Share this:
Landlords, earning handsome passive income? And, your monthly mortgage is covered with the rent you are getting? Good work! You are playing a good offense. Is your defense strong enough?
In a post why do we need insurance, I mentioned that investment is a offsense and insurance is a defense. So when I ask if your defense is strong enough, that essentially means are you covered adequately for the home you rented out?
Let me tell you an interesting story, this incident happened to my brother-in-law who lives in London. Not going much into the personal details, he had to claim for a property damage to his rental property he owned in the Brighton area. He had the home owners insurance on that property. It was a crude shock to him when the claim got rejected by the insurer.
The reason being, since he was not occupying the property his home owners insurance didn’t cover the damage caused. He needed a landlord insurance. Now don’t think this will not happen to you in America. The insurance law, in this regard, is same even in America. Most of the home owner insurance do not cover non-owner occupied properties.
My brother-in-law los all his passive income for last few years. I hope this doesn’t happen to you. He now got the landlord insurance quotes and all set to pay the premium, which is incidentally coming out as lower than the home owner insurance premium he was paying all-along.
When do you need landlord insurance
The answer lies in the insurance you currently have, revisit them and ask your agent if you are covered on your rental property if something happens to it while renters occupy it. Anything can happen starting from forest fire and hurricane to tornadoes.
In some cases your home owner’s insurance may cover rental property but, not always. It is important that you scrutinize your papers and policy documents, if required get help from experts. In US majority of insurance providers require you to have landlord insurance.
1. When your home owner insurance policy does not cover tenant occupying it – if you rent out for longer term and something happen while they are staying in the property. All your rental income and many more can go out of your pocket.
2. When you want rental income to be covered for repairs – When the damage to the property is caused by covered ‘peril’ you’ll get reimbursed for you rental income loss.
Types of Landlord Insurance
As always with any insurance, various types are available. The cheapest ones do not cover all damages, at the same time, you shouldn’t always go for the costliest one. Shop around and bargain with your insurance agent/broker. get some online quotes as well.
Limited liability (DP 1) – where type of coverage is explicitly mentioned, if some peril like, fallen tree damaging your roof is not listed as covered, then you will not get back any money. A DP 1 insurance will only return you the market value of the lost/stolen property. Obviously, these insurances cost lesser
Exclusive Insurance (DP 3) – where the exclusions are specifically mentioned. Unless otherwise mentioned on your policy document, you are covered from any kind of property damage. in most cases you’ll get a rental income coverage too. Most Dp 3 insurance providers do bear the cost of replacement, even if the damaged item was bought years back. The premium for this insurance is higher.
Although my brother-in-law is paying less premium than home owner insurance, a quick research on landlord insurance quotes reveals that it is costlier than homeowner insurance. But, when it comes to a lifelong passive income, you may want to secure your night’s sleep, isn’t it?
Readers, do you have a personal story to tale that can add value to this article. Please do share and help us protect our hard-earned money.
Share this:
Comments
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
Lance @ Money Life and More says
July 21, 2012 at 11:16 AMInteresting read. I know there are difference but I wonder if it is normally cheaper than regular homeowners…
SB says
July 21, 2012 at 12:18 PMNo its not cheaper than homeowner’s insurance. But you run the risk of getting your claim rejected. Play Safe!
Broke Professionals says
July 22, 2012 at 1:34 PMLike you, I have a third party story. My parents own a few rental condos, and a few years ago, the tenant flooded one of them. Fortunately, my parents had landlord insurance and only had to pay the deductible – it was a close call, though; they’d only purchased the policy three months prior to the flood!
SB says
July 22, 2012 at 7:00 PMNow that’s a chance factor. your parents were so lucky. I hope some readers read this and buy coverage, to feel lucky in future.
Save Green Team says
July 21, 2012 at 1:09 PMSB
Great advice! Newbies should absolutely know this information, most veterans know or have taken steps to insure adaquate coverage, whether through a policy or self-insurance. Rental coverage is not really that expensive, because the policy does not have to cover “contents” only the structure, so in many cases it is very comparable to homeowners policy in price. Also, as with most expenses on a rental, it is tax-deductible as a business expense.
If an investor has multiple properties and some cash on hand (which any investor should have) they can insure the rentals with a high deductible policy. Say a $5000-$10,000 deductible. That way the insurance company is accepting a smaller risk and the insurance will be very inexpensive. Just make sure to keep the deductible amount in a separate account that you do not touch until you need. If you hve multiple properties you will increase the amount on the account to accommodate multiple deductibles. I am not suggesting that if you have 10 properties, that you have the deductible for each (10 X $5000 = $50,000) As it is highly unlikely that all properties will be damaged all at once. The exception to this being, if all of your properties are in the same neighborhood or very close in proximity. The chances of a tornado or other major event damaging them all in the same area is much higer.
For example: I had one client tha buys and holds properties anywhere within 50 miles of the city. It is a rare opportunity that all of his properties are going to be majorly damaged within a short time window. With 10 properties, he keeps three $10,000 deductibles ($30,000) in a separate account.
I had another client that only buys rental property within 1 mile of his target area. In that area, it would not be uncommon for a Hurricane (East Coast) to devastate the entire area. Has it happened….no…but the eventuality is there,so with 15 properties (all within 1-2 miles of each other) he keeps $50,000 in a separate account ($5000 deductible for 10 properties)
Another good insurance investment for investors: Liability insurance. The basic Landlord insurance will cover some liability (someone falls off the rental property porch) and cn charge that against the basic liability of the policy-Maybe a short hospital stay for concussion or a broken bone. But what if its worse? Extended hospital stay, lawsuit for negligence (a crack in the sidewalk can lose a negligence lawsuit), or lifetime payouts for long term disability cused by an accident on the rental property.
Carry enough liability on te main landlord policy for each individual property-say that will pay out to $50,000 or $100,000, then carry a “Blanket Liability” policy which would cover liability on ANY property the investor owns from the $50K or $100K to at least $2M. This blanket liability is vey inexpensive-few $100 year in most areas-but can be a financial lifesaver in the event of major catastrophe.
When in business, Its better to spend a few extra dollars to C.Y.A. that to not and regret it later.
Great advice for any RE Investor!
Seve
SB says
July 23, 2012 at 11:45 PMThank for the detailed explanation! Yes having a high deductible is on great way to keep insurance cost down. You can use up emergency saving towards the deductible if required.
MoneySmartGuides says
July 21, 2012 at 3:45 PMI rent out my house and have a homeowners policy and an umbrella policy on top of that. I spoke with a few attorneys and my insurance carrier about this and they both recommended this approach. I’m curious as to how much landlord insurance is? A 1mm umbrella policy is only $100-200 per year.
SB says
July 22, 2012 at 12:24 AMThere are differences. But best you talk to someone who is expert in insurance. Umbrella insurance protects you from lawsuit financial damages. For example if your tenant got injured due to you delaying some repair. But landlord insurance guarantees your assets in case damages occur. To me, you need both!
Julie @ Freedom 48 says
July 22, 2012 at 11:08 PMGreat reminder for all the landlords out there. It’s also super important for renters to have renters insurance – because, in the event of a fire/flood etc. the landlord’s insuranace will not cover the tenants belongings!
SB says
July 23, 2012 at 11:47 PMVery true ans statistics show less than 20% acceptance rate for renters insurance.
JW @ AllThingsFinance says
July 23, 2012 at 8:01 PMLuckily I figured this out after renting a home out for a few months. Switching the insurance to cover a rental actually saved me some money each month. Currently, I’m paying about $30/month to cover $30k of damages. The home is a townhouse so the outside is covered by the HOA.
SB says
July 23, 2012 at 9:23 PMSo are you renting or a rental property owner, how did you figure this out while renting? If you’re paying $30 towards rental insurance then you’re paying too much.