Building a new single family home to be used as a rental has been on the rise as of late. In areas where existing home sales are heating up, it can make more sense to build a new property at a lower cost compared to buying an existing one. Yet part of the consideration must also address protectingreal estate investing the real estate, both during construction and for the long term with insurance.

And there are minimum insurance requirements that your construction lender and mortgage company will require to be in place before financing can occur.

Your will need a Builder’s Risk policy. A builder’s risk insurance policy covers equipment and materials as well as the work in progress. Most municipalities require such a policy before building permits will be issued. A builder’s risk policy will cover hazards such as rain, hail or fire as well as equipment theft. Liability coverage is also needed so make sure that your current insurance policy protects you against lawsuits should someone visiting the work in progress be injured.

Once complete, your standard homeowner’s policy will be in force. Lenders require a minimum coverage that is the greater of the replacement cost or loan amount. The property is the collateral for the loan and should the property be damaged due to a catastrophic event, the coverage should at least cover the mortgage amount due to the lender as well as enough to replace the home. The replacement cost is first calculated by the appraiser then reviewed by the insurance agent’s underwriting department.

Standard homeowner’s insurance does not cover floods. Flood insurance is in fact a separate policy and if the property is within a flood zone, flood insurance is requirement, not an option. If the flood line is away from the structure and only crosses the lot then a flood policy may not be required.