Real Estate IRA investing is a proven way to build long-term retirement wealth, for investors with substantial risk tolerance and a long enough time horizon. But you also want to avoid throwing your retirement wealth down a hole… literally… if a sinkhole should open up underneath your investment property.
This is a very real concern for Real Estate IRA investors in certain parts of the country – particularly in Florida, where thousands of sinkholes pockmark much of Hillsborough county around Tampa, and throughout much of the middle of the state. The most dangerous counties for sinkholes are Hillsborough, Pinellas, Miami-Dade and Broward counties.
A 2010 study by the Florida Office of Insurance Regulation found that sinkholes cost insurers and landlords/homeowners $409 million in Florida in 2009 alone – and sinkhole activity has been on the rise.
It’s not covered by a standard HO-3 or landlord’s insurance policy, though. Like earthquakes floods and hurricanes, sinkholes require specific insurance product that are offered separately from standard homeowners insurance and landlord’s insurance policies.
Florida Real Estate IRA owners can buy insurance
Fortunately, Florida Real Estate IRA owners can generally purchase insurance protection against most sinkholes that directly affect the building and property. Florida law requires all insurers selling property insurance in the state to offer coverage against “catastrophic ground cover collapse.”
However, confusion frequently arises because under Florida law, “sinkholes” and “catastrophic ground cover collapse” are different things.
Definitions matter in the insurance world. In Florida, a sinkhole is defined as a “landform created by subsidence of soil, sediment, or rock as underlying strata are dissolved by groundwater. A sinkhole may form by collapse into subterranean voids created by dissolution of limestone or dolostone or by subsidence as these strata are dissolved.”
For the hole to qualify as a catastrophic ground cover collapse, and thereby qualify for coverage, the following circumstances must apply:
- The collapse of ground cover must be
- The depression in ground cover must be clearly visible to the naked eye.
- There must be structural damage to the building.
- The damage must be so severe that the insured structure has been condemned and inhabitants ordered to vacate the dwelling by a lawful authority in that jurisdiction.
This definition excludes many incidents. For example, if the sinkhole appears very gradually, or if it requires engineering instruments to detect the ground movement, or if the sinkhole is in the yard and has not damaged the structure, the policy may not pay benefits.
To protect yourself, consider specialized sinkhole insurance. These policies, available as a rider or add-on to your standard landlord insurance policy, may provide much broader protection. Sinkhole insurance may also pay benefits to reimburse you for damage to outlying property, business and personal belongings lost to the sinkhole. Policies may also pay benefits to pay for sinkhole remediation, such as structural bracing, designed to keep buildings from suffering further damage.
Again, all businesses licensed to sell property insurance on homes in Florida are required by law to offer sinkhole insurance, but you must buy it separately. It does not come with a basic landlord’s policy.
The average sinkhole related insurance claim is over $100,000.
Tip: Real Estate IRA investors should ensure that the beneficiary of any sinkhole insurance policy is the IRA itself – not you, the owner. If you list yourself as the beneficiary, personally, you could run afoul of prohibited transaction laws and face big taxes and penalties.
If you’re buying a home where sinkholes are common – which includes not only Florida but also Tennessee, Kentucky and Pennsylvania – it may be worth it to have the property tested for sinkhole activity prior to signing the purchase contract, as part of your due diligence.