If you own a home, you know you need to keep it insured. But what if you’re renting out the home to tenants? Should you opt for rental property insurance or does standard homeowner’s insurance cover all your practical needs?
The two types of coverage are similar, but there are a few key differences. In this guide, we’ll contrast homeowner’s insurance and rental property insurance (or landlord insurance) so you can make an informed choice based on your needs.
The Basics
Homeowner’s policies are designed to cover your home and your family while you’re living there. If you rent a room out to a tenant, some homeowner’s policies can be adjusted to extend to situations where the home is damaged or a tenant is injured. But for the most part, normal homeowners insurance isn’t designed to cover tenants.
That’s what rental property insurance is meant to do. It protects you and your property, as well as income associated with it.
Both of the policies can protect you from events such as fires or natural disasters, but only landlord insurance can protect you from the risks of renting out to tenants. This means that if you’re renting out your property, a homeowner’s policy may refuse to cover damages to your property if you yourself are not living in the property.
If you’re looking to purchase your first investment property, the best way to get the coverage you need is to talk to your insurance agent about landlord’s insurance. Not only will it protect your investment from damages, but it will also protect you if something unfortunate were to happen to your tenant.
What does each policy cover?
Homeowner’s insurance and rental property insurance may look similar, but they have some key differences which reflect the particular risks of each situation. A single-family home with renters in it more times than not, has higher risk for damage than a home with the owner living in it.
The higher cost of landlord insurance reflects that greater risk. But unlike homeowner’s insurance, the premiums on all your insurance policies are tax-deductible. Renting out a home is considered a business, so tax law works in your favor here.
Homeowner’s Insurance
The Building policy covers damages to the house, as well as any detached structures such as a garage. Unless you have an open policy, it will only cover damages from named events.
The Personal Property Coverage covers your furniture, appliances, and personal items from any damages your policy covers. It also covers the property of guests so long as the policyholder is presently living there (that means if you rent it out, your policy won’t cover things owned by your tenant).
Liability covers you and family living in the house if you cause damage to someone else’s home or injure someone else unintentionally, and it results in a lawsuit. This policy follows you and your family wherever you are.
Medical Payments can cover the medical costs of minor injuries that happen on your property if you’re not at fault. This generally has a much smaller limit than your liability coverage and is meant to avoid the possibility of litigation.
Loss of use policies will pay for temporary accommodations if damages to your home make it uninhabitable, as well as things like restaurant bills, either up to your maximum limits or through the specified time frame, depending on your policy. It might also cover rent a tenant owes you if you rent out a room of your house, but that depends on your policy. (Always talk to your insurance agent and accountant before you rent out a portion of your home!)
Rental Property Insurance
The Building portion of the policy covers the house itself, but unlike a homeowner’s policy, it generally doesn’t include other structures on the property – unless you specifically pay to add them. General maintenance isn’t covered under this policy, although you can add emergency repairs coverage to some policies.
The Personal Property Coverage is meant to cover any appliances, tools, or furnishings you leave on the property for the tenants to use. This can include lawn maintenance equipment or washers and dryers. If you furnish the property before renting it out, you need to let your insurer know. It will cover your property, but the premiums will be higher.
Liability will pay medical expenses and legal costs if someone is injured on your rental property and you’re found at fault. Unlike the homeowner’s version, this policy only extends to incidents that happen on the property insured.
Loss of Income will make up for the rental income you lose if the house becomes uninhabitable due to damages, as long as the event causing the damage was listed on your policy. (So for instance, for fire damage to be covered, your policy must specifically list fire damage coverage.)
Level of Coverage
Landlord insurance comes in three levels of coverage. The lowest level of coverage, DP1, covers only named events, which are relatively limited in scope. You can usually add Vandalism and Malicious Mischief coverage, which can occur if you ever have to evict a tenant, but you’re still exposed to a lot of risks that you’re not covered from. It also only covers the actual cash value of your property. So as your property ages and depreciates in value, the policy will cover less.
A DP2 insurance policy is also called peril coverage, but it has a broader scope than the basic DP1 policy. It will also pay the replacement cost rather than the actual value, as long as it’s within the maximum limits of the policy. Additionally, it will cover loss of rental income if your tenants have to move out due to damages. However, it will not offer coverage if the property was vacant during the period that damages were incurred.
A DP3 insurance policy is truly comprehensive and is considered an open peril policy. Unless the cause of damage is specifically excluded from your policy, your property will be covered – even if there’s been a temporary vacancy. This is the recommended policy for landlords who desire to fully cover their rental property investments.
Homeowner’s insurance policies have similar levels of coverage, but none of them will protect you if you have long-term tenants and you’re not residing on the property yourself. If you’ve purchased an investment property, you need a landlord insurance policy to prevent total loss on your investment.
What your policy doesn’t cover
Your landlord’s insurance doesn’t cover your tenant’s property, nor does it cover them if they are found liable when someone is injured on the property. In order to protect them and to minimize possible lawsuits you might be caught up in, the best practice is to require that tenants maintain renter’s insurance as long as they live on your property.
None of these policies will cover general wear and tear of personal property or the dwelling, but routine maintenance is essential – both to protect the value of your home and to avoid making claims that will raise your rates.
If you ever have damages that exceed your limits, you’ll have to pay the balance out of pocket. The more houses you own, the more likely this is to happen. An umbrella policy can cover the rest of the damages, as well as offer you personal liability if you’re caught up in a lawsuit or are responsible for property damage or injury.
There are also less common scenarios that can leave you on the hook for damages. For instance, in the unlikely event that the police raid your property, your insurance will probably not cover damages.
You can’t predict the future, but a thorough tenant screening can help minimize worst-case scenarios like these, and ensure that you have quality residents who care for your property and pay rent in a timely manner.
The Bottom Line
If you’re buying property to lease out, it is highly recommended that you purchase rental property insurance. This will protect your investment and make sure you don’t miss out on rent due to unforeseeable circumstances. When you’re looking to purchase a new investment property, consider whether you’ll be able to afford the cost of an insurance policy and still turn a profit.
