4 Things To Consider Before Getting Landlord Insurance was written for Playlouder by a contributing author. Please note that contributing opinions are that of the author. They are not always in strict alignment with my own opinions. –Joe
The most common concern among real estate property investors is how to turn their investments into assets. For real estate investors, the obvious solution is to make their properties earn income by renting them out.
As with any business or investment, some risks and perils may disrupt your plans to earn income from your investments. In a rental property, your investments are always at risk of being damaged. To address this, investors buy landlord insurance to cover risks and potential damage.
You may ask around or you might want to consult with professionals who can give landlord insurance advice. Here are some of the things that you might want to consider before you get landlord insurance:
Distinction Between Homeowner’s And Landlord Insurance
Homeowner’s insurance is the insurance you get for a single-family home where you live. Most insurers would require that the property should be your primary residence. It covers the physical structure, your personal belongings inside, as well as liability coverage if someone gets hurt on your property.
Some homeowners may rent out a room for tenants who may be around for short-term stays or longer periods, but some insurers explicitly exclude this from your policy coverages. Insurance companies have different policies and rules on how to handle room renters. You should check with your homeowner’s insurance provider before you rent out a room. However, if you plan to rent out the entire house, you’re going to need landlord insurance for coverage.
Landlord insurance also covers the building itself, and other physical structures on the property like sheds, separate garages, or fences. The main difference between the two is that you can get homeowner’s insurance only if you’re going to live in the property as your primary residence.
If you’re going to rent out a substantial portion or the entirety of the property, most insurance companies won’t cover you with just a homeowner’s policy. You’re going to have to get landlord insurance to maintain your coverage.
Know What Landlord Insurance Covers
Landlord insurance policies were specifically made to insure properties that aren’t going to be occupied by the owner as a primary residence. Because leasing or renting out your property has proven to increase the risk of potential peril or damage, premiums for landlord insurance are typically higher by 25% than the premiums you’d have to pay for homeowner’s insurance.
Landlord insurance won’t cover all the personal property found in your rental property. Homeowner’s insurance will cover most furniture, appliances, and other belongings in your home, but this isn’t the case with landlord insurance. Most landlord insurance property coverages will only include those properties needed to service the rented property. An emergency power generator or a lawnmower might be covered.
Liability coverage of landlord insurance only covers tenants or other persons who might get hurt while they’re on the premises of the rented property. Some homeowner’s policy will provide liability coverage to you and your relatives who live with you whether the accident happens in your home or someplace else.
Know What It Doesn’t Cover
Landlord insurance won’t cover some of the personal belongings you left inside your rental property. It won't cover the personal belongings of your tenants, too.
It would thus be advisable to tell your renters or tenants that they might want to consider getting renter’s insurance to cover their personal property and belongings. This will come in handy during a hurricane, storm, or fire. It’s always a wise idea to protect your assets early on.
There are a few other things that landlord insurance won’t cover. Here are some of them:
- Landlord insurance doesn’t cover the maintenance of your rental property. This is your responsibility as a property owner.
- Pest infestations and other damages caused by pests and vermin aren’t covered by landlord insurance. Most insurance policies, such as those for homeowners, renters, and condo dwellers, don’t cover these either.
- Some insurance companies won’t issue a landlord policy if you just rent out a room or portion of a property, as you’re still living in a part of the property as your primary residence.
- Most insurance companies don’t include any potential damage due to flooding and earthquake. You may purchase separate insurance policies for these.
Note that California, Hawaii, Maryland, Massachusetts, Michigan, Oregon, and Utah don’t allow insurance companies to use credit scores in computing for insurance rates and premiums.
Know The Different Types Of Landlord Insurance
Before you get landlord insurance for your rental property, it would be good to know its types and how they work. Your coverages will depend on the type of landlord insurance that you choose for your rental property. There are three types (also called ‘dwelling policy’) of landlord insurance:
Dwelling Policy 1: Very Limited Coverage
The first type has the cheapest premiums and rates. A typical DP-1 policy lists only 10 specific causes of perils and damages. These are fire and lightning, windstorm and hail, volcanic explosion, internal and external explosion, smoke, aircraft, vehicles, riot and civil commotion, vandalism, and malicious mischief.
One disadvantage of the DP-1 policy is that it will only reimburse the actual cash value (ACV) if there’s any claim on any of the 10 covered causes. The ACV refers to the actual depreciated value needed to rebuild the property. This means that the computation on the payment amount would only be based on the value of the property in its damaged condition.
Dwelling Policy 2: Moderate Coverage
This will cover all the perils covered by DP-1, plus burglary damage, glass breakage, electrical damage, falling objects, collapse, tearing apart, cracking, burning, bulging, freezing of pipes, the weight of ice and snow, and accidental discharge or overflow of water or stream.
DP-2 will pay out the replacement cost value (RCV). This means that the insurer will pay out the amount needed for the repair works to restore the property to its previous condition. This is in contrast with the ACV from the first policy. This difference can run into tens of thousands of dollars.
Dwelling Policy 3: Comprehensive Coverage
DP-3 is the most common type of landlord insurance policy. It provides comprehensive coverage as it has the broadest protection to landlords and investors. It’s also called an ‘all-risk’ or ‘open peril’ policy.
Ready To Rent?
Landlord insurance isn’t the same thing as homeowner’s insurance. Most American homeowners are familiar with homeowner’s insurance, which they have for their own homes, but those who aren’t leasing or renting out their properties might not be too familiar with landlord insurance. Consider the things discussed in this article before getting landlord insurance.