Getting Insured On Your Rental Property
October 3, 2022
We’d love to connect with you.
Obtaining Insurance For Your Rental – Landlord And Renter’s Insurance
Health scares, accidents, recessions – when life gets unpredictable, we turn to insurance to help us shoulder the financial burdens.
Insurance is essential for investors who take a lot of risks. As a real estate investor, you might face property damage, casualty losses, or other disasters. You need protection against these losses and others you can’t predict.
Landlord insurance is your best defense against any worst-case scenario you can imagine.
Your tenants need protection too. They are responsible for losses that aren’t covered by your insurance, like belongings. Protect your tenants’ assets alongside your own by requiring renter’s insurance.
As a new landlord, you might not be starting out with a lot of funds. However, you should prioritize insurance among your monthly expenses. Even a minimal coverage policy can save you hundreds after an unexpected loss.
This article will cover everything you need to know about landlord and renter’s insurance.
Landlord insurance provides financial protection for rental property owners against potential losses.
Your insurance provider typically offers several levels of protection, called dwelling policies (DP). The lowest (cheapest) dwelling policy only covers basic perils like fire or storm damage, while the most expensive one might cover all damages except those specifically excluded.
To qualify, you must own and be responsible for an entire building and its structural components. If you don’t own the building (e.g., you are a condo owner), you need a different kind of property insurance.
Landlord insurance is also limited to properties that are strictly rental. This means you can’t purchase it for a primary residence that you live in, even if you rent out part of the building.
What types of losses are covered by landlord insurance?
Landlord insurance policies typically cover three types of losses: property damage, lost rent, and liabilities.
Property Damage – Property damage includes physical damages from storms, fires, wind, lightning, or criminal break-ins. It also covers personal property you may keep on the property, such as lawn or cleaning equipment.
Lost Rent – Physical damage might make your property uninhabitable while you make repairs. During the obligatory vacancy, your insurance may reimburse you for the lost rent.
Liabilities—Liabilities are legal claims made against you or your company. For example, if a tenant or guest gets injured on the property and your negligence was determined to play a role, you may be responsible for medical bills or legal fees. Most insurance policies cover these.
In addition to the three major types of losses, some insurance companies offer add-on policies. For example, you may be able to purchase additional coverage for vandalism or damage while your building is under construction. Some policies also cover the cost of making upgrades when the building code has changed since the property was constructed.
What Isn’t Covered?
Two types of insurance that aren’t included in a typical policy are flood insurance and eviction insurance. You can purchase coverage for these two losses separately.
Your insurance also won’t cover tenant belongings or repairs. The first is covered by renter’s insurance, while the latter comes out of your everyday operating expense budget.
Consider this scenario: a burglar smashes a window and steals your tenant’s computer. Since your landlord insurance only covers property damage, you can only make a claim for the broken window. Your tenant’s insurance covers the cost of their computer.
Cost of Landlord Insurance
Protecting yourself against damage and liability is a proactive move for your business. But how much will all this cost?
Bobvila.com estimates the national average cost of landlord insurance to be $1,288 per year—about 15-20% more than regular homeowner’s insurance. This is because renters introduce more risk than permanent homeowners, who have a stronger motive to look after the property.
Many factors play a role in your insurance premium. These include the age of the building, its construction materials, the most recent valuation, whether pets are allowed, and your own claim history.
The deductible amount and coverage limit you choose also influence your quote for landlord insurance. Your deductible is the amount you pay out-of-pocket for a covered loss before your insurance activates. A higher deductible makes you responsible for more up-front, but you’ll be rewarded with lower premium rates. The coverage limit is the maximum amount your insurance will pay for a loss. A higher limit means higher premiums.
You might also pay higher premiums if your dwelling coverage uses replacement cost value (RCV). RCV is the cost of rebuilding at today’s construction rates. Cheaper dwelling policies use actual cash value (ACV), which represents the current value of a home considering its age and wear and tear. If your coverage is based on ACV, you’ll pay less because your property has aged.
Benefits of Landlord Insurance
Landlord insurance is worth the monthly expense. Your investment is valuable financially and personally, so you should do everything necessary to protect it.
Insurance also offers other benefits. Many lenders require landlord insurance, so purchasing a policy may help you secure a better mortgage. Insurance premiums are also fully tax deductible. That $1,680 you pay every month qualifies as an operating expense. This means you can subtract it from your rental income and pay less tax.
Investing is already risky. Don’t take on any more risk than you need to.
Tips for Lowering Your Insurance Premium
If insurance premiums are a burden, you can strategize to lower the cost. Here are some ideas:
- Install safety devices. Add gates or fences around pools and child-proof windows. Make sure all smoke detectors and carbon monoxide alarms are up to code.
- Don’t make claims for minor losses. Claims for minor casualties quickly add up and can make you seem accident-prone. Your rate could be increased or denied altogether.
- Ask for multiple building discounts. If you own multiple buildings, ask for a discount.
Landlord insurance won’t protect your renters or their belongings. For this reason, you should require your tenants to purchase renter’s insurance. They can choose a coverage plan you endorse or purchase one independently.
Renter’s insurance also has three types of coverage: belongings, liability, and loss of use expenses.
Personal Property – Tenant belongings like clothes, electronics, and furniture can be insured in case of theft, fire, etc. These objects are typically subject to limits and require a deductible. Encourage your tenants to take an inventory of their belongings before moving in to decide on an appropriate coverage limit.
Liability – Coverage in case a tenant is responsible for an injury or damage on the property.
Loss of Use/Living Expenses – If a tenant’s unit becomes uninhabitable, their hotel bills or certain food expenses may be covered while the property is vacant.
Tenants may choose among several add-ons. These include water backup coverage, theft extension coverage (for items stolen from cars, boats, or trailers), earthquake and volcano coverage, credit card coverage (for unauthorized transactions), or scheduled personal property/valuables coverage (for items like jewelry).
What Isn’t Covered?
Renter’s insurance policies tend to be quite broad. The main exclusion is damage to the building structure, which is covered by your landlord policy.
Auto and flood insurance are also excluded and should be purchased separately.
Cost of Renter’s Insurance
Your tenants may worry how much renters insurance may cost them. The average cost for renter’s insurance is $15 per month, a highly affordable premium. But like landlord insurance, that cost depends on the coverage and deductible your tenants choose. Nationwide estimates an average between $15 and $20 a month, including plans with add-on coverage.
Benefits of Requiring Renter’s Insurance
Renter’s insurance doesn’t only protect your tenants—it also protects you.
If an accident occurs, your tenant’s policy kicks in first. The tenant’s policy usually saves you the trouble of interacting with your insurance company.
Renter’s insurance also prevents hostility, blame, and even litigation. Your tenants are much less likely to sue you if their damages are adequately recovered by their insurance policy.
Renter’s Insurance and Property Management Software
Renter’s insurance is so fundamental, it’s offered as a secondary feature on many property management software platforms.
Innago, Appfolio, Buildium, Doorloop, Avail, and several other platforms partner with an insurance provider for renters. Their interfaces allow you to approve preexisting policies or get tenants set up with a new policy. You can then monitor each policy’s status to ensure your tenants are always insured.
No one wants to think about potential disasters. But as a landlord, it’s your job to consider every scenario. There’s no better way to protect your properties and yourself than to invest in insurance. Your renters deserve that protection too. When the unexpected happens, both you and your tenants will be prepared.
Next, you’ll need to prepare your rental property for tenants.