We all need insurance. Even landlords, and even Self-Directed Real Estate IRA investors. Yes, your personal assets are protected in case of a lawsuit involving a Self-Directed Real Estate IRA property. But a lawsuit could lead to other assets within your Self-Directed IRA being put at risk. And, of course, all investment properties are subject to the risk of fire, flooding, earthquakes and – as some homeowners in Hawaii are now keenly aware – volcanic activity.
Insurance is valuable – but premiums are a cash flow killer. Beware of these items that can cause home insurers to hike your landlord insurance rates:
Swimming pools. Yes, some people may pay a bit more in rent or to buy a home with a swimming pool. But once you subtract the costs of maintenance and additional insurance premiums, a swimming pool can be an actual detriment to your ROI as a Self-Directed Real Estate IRA investor.
This is because of the high potential for liability associated with swimming pools. The insurance industry considers them to be an attractive nuisance. That is, they attract neighborhood kids, who might be tempted to use your pool when you are not home. And even if you are home, there is a substantial risk of tragedy from excited swimmers diving into the shallow end, or toddlers accidentally falling into the pool and being unable to escape.
Vacancy. Is your investment property likely to sit vacant for long periods of time? This can pose an insurance problem: Unoccupied homes can attract vagrants and squatters, who can cause damage, liability, and even destroy the value of the home by using it to manufacture methamphetamines.
They are also vulnerable to pests and mold, both of which have a lot of time to do damage undetected.
If your home is going to be unoccupied more than a few weeks, speak with your insurance carrier about securing special insurance coverage designed to cover vacant homes. This is going to cost a bit more than standard landlord coverage, but standard policies will not pay out for damage caused because the home was left unoccupied for months, in violation of your Self-Directed Real Estate IRA’s landlord insurance policy.
Homesharing. Are you renting your property out via AirBnB? Or are your tenants doing so without your knowledge? Either circumstance may require a change in your Self-Directed Real Estate IRA’s landlord insurance coverage. Insurance carriers regard regular short-term rentals to be a significant liability risk. After all, these individuals may not have passed a background or credit check, and in any case, are not likely to treat the home as if it were theirs.
If you fail to contact your insurance carrier and disclose that the home is being rented out to short-termers, they may not cover your property against liability or damage arising from this activity. You do not want to be surprised at claim time: It is much better to pay the premiums and take that cost into account when charging rent.