Real estate investing can be a great way to earn ongoing income while generating long-term profit too. However, there are certain recurring expenses that rental property owners need to incur in order to run a smooth, well-protected business. One of these expenses to take into consideration is the landlord insurance cost. While properly insuring your rental is a must to avoid various potential problems down the road, it comes at a certain price, which needs to be factored into your investment property analysis.
In this article, we will cover everything you need to know about the cost of protecting your income property against damage and yourself against liability. We’ll explore the main factors that affect prices as well as what types of policies you can get and how they impact cost. We’ll provide you with actionable tips on how to strike the right balance between cost and coverage for optimal investment results.
Table of Contents
- Factors Influencing the Cost of Landlord Insurance
- Average Landlord Insurance Cost
- Types of Insurance Policies and Their Costs
- Tips for Lowering Rental Property Insurance Premiums
- Balancing Cost and Coverage
- Conclusion
Factors Influencing the Cost of Landlord Insurance
Before getting into “How much is landlord insurance?”, it’s important to understand the circumstances and elements that affect the cost.
Here are the 8 most significant factors that play a role in determining the cost:
Property Location and Risks
When trying to figure out how much you’ll need to pay for protecting your income property, the main point to take into consideration is your home’s location. Once again, the market where you invest is crucial in real estate investment.
There are a few different ways in which location affects cost, including:
- Property values: The current market value of the rental that you are insuring is present in the insurance premium calculation formula. Protecting your house tends to be more expensive in markets where real estate prices are higher because companies will need to pay more in case of damage or destruction. So, you can expect to have to pay more for your insurance coverage in states with high values like New York and California.
- Natural disasters: Natural disasters such as fires, storms, hurricanes, tornadoes, hail, and lightning are some of the major risks covered by investment property insurance. Understandably, locations prone to natural disasters incur higher landlord insurance costs to cover for the more frequent need to use the protection. This means that investors in Texas, California, Washington, and Florida (considered among the most dangerous) pay higher premiums – on average – than property owners in Rhode Island, South Carolina, and Connecticut (considered among the safest).
- Crime rates: The best rental insurance policies protect against vandalism, theft, burglary, and other forms of violence against homes. As a result, costs are higher in states and cities with high crime rates due to the increased risk incurred by the insurer. Consequently, landlords usually have to pay higher premiums in cities like Monrow, LA, Memphis, TN, Detroit, MI, and Birmingham, AL (with the highest crime rates nationwide) than in cities such as Gilbert, AZ, Frisco, TX, Glendale, CA, and Cary, NC (with the lowest crime rates).
Property Type and Value
The second factor that influences the landlord insurance cost is the type of the property and the value of the home.
Insuring a single-family home tends to cost more than buying townhouse or condo insurance, for example. The reason is that a single-family home usually has a bigger square footage and comes with more additional structures, such as a garage, a patio, a swimming pool, and others. So, how much is condo insurance in the US market? It’s an average of $455 per year.
Moreover, rental homes that cost more incur higher premiums as it will be more expensive to repair them, not to mention to rebuild them from scratch.
Property Age and Condition
Buildings that are older and that are in a poor condition are usually more costly to insure. This is because they might be at increased risk of damage during covered natural disasters. Moreover, such types of properties pose additional risks to the health and wellbeing of tenants and their guests, and medical and legal expenses for bodily injury is one of the main items covered by insurance companies.
Tenant Types
The tenants that investors plan to lease to also affect the landlord insurance cost. For example, students and short-term guests are more likely to cause damages to rental properties. This is the reason for the elevated price of insurance in college towns as well as of Airbnb insurance.
Market Legislation
Another factor that affects the cost of rental insurance is the legal environment in the location where you invest. For instance, more tenant-friendly states (like Vermont, Nebraska, and New York) might require landlords to obtain additional liability coverage to protect renters. This will naturally inflate the price.
At the same time, landlord-friendly states (such as Louisiana, Alabama, and South Carolina) might have more lenient requirements, so real estate investors might be fine with covering just the basics.
Type and Extent of Coverage
Yet another major determinant of the landlord insurance cost is the exact type and coverage of the policy. While a standard policy covers the basics such as property damage, personal liability, and loss of rental income, there are many additional items that investors can opt in for. These include things like vandalism, theft, and more natural disasters.
The wider the coverage of your policy, the higher the cost.
Deductible Amounts
The deductible amounts for each item included in the insurance also affect the overall cost. The more money you expect to receive from the insurance company in case of a covered event, the more you will have to pay them beforehand, for the increased protection.
Claims History
Finally, insurers look at the landlord’s claims history when quoting a price. Individuals who have filed a lot of claims in the past are considered high risk, so they will be expected to pay higher premiums as they are more likely to need to file a claim again in the future.
Average Landlord Insurance Cost
Find out the average landlord insurance cost in the US
According to Steadily national real estate market analysis, the average rental property insurance cost across the US is $1,478 per year. However, there are major differences between the average values in different US states: from as low as $595 in Oklahoma to as high as $2,419 in Delaware.
As you can see, this is a four-fold difference, caused by the factors discussed above, such as median home prices, local market risks, and local legislations and regulations.
The price difference between landlord insurance vs homeowners insurance is about 25% for the same property, on average, with the former being more expensive. This is due to the increased risk associated with renting out a property to tenants rather than living there yourself. This leads to a wider coverage, which is reflected in the inflated price.
Moreover, special types of rental property insurance such as Airbnb insurance cost even more because of the more risky nature of short term rental activities than traditional, long term renting. The annual price of short term rental insurance in the US market averages around $2,000.
Types of Insurance Policies and Their Costs
Landlord insurance coverage is as diverse as the world of real estate investing itself. Different companies offer different basic policies with the ability to further customize coverage to provide the exact level of protection that an investor needs, while keeping the cost in mind too.
There are three main types of rental insurance that include:
DP-1 Policy
The most basic type of insurance for rental homes is DP-1, also referred to as Dwelling Fire Form 1. This is a peril policy because it provides coverage for the primary structure only for perils that are specifically listed in the policy. Typically, these perils include:
- Fire
- Lighting
- Smoke
- Windstorms and hailstorms
- Volcanic explosions
- Internal and external explosions
- Vehicles
- Aircraft
- Riots or civil commotion
Importantly, DP-1 covers the actual cash value of the damage to the property caused by one of the named perils. It doesn’t cover the replacement cost, as more advanced and comprehensive types of insurances do.
Landlords should also know that DP-1 does not cover damages to additional structures (unless included in the policy at an extra cost), personal liability, and rental income loss.
The DP-1 landlord insurance cost is the cheapest because of the limited coverage. This policy is usually optimal for vacant rentals, properties located in calm markets, and investors on a tight budget.
DP-2 Policy
The second type is DP-2, also considered a peril insurance. Similar to DP-1, it protects against named perils, but the list is longer also including:
- Falling objects
- Broken glass
- Freezing pipes
- Electrical damage
- Accidental water or stream overflow
- Snow and ice weight
- Cracking, bulging, or tearing
- Collapse
- Vandalism
- Theft
DP-2 covers both the primary structure and additional or detached structures. Lost rental income is usually included, but in some cases it needs to be paid for additionally. Personal landlord liability insurance is, however, not covered by DP-2 insurance for landlords.
The cost of this type is higher than of DP-1 because of the more comprehensive coverage, but it’s usually worth it considering the additional protection for the income property and its belonging structures.
DP-3 Policy
The third and most comprehensive type of rental property insurance is DP-3. Unlike DP-1 and DP-2, this is an open peril insurance, meaning that it covers perils resulting in all losses, rather than strict and limited lists of perils. The few perils that might be excluded from DP-3 comprise earth movement, power failure, water damage, neglect, intentional loss, governmental action, ordinance or law, and mold. In many cases, these perils can be added for all-inclusive coverage.
In terms of covered items, this type protects against damages to the primary structure and the additional structures, loss of rental income, and personal liability. Importantly, payouts are made on the basis of replacement cash value rather than the actual cash value. Depreciation will not be factored in.
The landlord insurance cost of DP-3 is the highest among all policies available to investment property owners. Nevertheless, it’s a good idea to get this policy if you are actively renting out your home and do not want to face unexpected expenses.
Optional Coverage
In addition to the type of insurance (DP-1, DP-2, or DP-3), another major factor affecting the price is the optional coverages selected by a landlord. Each investor needs to decide for themselves what extra coverages to opt for, depending on their particular situation, including things like market peculiarities, rental property history, tolerance to risk, and – last but not least – budget.
Some of the most popular additional coverages recommended by industry experts are:
- Vandalism coverage
- Theft coverage
- Building code coverage
- Heating or air conditioning loss coverage
- Vacant rental endorsement
The cost of each of these coverages is added separately and can range from a few dollars to a few hundred dollars, depending on the additional coverage and the insured amount.
Tips for Lowering Rental Property Insurance Premiums
While there are some standard values and prices dominating the insurance industry, landlords can get major discounts if they do certain things.
Here are a few tips to follow to minimize your landlord insurance cost without sacrificing coverage:
Risk Mitigation Measures
The best way to keep the price of your real estate investor insurance under control and to keep your property safe is to minimize the risks associated with your rental. For example, you should conduct regular maintenance and fix minor issues before they turn into major problems. Well-maintained investment properties are cheaper to insure as they result in fewer incidents and less frequent claims.
Safety Improvements
Second, you should look into ways to boost the safety and security of your rental home. Installing a sophisticated home security system will incur a major one-time cost, but it will save you money from the annual premiums down the road as insurance agents will see your property as low risk.
Policy Customization
Each rental property and each landlord is different, so each policy should be different – customized to the specific needs of the rental and the owner. When customizing your policy, it’s important to answer the question “How much insurance do I need?” The response should depend on multiple factors, including the location, the property type and size, the property age and features, the external structures, the monthly rental rate, the required additional coverages, and your preferences.
Bundling with Other Policies
You can also lower your landlord insurance cost by bundling a few rental properties under a single policy or bundling your insurance for investment properties with other types of insurance, such as homeowners insurance or auto insurance. Most companies offer sizable discounts to individuals who get multiple policies from them.
Annual Premium Payments
Yet another possible source of discounts on the insurance price is paying the insurance premium on an annual – rather than a monthly – basis. Companies prefer that they receive the entire amount at the beginning of the year, so they are willing to provide lower rates for landlords choosing annual premiums.
Working with Rental Property Insurance Companies
Last but not least, while all insurance companies (like Allstate Insurance, State Farm Insurance, Liberty Mutual, and Farmers Insurance Group) provide landlord insurance, the ones who specialize in this type of policies tend to offer the best pricing. For example, Steadily offers competitive rates for real estate investors across the US market.
Balancing Cost and Coverage
When choosing the best landlord insurance policy for your rental property, it’s key to strike the right balance between the coverage you and your investment will receive and the price you will need to pay. After all, this is one more expense that you need to incur as a real estate investor, and it needs to be factored into your rental property analysis to ensure positive cash flow and strong return on investment.
There are a few important considerations you need to take into account when balancing between coverage and price that include:
- The type of coverage you need: damage, personal liability, and/or loss of rental income
- The property coverage you want: primary structure vs additional structures too
- The optional coverage you expect: vandalism, theft, water damage, etc.
- The amount of coverage
Your decision should be guided by the characteristics of your rental, your market and local peculiarities, and your preferences as an investor. Ultimately, you need to choose coverage that you will feel comfortable with and that is within your budget to stay on track and generate profit from your investment.
Conclusion
The landlord insurance cost that you will need to pay is one of the many decisions you have to make and one of the multiple factors you should consider to have a well-protected investment that generates high yields. While having this type of insurance is not obligatory in the US market, it can help you and your property stay protected at times of turmoil.
Choosing the right policy and the optimal coverage, you have to take into account both what level of protection you need and the price you will have to pay for it. In most cases, having a more comprehensive policy makes financial sense in locations characterized by high natural disaster occurrences and high crime rates and for homes that are older and less well-maintained. Newer houses with a high level of security that are placed in safe locations require less coverage.
In any case, you should talk to a few different insurance agents and get quotes from several companies to obtain the best price.