New Funding Resources 
As a hard money lender in DC area, I believe that there are two key areas that every investor should continuously focus on. The first one is how to make money. It includes how to find good deals, how to manage your rehab process and how to build a good team that will propel you forward. The majority of your time as a real estate investor should be spent on tweaking, improving and learning from your success and mistakes in this area.
The other area is equally important. Unfortunately, as a hard money lender, I often see real estate investors ignoring it. I am talking about managing your risks. We’ve already discussed protecting your assets by forming an LLC and not doing business in your personal name. Today, I would like to focus on obtaining the right kind of property insurance.
Different Types of Property Insurance
Homeowner’s Insurance
If you own a home, chances are that you are paying for homeowners’ insurance. In fact, unless your house is free and clear of liens, your mortgage company will require you to have homeowner’s insurance. They do it because they use your home as collateral for their loan and don’t want to lose money if something happens to it. The insurance policy refers to the homeowner as “the insured” and the lender is called “the mortgage.” If the insurance company pays a claim, it typically pays to both the insured and the mortgagee to protect the interests of both parties.
Landlord’s Insurance
The same priciples apply if you own an investment property. If you finance the purchase of your investment property with the lender, that lender would want their asset to be insured. But you would need to get a different type of insurance policy. If you are currently renting your investment property, you will need to get an insurance type called a landlord policy. There are several key differences between homeowner’s and landlord’s policies.
The first difference is the type of liability coverage. The liability portion of your homeowner’s insurance often covers you and your family members who live with you in the home, regardless of whether the accident happens in your home or not. Landlord insurance, in contrast, typically only offers a liability coverage relating to the rented premises. If a tenant is hurt and you are found legally responsible, the liability coverage on your landlord policy may help cover the resulting medical expenses or legal fees.
The second key difference is the personal property coverage. While homeowners insurance may help protect many kinds of belongings, such as furniture, clothing and computers, landlord insurance typically only provides coverage for items used to service the rented property (such as tools, a snow blower or a ladder you might keep there). Also, it does not protect your tenants’ belongings or any of your personal items.
As a private lender, I think it’s important to understand the difference between homeowners and landlord policy. However, there is one key thing you need to remember. They are NOT the right coverage for your fix and flip properties. The right policy for you is a policy called builder’s risk.
Builder’s Risk Insurance
Builder’s risk insurance comes in several forms and shapes. Some policies cover major renovations, tear down of existing homes and complete new constructions on vacant lots. Others are designed to cover rehabs of the homes that are structurally sound, but require some renovations to make them marketable. We strongly recommend the latter.
Builder’s risk insurance typically protects against fire, vandalism, theft, water damage, wind and hail. Typically, it covers the home itself as well as the materials, tools and supplies that belong to the owner. It usually carries higher liability limits should something go wrong. For example, it might protect you when a worker or someone else, invited or not, is injured on site. Another example is when a neighbor’s property is damaged as a result of the project (a tree falls on your neighbor’s car).
Not all insurer’s offer builder’s risk policies. Builder’s risk insurance is more expensive than homeowner’s or landlord’s insurance. However, it helps you manage the risk by transferring it – for a price – to the insurance company. For more information about builder’s risk insurance, read our blog on insurance for real estate ivestors: how to get, when to get it and how not to waste money with it.
Vacant Property Insurance
Builder’s risk is different from a vacant property insurance policy. Vacant insurance, as the name suggests, covers a vacant home. It doesn’t cover the vacant home undergoing an active renovation. This is why a vacant insurance policy costs less that builder’s risk insurance. It’s an excellent choice when your renovations are complete and your builder’s risk insurance is about to expire, but you need to keep your property insured as it sits vacant awaiting a new buyer.
New Funding Resources is a top private money lender in DC area, Maryland and Virginia. Our local expertise helps our borrowers grow their profits, control their risk and capture real estate investment opportunities. If you are an investor rehabbing properties in DC, MD and VA and need a recommendation for a reputable insurance company give us a call at 240.436.2340.
Leave a Reply