Insuring Properties in Real Estate IRAs

Like all Americans, we were deeply saddened and distressed by the recent widespread flooding here in North Carolina and elsewhere in the Southeast. We know that beyond the property and investment losses, many people lost their homes, property and heirlooms that no insurance policy can replace. 

But torrential rains and flooding is an ever-present risk here in the southeast, America’s Hot Corner when it comes to hurricane and tropical storm activity and a place that certainly gets its share of ordinary thunderstorm and tornado activity as well, even apart from the tropical cyclone risk.

But according to industry sources, less than 10 percent of South Carolina homeowners carry flood insurance. That’s well below the national average of 14 percent, which is still distressingly low. 

That means a lot of these homes that were ravaged by floodwaters will be dead losses. Wealthier owners may be able to repair or replace these homes out of their own pockets, but few middle class homeowners can afford that kind of cash hit.

So we think this is a good time to revisit some insurance basics for owners of investment property held within real estate IRAs.

1. You need landlord insurance, not a standard homeowner’s insurance policy. While most insurers won’t knowingly issue a homeowner’s insurance policy on a home they know is owned by a real estate IRA, it’s still good to make sure your insurance broker understands that this is not owner-occupied real estate.

   Furthermore, landlord insurance policies cover a variety of risks that homeowners’ policies don’t cover, such as liability arising from negligence or criminal activities of your tenant. If it’s a rental property, you need specialized insurance coverage for landlords.

2. Similarly, many personal carriers don’t want to underwrite liability coverage on properties owned by IRAs. You may need to get liability coverage separately via a commercial form. You can bundle it with coverage on the dwelling or structure, or you can have the dwelling and liability covered separately.

3. Neither homeowner’s insurance nor landlord’s insurance policies cover flood damage. Flood insurance is optional, but it should be on your short list of critical coverages to consider – especially in Georgia, Florida, North Carolina and South Carolina, all of whom are vulnerable to flash floods.

4. Consider requiring tenants to own renter’s insurance. In the event of a flood, this insurance will cover your tenants’ belongings, and protect them from financial disaster arising from floods. If their losses are covered by a renter’s insurance policy, they are much less likely to break their lease with you and move back in with family to lick their wounds.

5. You shouldn’t need much in the way of personal effects coverage in a rental property, unless you’ve furnished the property for rental. If it’s a real estate IRA, you’re not supposed to be staying in it, so why would you have a lot of your own personal property in it.

6. Don’t forget that hurricane coverage is separate as well. If your property is near the coastline, you’ll want to consider insuring against windstorms. Each state has its own windstorm and flood insurance program to cover risk from named hurricanes and tropical storms.

7. Other states have similar arrangements for earthquake insurance. It’s not covered on landlord or homeowner’s policies – you have to buy earthquake coverage separately. Same with sinkholes for those in areas at risk.

American IRA, LLC is a leading third-party administrator of self-directed IRA accounts, and we work with many successful investors who have pursued real estate IRA and related strategies. Visit our extensive online resource library at www.americanira.com, or call us at 866-7500-IRA(472). We look forward to hearing from you.