We are seeing more interest among real estate IRA enthusiasts in purchasing distressed and vacant properties. Many times, the real estate IRA investor can purchase a promising vacant property at a substantial discount to its intrinsic value, which make these properties attractive value investments – especially for those real estate IRA investors who have the capital to upgrade these properties and make them once again attractive to tenants at a reasonable rent.
But as long as a property is vacant, there are some special considerations that investors need to consider:
Naturally, you’ll want to carry insurance on your real estate IRA investment – normally the standard landlord insurance policy for a property of similar size, type, value and number of units works fine.
But these standard insurance policies are not designed to cover the additional risks posed by a wholly vacant property. They are generally priced with your locality’s typical vacancy rates in mind. If your property has been vacant for more than a few months, and you have a claim, and your insurer finds out, they have grounds not to pay the claim.
That’s why insurance experts recommend owners of vacant properties purchase specialized vacant property coverage. You can buy this as a stand-alone policy, but it’s more commonly sold as a rider or additional feature or benefit of a standard landlords’ insurance policy.
The premiums are slightly higher than you would normally see on an off-the-shelf landlords’ policy, at any given deductible and coinsurance level. But the coverage is probably worth it, as it helps to plug a hole in your insurance protection plan that could result in devastating liability.
Note that just because your investment property is unoccupied doesn’t mean that it’s a vacant property for insurance purposes. The law expects and anticipates that landlords will have occasional vacancies of a few days or weeks between tenants, and during repairs and upgrades.
Many carriers will let you choose between a 3 month, 6-month or 12-month policy term. The best term for you probably reflects the length of time you may need to complete a repair or upgrade.
Premises liability coverage is usually optional, but is often a good idea because liability may be one of the biggest hazards to your IRA.
If you are doing upgrades or repairs, you may also consider purchasing builders risk insurance, which protects construction material and the value of those repairs and upgrades.