Disclaimer: I am not an insurance expert, nor do I claim to know exact policy types or coverage limits that should be in insurance policies for rental properties. Therefore, any information I provide is merely a stepping stone to helping you realize what kind of policies are out there. For further details and guidance, contact an insurance agent. Because I’m not one! In fact, I invite comments from anyone who can add more insight to this topic to help aid in providing a full understanding.
Believe it or not, insurance is not the most exciting thing to talk about when it comes to a rental property. I mean, maybe it’s exciting thinking about… nope, it’s never exciting. But it is a necessary evil. This article is a tricky one to write because I just honestly don’t know a ton about insurance. I can’t even tell you what coverage amounts are in the policies I have on my properties. Makes me quite the credible author to be covering this topic, huh! But I can give you a quick birds-eye view understanding of a couple of options when it comes to choosing an insurance policy for your rental property.
Actual Cost Value (ACV) vs. Replacement Cost Coverage
Oh geez, I already lost you. I know, even the terms are painful to read, much less to have to interpret and comprehend. Okay, don’t start snoozing yet. I’m going to keep this short and to the point.
Chances are, when you reach out to an insurance company in regards to insuring your soon-to-be rental property, the insurance agent is going to ask if you want Actual Cost Value (ACV) or Replacement Cost Coverage. At which point you most likely respond with, “Huh?”
Here’s what these two coverage types mean, both in official language and layman’s terms:
- Actual Cost Value (ACV): The replacement cost minus depreciation, also known as “market value.”
- Replacement Cost: The cost to replace the property in full, including similar building materials and structure, and on the same locale as the initial property.
- Actual Cost Value (ACV): You walk away with a check for the market value amount of the property. The end.
- Replacement Cost: You are compensated the amount it will take to actually rebuild the property, and you actually rebuild the property. (Oftentimes you will be paid the ACV amount first, and then once the property is rebuilt, you then submit the extra to the insurance company, at which point they will reimburse you that amount.)
Notice in the layman’s section, the one major component that is missing: an explanation on how depreciation plays into the equation. Why did I leave it out? Because depreciation is one of the coolest yet most mysterious calculations I think in all of rental property world, and I couldn’t care less to understand it, yet I love collecting income from it. I let depreciation do its thing, and I don’t worry about how it does it, I just make sure it does it. Therefore, I can’t explain it to you.
But really, I don’t think an in depth understanding of depreciation in the context of these two types of coverage is all that necessary if you can just understand that Actual Cost Value (ACV) covers market value and you don’t have to rebuild the property. You just walk away with the check, and Replacement Cost covers actually rebuilding the property, which will inevitably cost more than market value.
Which Coverage Type Should You Have on Your Rental Property?
It’s up to you. Either one is fine, and technically, there is no right or wrong answer. All you need to do in order to decide which coverage you feel better with is ask yourself, “If my rental property burns to the ground, do I want to rebuild it or just take the check?”
That’s it. That’s all you have to ask yourself. Think about it — which do you want to do?
- Emotional connection. How emotionally tied to your rental property are you? If you are crazy-tied to it and don’t ever want to let it go, choose Replacement Cost so you can rebuild and recreate your property. If you couldn’t care less about the property and are only in it for the financial investment, take the cash and run with an Actual Cost Value (ACV). Most often emotional connections lie more with people and their primary homes rather than rental properties. My personal feeling on my rental properties? No emotional tie whatsoever (except they are all admittedly very cute)! Bring on the check.