Is Landlord Insurance Worth the Expense?
Costs associated with owning a rental property can add up quickly and purchasing landlord insurance can seem like just another expense.
According to data from the U.S. Census Bureau, almost 50% of units nationwide are owned by individual investors, many of whom depend on monthly rental income for living expenses.
If your livelihood depends on your rental income, it is crucial for you to assess your insurance options to make an informed decision.
What is landlord insurance and do I need it?
Landlord insurance is not required by law. It is a policy designed specifically for residential homes, apartments or condos not occupied by the owner.
However, most mortgage lenders require you to obtain insurance before creating a mortgage agreement in order to lend you the funds to purchase a property.
Regardless of how you decide to finance the purchase of your rental property, it may be wise to purchase a landlord insurance policy to protect yourself and your property. In addition to landlord insurance, you may also want to consider creating a limited liability corporation (LLC) for additional individual protection.
What does landlord insurance cover?
Landlord insurance usually covers property damage, liability claims, and loss of income. Although most providers offer this coverage, or a combination of it, coverage does vary between insurance companies. Knowing this, it is important to find the right insurance provider and policy that best suits your needs.
Property damage coverage
Like homeowners insurance, landlord insurance includes property damage. This typically covers damage caused by fire and storms, as well as additional coverage options which can include theft, vandalism, and tenant damage. Ideally, your insurance will cover the costs associated with completely replacing or rebuilding your rental property if you were to experience a complete loss.
Landlord insurance with liability coverage protects you against liability claims and lawsuits.
If you are found liable for a personal injury that has occurred on your rental property, liability coverage will assist in paying the expenses associated with the injury, such as legal and medical bills. For example, if someone falls on your rental property due to a wobbly step or a loose handrail, you could be held responsible for the resulting injuries. In which case, your liability coverage will help cover the costs associated with the claim up to the limit indicated on your policy.
Liability insurance can also help cover the costs if you are found responsible for, or required to pay for damage to someone else’s property. If a tenant’s belongings are damaged as a result of your negligence to maintain the property and a claim is filed against you, your liability insurance will cover the associated legal fees.
Loss of income coverage
Loss of income coverage, also referred to as rental income coverage, is specific to landlord insurance. Loss of income coverage is exactly as it sounds; if your tenant is forced to move out of your rental property due to a covered loss (ie, the property is not livable), your insurance will kick in and reimburse you for the rental income you lose as a result of being unable to rent out your property.
Ideally, you want your loss of income policy to be equal to the annual rent collected for that property. For example, if the monthly rent is $1000, you would want your loss of income policy to be $12,000. This ensures that if damage occurs you have adequate time to repair the property while still receiving income.
On top of the items listed above there is additional coverage you can purchase for your rental property. For example rent guarantee insurance, which provides protection if a tenant defaults on their rent. Again, this coverage often varies by provider and policy so it is important to speak with an insurance representative to ensure you have the best insurance for your needs.
What does landlord insurance not cover?
Although landlord insurance provides a reasonable amount of coverage, invariably there will be some things that are not included. Your policy should state what is excluded and it is important to read and understand your policy to know what you are not protected against.
Tenants are not covered under landlord insurance policies. This includes wear and tear caused by tenants and tenants’ personal belongings.
For this reason, although not required by law, it is recommended that you make renter’s insurance a condition of your lease agreement. This condition of the lease agreement should apply to all tenants. Renter’s insurance will protect your tenants from liability claims and ensure that their personal belongings are covered in the event of damage or theft.
Renter’s insurance is usually quite affordable and should not deter potential tenants from signing a lease agreement. However if you do receive push back, remind the tenant that it is a precaution to protect them and their belongings.
You can learn more about incorporating these elements into a stronger lease here.
Unlike homeowners insurance, landlord insurance does not cover the loss of personal property. This means that if you, the landlord, leave any belongings in the rental unit that are stolen or damaged, they will not be covered.
The one exception to this is personal property that is used to maintain the rental property. For example, if you store a lawn mower at your rental property to maintain the lawn, it can be covered under landlord insurance.
Maintenance and equipment
Maintenance and equipment issues are typically excluded from landlord insurance coverage. This means that if something such as the oven were to break, you would be responsible for the cost of repairing or replacing the oven.
Landlord insurance usually does not cover intentional damage. For example, if a current tenant vandalises your property, it may not be covered under your landlord insurance policy.
How much is landlord insurance?
Landlord insurance costs on average 20% to 25% more than homeowners insurance. The reason for this is due to the greater liability and risk taken on by the insurance company.
Although more expensive, your premiums can be tax-deductible. This is because being a landlord is considered to be a business venture and therefore insurance premiums are considered a business expense.
Similar to homeowners insurance, there is no fixed cost for landlord insurance. The costs of your insurance will vary based on several factors. Factors include:
- The type of rental property (for example, a condo versus a single family home);
- the structure, condition and size of the building;
- location; and
- the amount of coverage you decide to purchase.
It is recommended that you obtain quotes from multiple different providers, not only to ensure you have the right coverage and protection for your rental property, but also that you receive a competitive price.
Why landlord insurance is worth the expense
Ultimately, despite the higher price tag of landlord insurance, it is usually a good idea to purchase protection for your rental property. The property damage, liability, and loss of income coverage that landlord insurance offers provides peace of mind and protection for you, your property, and your income.