Insuring A Rental Property – What You Need to Know
You may want to be careful when turning your primary residence into a rental property, especially when it comes to insuring that rental property. Homeowner’s insurance typically covers owner-occupied, single-family residences. When your home doesn't meet that definition because it's being rented out regularly, it's no longer covered. You will need a second, more intensive insurance plan for a rental property.
Risks in Insuring A Rental Property
The risk is higher for both you and your insurer when you rent out your home on a full-time basis. You have an increased responsibility for injuries on the property, whether to your tenants or your tenants' guests. Insurers also experience more claims on tenant-occupied properties because tenants typically don't care for properties as well as owners would. Renters are less likely to either identify or report maintenance needs and may be unfamiliar with a home's systems like the location of the water shut-off.
I experienced this first-hand on one of my rental properties. The tenant texted me and said that there was a leak in the bathroom. I believe it was a holiday or a Sunday, and I asked if she thought it could wait until the next day. She said yes. By the time I got a plumber out there, the adjacent bedroom was flooded. All the carpet, the drywall halfway up the wall and more – everything had to be ripped out and replaced.
Insuring A Rental Property: Price
Due to the added risk, expect to pay 15% to 20% more for landlord insurance than you did for homeowners’ insurance. Landlord insurance typically covers the house itself, other structures on the property such as sheds, the owner's possessions (but not the tenant's possessions), lost rental income if the house is damaged and uninhabitable, and some liability protection for the owner in case of injury or a lawsuit. Policies vary, however, so read the fine print. If lost rental income isn't included, you might be able to add the coverage for an additional $50 a year.
What If I Only Rent A Portion Of My Home?
Homeowners’ insurance may offer coverage if you're living in your single-family home and renting out a room to tenants, depending on the number of people renting or the length of their stay in your home. Coverage varies by insurer or policy, so check with your agent before you rent out a room in your place. If you plan to rent out your entire home to tenants, you'll need landlord insurance.
Landlord insurance typically only provides liability coverage relating to the rented premises. If a tenant is hurt in the home you're renting out and you are found legally responsible, the liability coverage on your landlord policy may help pay for the resulting medical expenses or legal fees. Meanwhile, the liability portion of a homeowner’s policy typically covers you and relatives who live with you in the home, whether the accident happens in your home or not.
Rental Insurance Tips & Trips
Read the Fine Print…some damages may not be covered by your rental property insurance without requesting additions to your coverage.
Some to consider are:
- Guaranteed replacement cost for your dwelling, allowing you to repair or rebuild even if the cost of building exceeds the original coverage amount.
- Water damage coverage for the building or anything inside the building from flooding, sewer backups and other natural disasters — typically not covered by a basic policy.
- Renter default protection pays you for lost rental income if your tenant fails to pay rent, must be evicted due to a court order, undergoes a hardship or dies unexpectedly.
Don’t take your chances with temporary tenants. It is essential that you obtain additional coverage if you are renting out your property even if only for short periods of time. The insurance company will deny a claim if your property is being used for ‘business purposes' and your policy is a standard homeowner's policy. This will result in you having no coverage for an injury that occurs on the property, or even property damage caused by a renter. You will be personally liable for all damages. This includes renting a room on Airbnb.
There may be other legal hazards if you don't insure your premises properly. Some states have very specific coverage requirements for rental properties that your homeowner's policy won't include. A great example is in Massachusetts where it is mandatory to carry $750 coverage for relocation expenses in the case of a fire. These very particular requirements would never be covered in a standard policy. Your insurance agent will be able to tell you what the min insurance coverages are in your state.
Also consider an umbrella policy for your rental property that provides additional liability protection beyond the limits of your landlord policy. I would highly recommend an umbrella policy if you have equity in your own home or savings. You can usually get an additional $1 million worth of liability coverage for $250 to $300 a year. In my opinion, some of the smartest money you can spend.
Another level of asset protection would be to require tenants to buy renters insurance that protects their own property. Remember, landlord insurance only covers the owner's property. In recent years, the average cost of renter’s insurance has run $182 annually.
These are just a few of the tips and tricks I have learned about insuring a rental property. Want to hear more? Be sure to subscribe to my email list for the latest posts – and don’t be afraid to ask questions.