Insuring a Rental Investment
Insuring a Rental Investment
As a real estate investor, purchasing insurance is crucial to protecting your investment. It's important to have the right insurance policy to cover your property from damages caused by natural disasters, tenant damages, and liability claims. In this article, we'll discuss the insurance policies that real estate investors should have for their residential rental properties.
Property Insurance for the Rental
Property insurance is the most basic type of insurance that a real estate investor should have. Also known as a “landlord policy” this typically covers the physical structure of the property from damages caused by fire, wind, hail, lightning, and other natural disasters. The policy should include coverage for the full replacement of the property, which is the cost to rebuild the property from scratch, including the cost of labor, materials, and any required updates to meet industry standards. The replacement cost is usually higher than the market value of the property and will fluctuate with economic changes such as the supply and demand of materials and labor. An insurance agent has special tools to estimate a building's replacement value so be sure to get a formal estimate to ensure that the policy covers the full replacement cost of the property.
Forbes advises that many landlord policies will offer personal property coverage for the landlord's belongings that are kept at the rental property. For example, this could include lawn maintenance equipment, poolside equipment, appliances that are available to tenants but owned by the landlord, and even furniture that the landlord owns within the building. Although this coverage is sometimes included for landlords, this is usually bought for an additional cost. Additional coverages that protect the building and personal property include vandalism coverage and burglary coverage. These may be available at an additional charge depending on property location, claims history, and company-specific requirements when quoting the policy.
Liability Insurance for Landlord
Liability insurance is another important policy that a real estate investor should have to protect the landlord from third parties who are injured on the property. This policy provides coverage for any legal expenses and damages caused by injuries or accidents like slipping on an icy sidewalk, dog bites, or falling down stairs. If a tenant or visitor is injured on the property, liability insurance can help cover the medical expenses, legal fees, and other costs associated with the injury. This coverage can also protect the landlord from lawsuits filed by the tenant or visitor. National Real Estate Insurance Group reminds us that intentional/criminal acts done by the landlord and personal injury claims are not covered under this policy.
How Much Coverage to Buy?
A landlord should have an adequate amount of liability insurance and property protection to safeguard their investment property against damage and potential lawsuits. The amount of insurance coverage needed varies based on the value of the property, the location, and other factors. When deciding how much insurance to purchase, consider the replacement value of your property, your tenant screening processes, the recommendations of your insurance agent, the size of your overall portfolio, and the amount of risk that you are willing to take on personally (also known as the deductible). Also, keep in mind that various states do have required limits for liability insurance, offer a variety of additional coverages that give more protection, and whether you are requiring renters to show proof of a renter’s insurance policy.
Although the agent may try to upsell you on a policy that you can’t afford and don’t need, agents are professionals who have seen it all and who generally have your best interests in mind when it comes to selecting coverage! If your tenant screenings often reveal a history of lawsuits and unsettling rental history, consider taking out additional liability coverage by increasing your limits or by taking out an umbrella policy. Investopedia suggests that umbrella coverage is very affordable and offered in increments of $500,000 to $1 million. If you are well known in your local community as a wealthy, successful individual, it is likely that any lawsuit made against you will be significant. Keeping that in mind, a wealthier person should anticipate larger payouts and take out a higher amount of coverage to protect their portfolio. The size of your portfolio can also impact your personal risk assessment and impact the size of your deductible. To keep costs down, a higher deductible on a landlord’s policy will lessen the premium but increase the amount of risk that a landlord is exposed to. A lower deductible will reduce the amount of financial risk placed on the landlord but will increase the premium and place significant burdens on the insurance company.
Flood, Earthquake, and Lost Rent
In addition to property and liability insurance, there are other types of coverage that real estate investors should consider buying depending on the location of the rental property. Flood is an optional coverage that can be purchased for properties that are located in flood zones. Because this coverage is typically very expensive (prices vary based on the predicted frequency of floods), it is unlikely that a landlord would purchase this coverage if the property is not prone to flooding. Earthquake coverage is also available in most states and can be purchased on a separate policy. This coverage is probably not necessary unless the property is located near a fault zone or has a history of potential quakes. Loss of Rents coverage is a policy that can be especially valuable if damages from a covered loss result in an uninhabitable space for an extended timeframe. When the property is damaged and the renters are forced to leave, the landlord will be losing income unless they have purchased coverage to supplement the lost rent for the time that it takes to complete repair or construction. Allstate advises that most policies place a limit of 12 months on this coverage although some allow extensions.
Purchasing insurance is an important step in protecting your real estate investment. Property and liability insurance are the most basic types of insurance that a real estate investor should have, but there are other types of coverage that may be necessary depending on the location and risks associated with the property. It's important to understand the insurance requirements in your state and to work with an insurance agent who has experience with real estate investments to ensure that you have the proper coverage for your property.
If all of this research has you concerned about your liability exposes as a landlord, consider reading “Every Landlord’s Legal Guide” by Marcia Stewart, Ann O’Connell Attorney, and Janet Portman Attorney. This book will guide you through best practices that will keep a landlord out of the legal system and protect your property portfolio! If all else fails, be sure to have broad insurance coverage and a high limit of liability.