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Expecting the Unexpected: Building Your Reserve and Finding the Right Insurance

Recent events have served as a reminder that no matter how well you plan, events will always occur that you failed to anticipate. Thankfully, financial success is not reliant upon foreseeing financial setbacks, but it does require preparing for them. By building your reserve and purchasing the right insurance, you can make sure you’re prepared no matter what happens. 

Building Your Reserve 

Having an emergency fund is vital for anyone’s financial stability, but for those who invest in rental properties it’s even more important. While having any sort of emergency fund is better than nothing, there’s a difference between having an emergency fund and having an appropriately sized emergency fund.

So how much do you need? Part of what makes putting enough money in reserves so difficult is that there is no one size fits all answer for how much is enough. How much you’ll need in reserves depends on your situation and the properties you own. The general rule of thumb is that your reserves should cover about six months of expenses including mortgage payments, insurance, and maintenance. This way you could remain financially stable even if you lost access to your income sources, whether that income source is a job, rental payments, or a combination of both.

Finding the Right Insurance 

Having the appropriate amount of reserves can help you through financial setbacks, but plenty of events may still occur that would require more than six months of savings. Helping to cover these major setbacks is what insurance is for. But just like having an emergency fund doesn’t mean you necessarily have an appropriately sized emergency fund, having insurance doesn’t mean you have the right insurance. Not all insurers are created equal. Some insurance providers are more aptly suited to insure rental properties. 

We spoke with our preferred vender, Daniel Reeder from State Farm, about what sort of insurance investors may need for their rental properties.

What criteria should insurance policies for single-family rental properties meet?

Daniel: Insurance policies for single-family rental properties should meet three main criteria: adequate coverage written on a replacement cost basis, loss of rents coverage, and liability coverage.

Can you tell us a bit more about adequate coverage and why you suggest having it written on a replacement cost basis?

Daniel: One of the criteria you should look for in a policy is adequate coverage to pay off the mortgage or cover the purchase price of the property in the event of a total loss. Policies can do this through either a replacement cost basis or actual cash value. Having the policy written on a replacement cost basis and not an actual cash value is generally the best policy for single family rental properties. Here’s why – if the roof gets blown off in a storm a policy with replacement cost would fully replace the roof with a brand-new roof of the same type. With an actual cash value policy, the roof has depreciated with age and you may not receive enough coverage to restore the roof without paying more than your deductible out of pocket.

Why is loss of rents coverage an important criteria for those investing in rental properties?

Daniel: When your policy includes loss of rents coverage, if for any reason the property is damaged under a covered claim and is not livable for the tenant, the insurance pays the agreed upon amount of rent in the lease each month that the property is being repaired.  

What does the liability coverage in a policy cover?

Daniel: The liability coverage protects the investor’s personal assets. In the event the owner of the property gets sued by the tenant this would be a heavy layer of protection. Investors may also want to purchase a personal liability umbrella policy in their resident state. These are extremely inexpensive and a substantial layer of coverage over all assets.  

You can’t predict the future, but you can prepare for it. If you invest in rental properties, building your reserves and having the appropriate insurance can help you during the tough times and bring peace of mind during the good times. 

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