Many landlords renting out a residential property for the first time assume that their homeowners insurance policy will protect them in the event of a natural disaster, accident, or other damaging event. It is a common and potentially costly mistake.
Homeowners policies generally only cover dwellings that are occupied by the owner. If you start renting the property out to someone else, that coverage no longer applies.
Once you become a landlord, you will need a specific landlord insurance policy that covers your property and extends your liability and dwelling coverage.
Why You Need Landlord Insurance
Your investment property has value that you will need to protect. Anything from a windstorm that knocks out the gutters, to a lawsuit from someone slipping on an icy sidewalk, could cost you thousands of dollars. Inadequate coverage could be catastrophic for your business and personal finances.
What Does Landlord Insurance Cover?
As a landlord, you will not need to insure the contents (personal belongings) of your units. That will be the responsibility of your renters. That said, you may need additional coverages such as income loss coverage in case of loss of rental income resulting from flood, fire, or significant tenant damage to your property.
This covers the structure of your property if it is damaged by a covered peril such as a fire, electric/gas malfunction, or irresponsible tenants. Other structures on your property such as fences, sheds and detached garages should be protected from damages caused by included perils as well.
Try to get a policy that offers coverage for a replacement cost instead of the actual cash value, especially for homes where the fixtures and furnishings are old. Some options offer a predetermined lump sum of cash
Some riders cover additional construction expenses that will cover the cost of having to bring an older building up to current code after it has been damaged.
Other commonly excluded items include damage from earthquakes, water or sewage back-up, and floods. You may be able to purchase additional coverage for this type of loss but be sure you know what is covered before the unexpected happens.
Personal Property Protection
Landlord insurance does not cover normal maintenance or wear and tear to the property, including landlord furnished appliances. You can purchase personal property protection to cover your personal items/equipment that are used to maintain or service the property, such as lawn equipment.
If you do not have a property management company to handle maintenance calls, you might want to invest in a rider for emergency coverage. It can help you cover some or all the costs you incur traveling to a property if a tenant calls you to fix something such as a leaking dishwasher or was accidentally locked out of the house.
While a lot of liability issues will fall under the tenant’s responsibility, if you are found responsible for an injury on your property, liability insurance will protect you legally and financially. It covers medical and/or legal costs that might occur if a tenant or visitor suffers injury due to a property maintenance issue, such as icy walkways or architectural collapse.
Rental Loss Protection
Rental loss covers lost income when the property becomes uninhabitable for various reasons such as severe mold, termites, or a pest infestation. It provides temporary rental reimbursement to cover the rent money you would be receiving if the property were occupied but does not typically protect against tenant default or vacancy.
You can purchase a guaranteed income rider to cover tenant default, which may be worth considering if you cannot cover your mortgage without the rental income and if you think it will be hard to find a new tenant and/or difficult to evict a tenant who is withholding rent due to no fault of your own. This also covers you if a tenant comes up short on the rent one month.
How Much Does Landlord Insurance Cost?
There is a direct correlation between the amount of your premiums and the length of time the property is leased. If you own a vacation rental, the National Association of Realtors say you should expect to pay nearly double in annual premiums if you rent out your home for 12 weeks as opposed to an entire year.
Short-term tenants are less likely to notice or mention maintenance issues. They are more likely to be careless and less likely to understand the layout of the house, location of the plumbing, electrical wiring, etc. This can increase the probability of problems and the insurer’s risk.
According to the National Association of Insurance Commissioners (NAIC), the average cost of homeowners insurance was $1,211, though prices can vary significantly by state. However as rental properties are more prone to damage and incidents, you can expect to pay about 15% more for landlord insurance on the same property.
Most landlords suggest their tenants invest in a renter’s policy and many make this coverage mandatory. The cost is generally about $20/mo.
The Bottom Line on Landlord Insurance
Landlord insurance helps you rent your property with confidence. When shopping for policies, be sure to ask your homeowners insurance provider about bundle options. If you sign up for homeowners and landlord insurance through the same company, you may receive a discount.
As a landlord, you have a lot of things to keep track of. Not only do you want to make sure your property is functional for your tenant, but you also want to be sure you are protected from liability or financial loss should something happen. Whether you own one or multiple rentals, a property management company can help you understand and implement all that you need for a successful leasing business.
Nichole Shahverdi is the Director of Marketing for Bay Property Management Group. Prior to running the marketing division, Nichole worked as the Director of Leasing, working directly with landlords and property owners to protect their investment properties.