2022 Landlord insurance guide: If you don’t protect yourself and your money, your real estate business is going to fail. Insurance isn’t the most exciting topic, but if you don’t properly protect yourself, your business, and your properties, you could lose everything.
Landlords need a different kind of insurance than normal homeowners, and even then, there are different rules for different situations and places. Today, we’ll explain some of the most important things about landlord insurance so that you and your assets are safe.
A disclaimer: All real estate investors should talk to an insurance broker who is licensed and has a lot of experience. In this article, we’re only going to give you general information about insurance. You should also talk to an insurance professional about what you should do.
The difference between homeowner’s and landlord’s policies
As a landlord, you need landlord insurance instead of homeowner’s insurance that you own. If you’re running a rental property business, you need to make sure you have extra protections in addition to what a homeowner might need. A homeowner policy will cover things like fire, flood, personal belonging protection, and theft, among other things. Many of these are important for real estate investors, but there may be other protections you need as well.
It will be up to your renters to insure the contents of their units. Many landlords make this a requirement, but you don’t have to do this. However, you may need extra coverages like income loss insurance if you lose a lot of rental income because of floods, fires, or major tenant damage to your home.
2022 Landlord insurance guide 101
People who rent out their homes should know about three common insurance policies. They’re called “DP-1,” “Dp-2,” and “Dp-3.” In general, the standard DP-1 policy covers less than DP-2, DP-3, and so on. For example, DP-3 policies cover most risks, like theft and vandalism, while DP-1 and DP-2 may not. People who have DP-3 policies can use their policy to pay for legal or medical costs if a tenant gets hurt on their own property.
For example, most landlord insurance policies don’t cover your belongings when you rent a room or a house. This is your responsibility. Most DP-3 policies, on the other hand, cover things that the landlord owns, such as appliances or furniture. DP-3 policies also cover the loss of rental income if the unit is off the market while you fix it. The following are some of the most common insurance policy features that you should think about:
- Property protection (structure)
- Personal property protection (contents)
- Liability
- Rental loss protection (only if the unit is unhabitable for various reasons)
- Flood
- Acts of nature (be sure to ask your broker what is covered, and what isn’t)
Rental Loss pays for lost income when the property is uninhabitable, but it doesn’t usually cover things like tenant default or vacant units. If you can’t afford to pay your mortgage without the rental income, you might want to think about getting extra insurance to cover the cost of evicting a tenant who isn’t paying because of no fault of your own. You can also buy extra insurance to cover the cost of evicting a tenant who isn’t paying because of no fault of your own.
It’s important to note that if you have a HOA, there will be insurance for the way the HOA is run. A condo building with a HOA will have its own insurance to cover some things. Working with your broker is important in this case, because you don’t want to double up on coverage that is already covered by your HOA.
My pre-paid policy isn’t going to expire for a long time?
Keep in mind that you can change insurance providers at any time and get a prorated refund for coverage you didn’t use, so don’t be afraid. Talk to your insurance broker or a new insurance company to find out more about what they can do for you. The policy you have now can’t stop you from moving forward.
So, how much does landlord insurance cost?
The general rule is that landlords can expect to pay about 15% more for landlord insurance than they would for a standard homeowner’s plan. According to Insurance.com, the average cost of a home insurance policy in the United States is $1,288. For this reason, most landlords can expect to pay about $1,481 a year for landlord insurance.
Because landlord insurance costs more because there are renters, insurers are taking on more risk from them. Here are some other things that can raise the cost of your landlord insurance:
- Security features
- Age and condition of the property
- Smart home devices that provide early warnings of potential issues
- Number of rental units
- Location
- Safety equipment on the premise
- High-risk features such as wood fireplaces, pools, and hot tubs
- Long-term vs short-term tenants (different coverage is needed for each case)
Questions to ask your insurance broker
It is very important that you talk to a licensed insurance broker before you buy any rental property. Also, you should get insurance quotes. If you don’t already have insurance through a company, you might want to think about using a broker. Brokers can shop around for the best prices and policies for their clients. There may be one insurance company that gives you a bulk deal only if you only use them. Be sure to look at both options.
As part of your investment due diligence, you should also make sure that you have insurance. Many lenders require it as part of the process of getting money for your home. When you talk to your broker, here are some questions you might want to ask:
- Are there any upgrades/repairs I can do to this property to reduce my insurance costs?
- Does this policy cover flooding, and what type of flooding (natural disaster vs sewer backup vs tenant error)?
- What are all the deductibles on my policy?
- Are there additional coverages I should add on given my location?
- Are there any insurance discounts that may apply to my situation?
- Does my policy cover both short and long-term rental periods?
- What if my property is damaged by the negligence or criminal acts of my tenant?
- How is the replacement cost or cash value calculated under this policy?
- Does my policy cover other structures on my property such as a shed or coach home?
- Should I get a separate umbrella policy to cover myself if I max out my liability coverage?
- Will having safety equipment on premises reduce my landlord insurance premium?
- What is NOT included in my landlord insurance?
- Is my policy covered in the event of a terrorist event?
Your insurance broker and other landlords in your area can help you figure out what could happen.
6 critical tips when seeking landlord insurance
Tip 1: Make it mandatory for your renters to have renters insurance. You can make this a part of the application process, or ask them for proof of a renter insurance policy when they sign the lease. Thankfully for tenants, the renters insurance cost is quite low, and can run as little as $20 a month.
2: Consider going with the same insurance provider for all your rental units to get a bundled discount.
3: Add short-term rental coverage to your insurance policy to give yourself the flexibility to rent out your unit for short-term periods if needed.
4: If you have a net worth that is higher than the liability coverage on your insurance policy — $1 million for example — you should consider getting a separate policy to cover yourself or LLC if you require more coverage if needed. For instance, if your liability coverage is only $1 million but your net worth is $5 million, you don’t want to max out your liability coverage and then leave you personally liable for the remainder. You can obtain a second policy that will cover your assets should this be the case.
5: Make sure your rental loss coverage is the same as your gross rents for the entire dwelling to ensure there is zero loss of income.
6: Consider add-on insurance items if they aren’t on your current policy such as flooding, wildfires, burglary, earthquakes, terrorism events, and vandalism.
2022 Landlord insurance guide Final thoughts
There’s no doubt that having the right insurance can make or break your real estate investing business. If your street was flooded 10 years ago and your sewers backed up, then you need to make sure you have the insurance to cover that now that it’s been so long. It’s also risky to not have liability insurance if a tenant falls on the steps and you are held liable. If you don’t have it, you’re putting both your business and personal finances at risk.
Ask for different quotes, talk to experts in the area, and do your research with help from a professional insurance professional. That way, you can go to sleep at night knowing that no matter what happens, you and your business will be taken care of, no matter what.
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