Regarding property insurance:

Do you insure your rental property (or even your own home) for cash value, or replacement cost?

I've always done one, but a conversation with someone who does the other has got me thinking.......

Please share your thought process and why you choose one over the other.

Replacement value plus code upgrades.

I had an fire loss at an apartment building that as a contractor, could do the work myself (my company) for a round $100,000. Cheap and quick. The insurance company came back, they would only pay men $80,000. That deducting depreciation and a 10% deductible. I said, WT F? Response this was their policy for a cash out settlement. I said I was only trying to save them money and get things done, but if they don't like that and are planning to penalize me trying to save everyone time and money, then I will hire a Public Adjuster to handle things for me.

The same day I called a giant Public Adjuster who went over everything with a fine tooth comb and wrote up a proposal getting every trade, every contractor and sub-contractor to go to the property, take pictures and write out a detailed estimate and proposal.

The bid they submitted was $323,689.42, that's more than triple what I had asked for. My policy covered doing the job using the same type materials, skilled labor to accomplish this and covering all necessary code upgrades.

On key element is that the insurance company was just going to slap 1/2" drywall over 30 day old wet lumber (studs). My walls were put up on kiln dried treated lumber, with 1/2" drywall with 3/4" thick textured plaster. Then sealed with oil base primer and 2 coats of quality gloss paint. This one issue raised the price by around $30,000.

The insurance company wanted to use Romex. While I had 1/2" and 3/4" ridged conduit with heat shielded wire. They wanted to give me crap for the electrical. We went with flex conduit but got paid for replacing things with metal piping.

SO CODE UPGRADES are a must. No short cuts or inferior methods.

As with all things..."it depends."

I own mostly Class C residential units which I purchased "back in the day" for anywhere between $20,000 - $40,000 and have maybe another $5,000 - $8,000 worth of renovations into them. Thus my total "all in" is somewhere between $25,000 - $48,000. I typically insurce them for $50,000 ACV, because if the place is destroyed it would cost well north of $100,000 to rebuild them, and that's if I could actually find a builder willing to do the deed. No builders here are interested in the tiddly-wink profits to be had on building a 2-bed, 1 bath house on the lower income side of town. It would probably cost around $120,000 or more even if I could find the builder. The insurance cost would be prohibitive. Back when I used to have Replacement Value via a different insurance company, my premiums were triple what they are now that I have ACV policies. Essentially, the savings on my policies get banked, so that I "self insure" through anything but an almost total loss. To date...17 years in the biz and 31 units... I've only had ONE house burn, and my ACV policy maxed out plus I got to sell the burned house to someone else. I actually came out $15,000 positive above what I had into it.

I buy Class Cs for cash flow, not appreciation. They're already somewhat worn out and can be fixed relatively inexpensively.

Now if I owned well-maintained Class B or A houses in nice hoods... I'd probably go with replacement cost, because appreciation is more of what you're banking on with those properties rather than cash flow, and it costs a lot more to restore them to the level of habitability that those tenants demand.

Fun story: several of the houses I've bought came from an elderly gentleman whose been in the biz as a developer and landlord for over 50 years. He never bought ANY insurance at all on his houses. Never had loans either: just bought stupidly cheap, dilapidated houses and had his crews fix them up to livable standards. He had over 200 units at one point, plus owned all of the "Head Start" pre-K school program buildings the local public schools leases from him in about a 50 mile radius of my town. He said during that time he had three houses burn down and one liability claim that he settled for about $5,000. Can you imagine how much money in premiums he saved on 200+ houses over 50 years? More than enough to replace three burned down cheapie houses and one small liability claim.

Most of my places get overhauled after I pick them up. So with that overhaul I don't to spun up about cash vales being depreciated.

Not all homes may be able to get rebuilt where they are at due to changes in zoning over the years -so most often I pick up a cash policy.

Say I picked up a place for $100,000 and put in $30,000 into the place making the ARV $160,000-180,000. I would insure the place for only $140,000. Why 140? 100 plus the 30 put into the place and in a worse case scenario, $10,000 more to haul away the pile of debris. I then put a lot for dale sign out there.

I have everything as ACV and a $5000 deductible. Financially, over 30 years doing this I've saved the cost of a couple of class C houses in insurance premiums. I've never had an insurance claim. Small fires and vandalism cost less than $5000 to fix, depreciated roofs are worth nothing after a hailstorm, and I've never had a place burn to the ground (knock on wood).

Hail storms are our most likely insurance event. I learned long ago from a close friend who runs a roofing company that you don't have to replace the roof just because of some hail dings, they have multiple layers with tar paper under it for a reason. I wait until the edges of the shingles are rolling up before I replace them, never had one leak. If you pick your roofer well and he understands you don't have insurance so it's coming out of pocket you can get it replaced for 30% of what the big roofing companies that do tons of advertising charge. So there are strategies to reduce your out of pocket expenses.

Our biggest threat is hurricanes. The chance of losing more than one roof at a time is real. (We lost 7 one year.) The chance of losing more than one HOUSE at a time is real.

Having a few wiped out and receiving a pittance (ADCV) in return is real.

You've all given good thoughts to consider - thank you.

ACV here on most except my personal residence. Actually, liablity insurance only on many of my class C single family that are paid for. Unlikely I'm gonna lose many at same time. Save lot in premiums. I'd still be aok if I lost all my houses that have only liability insurance. High deductibles.