How to Properly Insure a Fix & Flip Property
If there’s one thing that real estate investors of all experience levels have in common, it’s a need for adequate insurance on their investment properties. Whether you’re working on a short-term fix & flip, or holding a portfolio of rental properties, proper insurance is crucial for managing risk in your investment activities. While we all love to think that nothing terrible will ever happen to us – and let’s be honest, we all want to save money to increase margins – insurance is an absolute necessity and should never be considered as optional. If you’re working with a private lender to finance your project, you’ll be required to carry insurance as well.
That said, there are multiple types of insurance that you can carry depending on the investment type and what exactly you’ll be doing with the property. Let’s take a look at different insurance types and what they cover.
Most Flips Will Require a Dwelling Policy
Despite its name suggesting that someone might be living in the property, a Dwelling Policy is meant for vacant properties undergoing renovations, and protects against physical damage to the property. At any point throughout the course of your project, unforeseen events may occur – whether it’s a result of the construction process, bad weather, or vandalism, you never know when something might happen that could severely affect a given property. Vacant properties that are undergoing renovation are considered more prone to damage, and your lender will likely require you to carry a Dwelling Policy throughout the course of your project.
Builder’s Risk Insurance is a Must for Structural Renovations
Builder’s Risk insurance will be required for any property undergoing structural renovations on load bearing elements. This is a must in such cases, and your lender will be very thorough about ensuring that the property is covered for the duration of the project. Builder’s risk insurance not only covers the value of the property itself, but also construction materials, fixtures, and equipment. This is specifically for flips where structural work is required to get a property up to code, which is an extremely common scenario when flipping houses in Baltimore. However, builder’s risk insurance does not cover liability like workplace accidents or medical treatment for any person injured in the process of working on the house.
Don’t Forget General Liability Insurance
Many people confuse builder’s risk and general liability insurance, but they’re not at all the same. Though both are commonly required by private lenders, they are separate policies and cover separate issues. Where builder’s risk insurance covers the property and materials during structural renovation, general liability covers the people who are working on the project, and anyone else who may end up being injured on the property during renovation. General liability ensures that contractors and investors are both protected from lawsuits throughout the construction process.
What Happens if My Insurance Lapses During a Renovation?
If for any reason your insurance coverage ends or lapses during the construction process, chances are that your lender will be one of the first people to give you a call about it. If you don’t proactively renew your policy or obtain a new one, your lender may force place insurance in order to protect the underlying asset, i.e. the property that’s undergoing renovation. If something unpredictable were to happen, such as an electrical fire or catastrophic flood, insurance will cover the property and you won’t be stuck underwater on a loan. As is the case with most types of insurance – you probably won’t ever need to file a claim, but if you do, you’ll be very happy that you had it!
Planning Your Next Fix & Flip Project?
Pimlico Capital helps real estate investors fund all kinds of investment activities, including short-term fix & flips and long-term rental property financing. Give us a call at 410-855-4600, or fill out our rate calculator to get a quote for your next project today!