If you’re a landlord, you need to insure more than just the building on your investment property. Insurance comes in many different forms and investment property insurance is no different. Pick the wrong insurance and if your house burns down, the insurance won’t pay enough to rebuild it. In fact, they may pay less than you bought it for 10 years because there may be a depreciation clause in your contract. With the wrong insurance, they will depreciate your 15-year-old roof and only pay for the remaining five-year value.
Many people are becoming landlords today that never intended to. Maybe you bought a new house and have been unable to sell your other house. Or maybe you bought a vacation property and are taking on short term renters to cover unexpectedly high costs. If you are an accidental landlord, don’t assume the homeowners insurance you have on the property is adequate. It almost certainly is not.
If you’re depending on your old homeowner’s policy, read it carefully. If you’re only renting out a vacation house for a few weeks each year, the old policy might be sufficient. If it goes beyond a couple weeks, the policy probably no longer covers your investment.
You may want to make it a common practice to recommend that your tenants take out renters’ insurance. Your policy doesn’t cover their personal property.
What You Need Beyond Homeowner Insurance as a Landlord
A basic rental policy covers much the same thing as a homeowner policy. The difference is that the insurance company is aware the house is being rented out and that there are more risks than when the owner lives in the house. Tenants simply don’t take care of a property the way an owner does. A basic policy covers fire and storm damage (to an extent). In most states, you can also add ‘named peril’ coverage. This provides coverage for specific types of coverage listed in the policy. If you’re in a hurricane prone part of the country, you would want to add hurricane coverage. Same thing if you are in an area susceptible to earthquakes.
The next level of coverage is an ‘open peril’ policy. Unless the policy specifically excludes a peril, you will be covered for any damage that comes along.
You also need better liability coverage than what comes with a homeowner’s coverage. It’s a litigious society. Anger a tenant and they’ll make up any reason to sue you. You’re also exposed to wrongful eviction and wrongful entry liability and of course for not repairing or maintaining the property that causes an injury.
You also want to consider insuring any expensive equipment you have on the property. If you have a four-plex with a single large furnace, you don’t want the unexpected cost of shelling out tens of thousands of dollars for an emergency replacement if it breaks down during a cold snap.
Don’t let the ‘loss of rent’ clause fool you. This clause typically doesn’t pay you if you lose rent because you evict a tenant or one skips out owing a month or two of back rent. A typical ‘loss of rent’ clause only kicks in if the house can’t be rented for a few months while repairs are being made. This generally has to be an insured incident that the insurance company is already paying for.
If you have multiple investment properties, you’ll want to ask for a discount for the same insurance company to cover all of them. You can have separate policies with specific coverage for each property but by bundling them together with one company you will receive a discount.
Finally, insurance laws vary from state to state so make sure you know the laws in your state.
Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.