Investing in real estate property is not like other retirement investments. It requires owners to be more hands-on and involved than typical stock options. Those hoping to use a self-directed IRA to invest in real estate will need to investigate market trends, learn the local real estate laws, and thoroughly inspect the property before investing. The plan owner will also need to evaluate potential liabilities stemming from the property, such as mold, types of tenants, older appliances, taxes, and more. The amount of work needed for such investments would surely scare anyone away from this option. However, the payoff for real estate investments can be enormous if executed correctly. One of the biggest decisions plan owners face when it comes to their real estate investment is the type of insurance it will have.
Investment Property Insurance
No matter where the property is located, it will need some type of insurance, or a combination of coverages. If the property is located in another state from where you live, extra precautions must be taken so that you completely understand the area and local safety requirements. Since these expenses must be payed from IRA, some investors may be apprehensive about purchasing adequate coverage and think a basic policy will be enough. However, having the wrong type of coverage could end up being more detrimental for your retirement funds in the long run if a disaster were to happen.
Some types of insurance property investors should look into are:
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- Flood insurance
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- Wind and Hail coverage
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- Third-party liability coverage
- Replacement Cost
Even if a property is not in a designated flood zone, it may be wise to investigate further regardless. For example, Hurricane Harvey affected homes outside of the regular flood zone and 4 out of 5 homeowners didn’t have adequate coverage. Third-party liability coverage is another point often overlooked. If someone, other than you or the tenant, were to injure themselves on your property, would your insurance cover the damages? What is the policy regarding injury to pets or destruction caused by pets? These are the little details plan owners must be wary of before making a real estate investment.
There are still other points to consider as well. A standard homeowner’s policy requires that the building be occupied during a claim. If no tenant was residing in the space at the time of the claim, or it was vacant for at least 30 to 60 days, the insurance company could deny paying on the claim. If the investor decides to renovate the property or update a few features, a general homeowner’s policy may not cover liability for the builders. This may be an extra expense for a building project that owners will need to include in the total budget.
While setting a realistic budget is essential for real estate investments, the one area investors will not want to compromise is insurance coverage. After all, this is your hard-earned retirement money and it should be guarded with the utmost care.