A Lesson From Sandy: Underestimating Soft Costs

Being prepared

With hurricane Sandy about to deluge the Northeast, I think about how many investors undervalue their insurance when they are purchasing any piece of investment property…especially those investors that are just flipping houses. Too often property investors will consider the expenses that only add to the value of a property.  I call these the hard costs of the investment.  For example, renovations to a kitchen or bath or performing extensive landscaping on the property are things that will have a direct relationship to your overall costs, since they will actually be seen by the eyes of a potential buyer (or tenant).

Soft costs

But it’s also just as important to consider the soft costs of investment property acquisition when crunching all your numbers.  These represent the costs not normally associated with “what’s up on the screen,” or rather, what the potential buyer (or tenant) will not see.  Hurricane Sandy reminds us that an expense such as proper insurance should not be overlooked when estimating overall expenses.  For property investors, underestimating the cost for insurance is simply foolish.

You should be considering getting full replacement cost for property in case of something catastrophic. Say, a hurricane like Sandy for example. If your asset is wiped out because of a flood or fire you do not want to be woefully underinsured.  Thinking that you’re only going to hold the asset for a very short period of time in the case of flipping, or that your tenants don’t care what kind of insurance you carry is terribly shortsighted.

Obtain full replacement value coverage

Make sure when you purchase any investment property that you have it properly insured – and that means obtaining full replacement value coverage.  It’s extremely important to spend the extra $100 or $200 to make sure that you cover yourself in case of catastrophe. I know it’s not easy to add more expenses when you think you can cut corners since prospective buyers are not going to see this particular expense. But in the light of this current hurricane bearing down on the Northeast, it’s foolish to shortchange and not fully protect yourself financially in the event of a real catastrophe to your investment property. Better to be prepared and be safe than sorry. Always protect your assets and add an inflated figure for insurance to your list of expenses that you’ll have to satisfy on a monthly basis.

Savings through deductibles

Of course you’ll want to shop around for insurance carriers to find the best deal, but again, make sure that you’re looking to get full replacement value for the property. Your investment property is too valuable to risk taking such a huge loss (the difference between full replacement value and market value in insurance parlance) in case of catastrophe. If you’re going to save on insurance the best way to do it is through obtaining a higher premium deductible amount on the house. So instead of a $500 deductible, consider going with a thousand dollars or more for each claim’s deductible amount. This will at least help defray the added cost of getting full replacement value insurance on the property.

 

photos courtesy of  clubfrontier.org, news.cnet.com, ibtimes.com, genins.com, thectrealtyblog.com