As I insure more and more investors I see the dilemma of choosing either actual cash value or replacement cost for their properties. In the end, it really comes down to the investor and what the savings is with each carrier between the two and if it is worth it if there is a loss. In making this decision here are some key points think about.
If you select Actual cash value this will pay out the amount of what the building is worth, not necessarily what it will cost to replace it. So if there is a total loss, the question becomes are you content with the payout being just what you paid for the property. With this type of settlement there would be no way you would rebuild it, you would have to scrap the property and be out of the tenant’s monthly income you were receiving. Then you have to weigh that out with the savings of the insurance by going ACV vs Replacement cost. The difference can be $800-$1,500 more a year per property depending on the value. Now if you have 20 properties then this can be $20,000 a year savings by going ACV. So in this case it may be worth it to go ACV on all of them and hope you don’t have multiple losses.
The benefit of replacement cost is if there is a total loss then you get the amount up to the limit on the policy to fully replace the structure. So if the property is a good source of income and you want to rebuild it to get the income back then RCV is much better. But again it really depends on the carrier and the savings you get between the two.
The issue that most investors don’t think about is a partial loss. Recently I came across a fire that took place in a 10 unit apartment. The loss was $60,000 but since it was an ACV policy they only got $30,000. In this case he had tenants living in the other units so he had to fix it. So in this case he was out $30,000.
In the end it really depends on the savings between ACV and RCV, the value of your portfolio, and your preference in risk.
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