Ready to start investing in real estate? Don't make the rookie mistake of assuming that your homeowners' insurance will cover accidents, disasters, or damage once your owner-occupied home becomes an investment home.
Homeowners' insurance policies typically only cover owner-occupied homes. If you start renting out to someone else, that coverage generally no longer applies.
And if your renters have insurance, their coverage is designed to protect their belongings inside the home, not the physical dwelling itself.
This is where investment property insurance comes in. Also known as landlord insurance, here are the two biggest things you need to know about coverage for your investment property:
What Does Landlord Insurance Cover?
A comprehensive landlord insurance policy will offer three main protections for your investment:
The primary purpose of landlord insurance is to protect your investment against damage or destruction due to a covered loss, like from a natural disaster, fire, electric/gas malfunction, vandalism, or even irresponsible tenants.
Tip: Ask your insurance professional if your policy offers replacement cost or replacement value, rather than actual value.
Just like homeowners insurance in an owner-occupied home, good landlord insurance will also provide liability protection. Liability protection can cover medical or legal costs that could arise if your tenant or a visitor is injured due to a property maintenance issue, such as icy walkways, stairs that need repair, or a structural collapse.
Lost Rental Income
Once you become a landlord, you become a business owner, too. Which means you want protection against the possibility of a loss of income. This coverage could help provide rental reimbursement if your property became completely inhabitable as a result of severe mold, pest infestations, or a sinkhole, to name a few.
Several common riders come with typical landlord insurance policies. While not as vital as the protections mentioned above, they could come in handy and save you some money in the long run.
- Guaranteed income insurance: This covers the landlord if a tenant comes up short on the rent one month (or doesn't pay at all).
- Earthquake insurance: In some states, like CA, earthquake damage is excluded in a typical policy. But if you live in a quake-prone state, this coverage could protect you against structural damage.
- Flood insurance: Since many landlord insurance policies don't include flood damage related to natural disasters or municipal plumbing, flood insurance is worth adding if the property is in a flood-prone zone.
- Emergency coverage: In the event a tenant calls you out to fix something like a leaking dishwasher or was accidentally locked out of the house, this feature can help cover some or all of the costs you incurred to travel to the property and resolve the issue.
How Much Does Landlord Insurance Cost?
Since rental properties are more prone to damage and incident, you can expect to pay about 15 to 20% more for landlord insurance than you would on owner-occupied homeowners' insurance on the same property.
The cost of insurance for a short-term rental can be even higher than a long-term rental property. Keep that in mind if you're trying to decide between finding a long-term tenant or posting your place as a vacation rental on AirBnB.
While it may not seem fair, short-term tenants are less likely to notice and mention maintenance issues. They can also be more careless, which can increase the probability of problems and damage occurring.
There could be ways to reduce the cost of your insurance, however. Ask your homeowners' insurance provider about bundle options. If you sign up for homeowners and landlord insurance through the same company, you could receive a discount.
Before you decide to rent out a piece of property, remember that rental properties need landlord insurance, not a traditional owner-occupied homeowners policy. Only landlord insurance is designed to protect your property—and your financial investments—from the risks that come along with turning a home into an income stream.