With home prices getting steeper and steeper, and mortgages becoming near impossible to qualify for, more people than ever choose to rent than buy a home. Renting appeals to many families and a large number of young adults because it’s cheaper and comes with fewer responsibilities – lower maintenance cost and no property taxes among others.
Aside from long-term leases, rental properties are also becoming increasingly popular for short-term stays. Many tourists and travelers opt to stay in rented homes and apartments than in hotels because it’s more affordable and allows them more freedom. In both of these scenarios, however, renting out a home poses considerable risk to the landlord.
You’re probably reading this because you’re thinking about renting out your home or investment property. If you are, then you need to make sure that you have the right insurance coverage.
Protecting Your Rental Property
If you decide to rent out the home you previously lived in, there’s a good chance that you have an existing homeowner’s insurance policy in place, including a condo insurance if you own a condominium unit (How much is condo insurance? – Abn average of $455 per year). The thing is, policies intended for owner-occupied properties generally invalidate claims when the insurer finds out that the home is rented to another party. To ensure protection against losses and damage, you need to purchase the appropriate type of coverage once you decide to set your property up for rent.
Unlike standard home insurance, landlord insurance is specifically designed to protect you and the property from potential liability issues caused by tenants, resulting in damage or loss of income. It provides superior-level coverage against risks and pitfalls that most landlords are exposed to.
While the price difference between landlord insurance vs homeowners insurance can be up to 30%, the policy also includes additional coverage for tenant liability and loss of rental income.
Related: 10 Types of Insurance for Real Estate Investors
Choosing the Right Landlords Insurance Policy
No matter what you do to ensure that you only have the most responsible tenants in your home, your rental property is never entirely safe from fire, natural disasters, and vandalism. There are a lot of things out of your control. The best that you can do is make sure you have the right insurance coverage to protect you from the worst that could happen.
Use this guide to ensure adequate and appropriate insurance coverage for your rental properties.
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Know What’s Covered
A landlord insurance policy for rental homes and investment properties typically covers the following:
Property Damage. It provides coverage for damages due to disasters like fire and storm, as well as incidents that destroy or spoil the physical structure of the home or dwelling, including theft and vandalism.
Liability Insurance. Covers lawsuits, claim for physical injuries, settlement costs, medical and legal fees, and other liability claims for accidents that occurred on your property. It may also cover 3rd party property damage, in case you’re found liable for damages on the tenant’s or another person’s property.
Loss of Income. When events like fire or flooding inflict severe damage to the rental property, causing the tenants to move out, your insurance policy may help compensate for your lost income. Note, though, that this only applies to loss of income due to disasters or unexpected events and does not cover evictions.
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Property Damage Coverage Options
Property damage coverage includes physical losses due to sudden and accidental occurrences. It is broken down into three levels, which also defines the scope of the coverage.
- DP1 or Basic Property Coverage covers property damage due to relatively common disasters or accidents like fire.
- DP2 or Named Peril Coverage has a broader scope, including specifically-named perils such as fire, hail, storm, and vandalism.
- DP3 or Comprehensive Property Coverage is the most extensive. It is an open policy that includes all possible perils unless specifically excluded in the coverage.
Of the three, DP3 is the most popular among landlords because it offers the highest level of protection. However, if you’re only renting out a single apartment unit or condominium, it may not be necessary to purchase comprehensive coverage. Your choice should depend on your situation as a landlord.
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Cash Value vs. Replacement Value
During claims, your insurance policy may pay out in terms of cash value or the replacement value.
Cash Value means you’ll be paid according to the current value of your property, belongings, or other losses. It takes into account the age and depreciation cost of the damaged property.
Replacement value, on the other hand, pays out the amount it takes to replace or repair the damaged property or item in the current economy.
Of the two, you should consider a policy that pays out the replacement value, so you don’t have to supplement your claim to afford the repairs or buy a new one.
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Consider Additional Coverage Options
There are additional coverage options that you may want to add to your standard policy, depending on what you think your rental property needs. You may choose to go for rent guarantee insurance, natural disaster insurance, protective coverage for equipment breakdowns, or coverage insurance for the furnishings inside the home you’re renting out.
In most policies, Lost Rental Income Coverage is an additional option. It’s recommended for landlords to avail of this add-on to ensure a steady flow of income even when the property is vacated due to damages caused by covered perils.
Do You Need Landlords Insurance?
The law does not require landlords insurance for rental homes and investment properties. However, it’s prudent to obtain some level of coverage in case of unexpected perils and events. When disaster strikes, your existing homeowner’s insurance policy won’t do much for you if you’ve already rented out your home — especially if you have a long term tenant.
Before purchasing a policy, though, consult and discuss your options with an insurance agent you trust or a reliable insurance provider in your area. They can direct you to the right type and level of coverage, so you’re sure to have all the protection you need.
This article has been contributed by Rachael Harper.