Rental Property Insurance: 5 Questions Answered

When you buy a house, homeowner’s insurance seems like a no-brainer. A fire or natural disaster can do serious damage to your investment – or worse, leave you without anything to show for it. While homeowners insurance might provide adequate coverage, if you’ve purchased residential property to rent out, there are a lot of risks a standard homeowner’s policy may not cover. 

That’s where rental property insurance comes into play. Also known as landlord’s insurance, these policies are written specifically for the property owner, and are designed to cover things beyond the concerns of a homeowner living in his or her own property.

The ideal insurance policy will leave you covered for just about anything, including total loss of the house. That means your investment property is protected and you can continue to earn rental income and grow your real estate portfolio with reliable equity. In order to help guide you through the process, here are the answers to five important questions people have about rental property insurance:

1. What does landlord insurance cover?

Similar to a standard homeowner’s policy, your rental property insurance will cover property damages from causes listed on your insurance agreement, up to the maximum limits listed on the policy page. The key difference is that it’s written to protect your long-term rentals against damages you’re more prone to as a landlord. Generally speaking, that means higher property damage limits and more thorough injury liability policies.

Loss of rental income in cases where damage to the house prevents you from renting it out is an additional coverage included with a landlord insurance policy. Additionally, some policies can help pay for the costs of moving your tenant back in if they had to vacate the property temporarily. 

While rental property insurance will cover the personal property you leave there – such as appliances or lawn maintenance equipment – it will not cover your tenant’s possessions or your tenant’s expenses if they need to stay in a hotel. A good safeguard against situations like this is requiring your tenants to hold their own renter’s insurance policy.  

Otherwise, if the kind of damage isn’t spelled out in the policy, you aren’t covered. For example, if your property is in a flood zone, you’ll need to add flood protection to your policy. Damage caused by vandalism and liability policy for maintenance professionals who are injured while working on the property are additional options to consider.

2. How much will your policy cost?

Renting out a home generally has more risks than living in it yourselves. Tenants are more likely to ignore smaller problems with the rental property that might lead to larger ones later on and have a tendency to be more lax with the property than the actual homeowners. Additionally, you may be liable for injuries that happen on the property. Because more money in claims is paid out each year to landlords than homeowners, insurance companies charge higher premiums to reflect that.

On average, homeowner’s insurance costs around $1,200 a year. Of course, the price is dependent on the appraisal value of your home, where your home is located, and the level of coverage you select. For example, Florida had the highest average homeowner’s insurance cost at around $1,993, while Oregon had the lowest at $643. Rental property insurance will usually cost 20-25% more than a homeowner’s policy. You can use that information to estimate the cost to insure real estate before you decide to buy. 

Knowing the price of insurance, the amount you will pay on the mortgage, and the average rent prices in a neighborhood will help you determine if an investment property is worth your time and money. The best way to save money is to compare rates from multiple insurance carriers and look into customer feedback to see which insurance company is right for you.

3. Are you required to have landlord insurance?

There’s no law that says you need to have insurance on a house to rent it out. Your mortgage lender may stipulate that you carry it until you’ve paid off the loan, but otherwise, you’re free to own your assets uninsured. That being said, you’ll really want to consider if that’s the route you’d actually like to take.

If you don’t insure your investment, a natural disaster could wipe out your house and all the equity you have in it. If you have a reckless tenant who doesn’t take care of your property well or if a tenant is injured on your property and sues you for negligence, you’ll be on your own to pay legal fees and damages, which can add up to a lot. 

The best practice is to make all the safeguards you can on your property and to carry an insurance policy that leaves you protected. Even a small claim can raise your rates by a lot, so this small investment will save you money in the long run. 

4. Do you need rental property insurance for short-term rentals?

If you’re planning on renting out your primary residence for a weekend or a couple of months, you can usually notify your homeowner’s insurance provider, and they extend the policy to cover the house for the duration of the rental. However, your policy won’t suddenly cover flood damage or vandalism if it wasn’t covering it before.

If one of the tenants gets hurt and you are found liable, you want to be absolutely sure your insurance will cover the cost of their medical expenses before they move in. If you don’t plan on purchasing rental insurance, ask about it when you notify your insurance company about short term tenants. 

If your property is subject to frequent short term renters, like a bed and breakfast or an Airbnb listing, then an insurance company will view it as a business. You will need a commercial insurance policy to protect yourself from damages and loss of rental income.

5. Is your landlord policy enough?

If you own a lot of properties, having policies on all of them is the smart choice. But there are ways you can go the extra mile in instances when your coverage alone isn’t enough. We’ve already discussed the importance of a renter’s insurance policy, which will keep your tenants covered in instances when their property is stolen or damaged. This will ensure your payouts are limited to damages that directly affect you. But what if your coverage maxes out? 

Your other policies will only pay for claims made on the property they cover, but an umbrella insurance policy isn’t limited to one specific property. Unlike an LLC, it can protect your investments no matter what state they are in.

An umbrella policy will cover costs beyond your maximum limits, as well as protect you from any number of circumstances, including unfortunate instances in your daily life that result in lawsuits. It can also work with your homeowner’s policy if your primary residence is damaged or a guest is injured on your property. Talk to your insurance agent to see how an umbrella policy might meet your needs.

The Bottom Line

If you’re in real estate investment for the long haul (and you should be!), you’ll want to carry rental insurance on all your properties and look into other ways to protect your investments in the worst-case scenarios. 

Being a landlord is a lot of work, but a solid property management team can help you keep all your rentals in tip-top shape, help you place top-notch tenants, and handle many other stressful tasks of daily maintenance. If you’d like to partner with someone so that you can keep your focus on the big picture, learn how Great Jones can help.

Laura Fayer

Laura works on the Finance & Analytics Team at Great Jones. She's eager to help Great Jones scale as a business and make our services readily available to more investment property owners across the country.

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