What You Need to Know About Insuring Your Rental Property as a Landlord
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If you own a property and plan on renting it out, it’s unfortunately not as simple as placing a ‘for rent’ sign in the yard and hoping Ethel and Fred show up to apply. You’ll need to obtain insurance specifically for rental properties and you’ll have a few more considerations than you may have had with standard homeowners insurance policies.
One thing is for certain: your regular homeowner’s policy, or standard homeowners insurance, may not protect you if you’ve rented out your home and haven’t told your insurance company. This is especially true if you’re renting out a vacation home and the same tenants will not be permanently in residence, as there’s a much greater risk for the insurance company—unfortunately the reason it can be difficult to find insurance for vacation rentals.
Regardless of your intentions though, always let your insurer know–not being honest can lead to denied claims or insufficient coverage.
Your main concern when it comes to insuring rental properties will be the structure including the roof and foundation and other buildings on the premises. Ask your agent about options regarding multi-family dwellings if you’re insuring an apartment, condo, or duplex.
No matter what kind of property you’re renting out and regardless of to whom and when, there are a few key things to think about when it comes to insuring any rental property.
1. Furnishing appliances and/or the property, either in whole or part.
When you rent out a home, an apartment, a condo or any other structure to a third party, you need to insure the property itself, but you’re not required to insure the contents. The exception to this would be any appliances you are leaving in the property – a dishwasher, stove, refrigerator or washer and dryer, for example. The standard fire policy for rental homes doesn’t automatically include coverage for them, and you need coverage specifically for those items. Figure out how much it would cost to replace them all at once, and make sure that’s the minimum amount you have for personal property coverage.
Contents belonging to the tenants will be their responsibility. Have a conversation with your tenants urging them to buy a renters insurance policy to indemnify them if they experience a loss of contents. If a fire or storm destroys the home and contents inside, your insurance will not pay out if their possessions are damaged or destroyed.
2. Protecting rental income.
One important factor regarding your insurance coverage is deciding whether you want to have insurance for the income you make from renting.
If a fire or storm damage makes the home unlivable, your tenants will be finding alternate housing. Until they come back or until the house can be re-rented, you won’t be receiving rental income during that time. If you ask for rental income protection on your insurance, payments can be made to make up that gap.
Your insurance policy can cover fair rental value in the event of a loss. You’ll have to decide how much you’d receive in annual rental income and obtain insurance for that amount. This is vital if your budget is greatly dependent on rental income and if finances are tight. Having a mortgage to pay without the rental income to support it could cause you to lose your property.
3. Maximizing your profit from rental income by making smart insurance choices.
Of course, you’re probably renting the property because you’d like to realize a profit. Your property taxes, maintenance, and repairs will not stop just because you’ve rented the place to somebody else. This means you need to do everything possible to make that rental income worth as much as possible, and making the right insurance decisions will help boost profit you can pocket.
If possible, consider a higher deductible. Perhaps you’re renting out the property because you’re in a financially stable position to do so, meaning you may be able to pay more out of pocket with more ease. If you feel you can afford to pay a $1K deductible just as easily as a $500 deductible, you might as well save some money on your insurance and opt for it. Additionally, since some risks are being absorbed by the renter you may be less likely to face a loss anyways.
Since many companies require you to carry multiple policies to get coverage for rental properties, take advantage of that bundled coverage. Insuring your home and your car with the same carrier can often save at least 10% on premiums. As usual, look for savings from discounts. There are often similar discounts for rental property insurance as for regular homeowners from improvements like sprinklers or other security systems.
4. Choosing between replacement cost and cash value insurance.
Unless you have full replacement cost, you will only get the amount of money it would cost to fix the repairs needed to bring it to the level it was prior to the loss with depreciation figured in. This could mean you’d be on the hook for a much greater out of pocket expense to have it fixed correctly.
Full replacement cost will cost more, but it won’t be as expensive as the out of pocket expense you could face without it.
5. Liability if your tenants or their guests are injured.
Many landlords have a concern about someone being injured on their property. Your tenant will ultimately be responsible for injuries which are caused by his careless or negligence. If a guest falls in the shower, your tenant will be liable, so it’s a good idea to make him aware of this risk.
Discuss possible accident scenarios with your insurer as there are some gray areas you’ll want to understand thoroughly. For example, if the tenant fails to remove the snow from the front sidewalk and the mailman slips and falls, is it the tenant’s responsibility or does it fall back on you, the owner, because the fall didn’t happen on or within the structure? It’s always better to know as much as you can before an accident happens, and it’s never wise to guess or assume when it comes to insurance.
All key issues to address when obtaining insurance can be less worrisome with the right tenants. One of the most important things you can do when renting out a property is easier said than done, but be careful who you rent to. You want somebody who pays the rent, but you also want a tenant who doesn’t have a reputation for neglecting their home, making frivolous claims, or having a litigious history.
As one very successful property manager once said to me, “If the tenant’s shoes are dirty and run down, your property will end up looking the same!” Without the right protection and caution, your finances could end up run down too.