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Your home is probably one of your most expensive assets to own and maintain, and it houses not only you but many of your other assets as well. So here’s a question for you, if your home burned down or somehow was destroyed, how much would your insurance company pay?

Most people don’t know the answer off the top of their head. But this is an important thing to know because the insurance value of your home is far different than the market value of your home. You might’ve purchased your home a year ago for $150,000 and then this year your neighbor has transfered out of state and is selling his home for $160,000. Even though you just paid $150,000 for your home and your neighbor (who of course owns an identical house) has his for sale for $10,000 more than you paid, you can’t be caught up in the misconception that $150,000 or $160,000 is your home’s insurable value. Those numbers previously mentioned are the home’s market value, what a buyer would be willing to pay given the current real estate market conditions.

It’s rather easy to figure out your home’s market value if there are a lot of comparable homes in the area that are either for sale or recently sold. In fact, you can call any licensed Realtor or Appraiser and request an estimate of the value any time you want. If you want a less precise estimate, there are websites like Zillow that will help you estimate a value. When you look at these market values though you are looking at the cost of the land and everything built on it (known as the improvements). Everything from the house, the landscaping, driveway, swimming pools, fences, and so forth.

When we say the insurance value of your home we have a slightly different value in mind. If your home burns down, the insurance company does not have to buy the land (as you did when you bought the house). Instead, the insurance company is concerned with the cost to repair the damaged property - everything from site cleanup and debris removal to the actual construction cost to rebuild. In some rural areas that are not serviced by a city fire department, a volunteer fire department may even have a fee that they charge residents to come put out the fire (this is in lieu of those area residents paying taxes for the fire department’s services - or it may help subsidize the cost of those services).

In the wake of numerous hurricanes in the southern states in recent years, such as Hurricane Katrina, building materials cost have increased significantly. The cost of concrete, plywood, PVC piping, and so on are all concerns that the insurance company has to consider when pricing your homeowners insurance policy as well as when they settle claims. Therefore it is also a concern for you, as any increase in these building material costs directly corresponds with the cost to rebuild any damaged portion of your home and therefore a higher insurance value on your house. You may have purchased the house for $150,000 but if it’s a 2,000 square foot house and building materials average $100 per square foot to rebuild, your home’s insurable value is $200,000 and not the $150,000 that you paid for it.

Not to mention if you purchased an older home, it may cost more to rebuild if the home has to be brought up to current building codes.

We will revisit this issue of insurance value in future blog postings. For now, just know that the value of your home is quite different when you have to rebuild it after you suffer a loss compared to when you go to resell it. And the older your home gets, the more work it may require to bring it up to code should you ever have to rebuild it. The insurable value and the cost to bring your home up to current building codes are important things to discuss with your insurance agent - not just because the difference in value affects your insurance premiums - but also because not having enough insurance coverage in force could impair your property once a loss occurs (insurance companies often penalize you for not carrying adequate limits in the event of a loss - these are known as coinsurance penalties, we will touch on those in future blog posts!)

As always, your comments are welcome…

Handy gross rent multiplier calculator, rental income calculator, and return on investment and sale price calculator. This post is a follow up to my previous real estate blog about gross rent multipliers. You will need Microsoft Excel to be able to download this file.

When you open the file you will notice that I have color-coded it in shades of blue. Do not type anything in the dark blue boxes. The value of these boxes automatically changes when you input numbers into the light blue boxes. You can enter various sale prices, interest rates on your mortgage, various rent levels and expected vacancy levels, as well as estimated utility costs and real estate taxes for the property. All of these factors will then compute your expected rate of return on your investment as well as the gross rent multiplier (GRM) in both months and years. You will notice on the table that the more income you derive from the property and the lower the sale price, the higher your rate of return will be and the lower your GRM will be (as it will take less time to recoup your investment).

If you have any questions on how this calculator works, or if for some reason you cannot download it, please email me at allthingsfinancial@yahoo.com and I will be happy to send it to you directly or answer any questions that you might have.

As always, any comments or feedback is welcome!

Please click the following link to access the Mortgage ROI GRM Calculator

Please note: the best way to access the Mortgage ROI GRM Calculator above is to right-click on the link and select “save target as”. Opening the file in your Internet browser window will limit the Excel capabilities. If you save the file to your computer’s desktop and then open it in Excel you will have access to all of Excel’s functions and the program will not run in your Internet browser.