unfortunately, Mark added, in addition to rejecting flood and earthquake coverage, many new real estate investors just buy the cheapest policy available. They mistakenly believe that part of keeping costs low is cutting corners across the board. Of course, they regret this decision later when an unforeseen calamity strikes and sinks their potential profits. Ensuring that you have the correct policy for your property and the right amount of coverage is the only way to protect your investment and help keep future expenditures down.

The main lesson here is that spending a little extra on your investor policy now could go a long way in saving your real estate investment later.