Learn how to protect your investment property.
If you’ve just bought your first investment property, you’ll need to update your insurance coverage, no matter whether your rental is short term or long term.
While some insurance companies allow homeowners to extend their home insurance to a short-term rental, this is not an appropriate solution for most rental situations. Unless you’re living on-site and seldom rent your extra unit, this probably doesn’t apply to you.
If you’re primarily dealing with long-term rental properties, you’ll need landlord insurance (called a DP3 policy in the insurance world).
But before we get any further, let’s take a look at the difference between landlord insurance and home insurance.
Landlord Insurance vs. Homeowners Insurance
Homeowners insurance primarily covers three things:
- The house where you live (called a “dwelling” in insurance parlance) and other structures on the property
- The things in your house
- Your liability related to the property
Homeowners insurance is the go-to choice for your primary residence, that place you occupy 100 percent of the time. However, it does not cover commercial risk, which is why landlord insurance is so essential.
Landlord insurance is necessary to cover the business side of renting out your property. Maybe you have one rental property that you use to generate income on the side. This may not feel like a business – maybe it’s just one investment property – but in the eyes of the IRS and your insurance company, it most certainly is.
What Is Landlord Insurance?
Landlord policies cover a number of things, usually including:
- Property: This includes the dwelling, other structures, and any personal property used to service the rental that you leave onsite (think of your snowblower and lawn mower).
- Fair Rental Income: Sometimes called “Fair Rental Value,” this is the part of your landlord insurance that covers the most important part of the business aspect of your property: the rental income. In the event that a covered event makes the property temporarily unfit for occupation, this may help you maintain your income stream.
- Unoccupied space: You’d think an unoccupied property would be less trouble than one full of tenants sliding their chairs across your refinished hardwood floors, but that’s not necessarily the case. An empty space can suffer water damage or a rodent infestation or worse with no one around to report the events. The litany of possible issues is far from reassuring, so we won’t dig deeper here, but it does behoove you to treat your investment property like a valuable asset even when it’s not actively pulling in rental income.
- Liability: This may help you cover legal expenses or medical bills if someone is injured on your property. This is one of the biggest areas for concern, as liability claims can be much more expensive than property claims, which is why it’s one of the greatest incentives for ensuring you have the right coverage.
What’s not covered: Maintenance costs and tenants’ belongings. Unlike regular homeowners insurance, the contents of rented spaces are not covered by this policy. Tenants should take out their own renters insurance policies to ensure their valuables are covered.
Sidebar: Airbnbs are their own animal, which is why we created a guide to insuring your Airbnb. The long and short of it is that Airbnbs have some special insurance considerations. That said, our landlord policies can easily cover Airbnb and short-term rental properties. Just ask us about it!
Landlord insurance covers the risks associated with renting your property.
How Landlord Insurance Works
Whether you’re doing peer-to-peer rental through Airbnb or using your property as a regular rental space for full-time tenants, the best place to start is to talk to your insurance provider directly and be frank about how you plan to use your property.
It’s in everyone’s best interest for you to have appropriate coverage. If anything changes along the way, update your insurance coverage as soon as possible.
Why? You want to cover your back. After all, an income-producing rental property doesn’t live up to its name if you’re refinancing it to pay off a lawsuit.
Here are a few hypothetical examples to demonstrate the ways your landlord insurance can save you from a major unexpected expense.
Scenario #1: Your tenant throws a rager. You rent out one investment property down the street from your house. One of your tenants throws a party: guests get wasted and one of them falls down an exterior flight of stairs. Your landlord insurance can help you pay for his medical bills because they’re your stairs.
Scenario #2: The old slip-and-fall. Say you decide to rent your apartment out, and you forget to de-ice the sidewalk one winter. If your tentant’s guest is injured, they can sue you for their damages.
Scenario #3: Your rental property catches on fire. If your residential rental property catches fire, you’re likely covered for structural damage and income loss. Your policy should help you repair or replace the building, as well as replacing the income you’re not receiving from tenants during the repairs that follow. The tenant’s belongings, of course, would not be covered by your landlord insurance but would be covered if they carried a renters insurance policy.
An income-producing rental property doesn’t live up to its name if you’re refinancing it to pay off a lawsuit.
Other Considerations: Home Warranty Insurance
You may want to consider home warranty insurance for property that manufacturer warranties don’t cover or for those that have aged out of their warranties. This can be a huge cost saver as you scale up your portfolio of investment properties (no pressure), even if you have a trusted maintenance contractor on speed dial.
As you outfit your investment property, shop for appliances that come with a warranty that includes regular service. The days of Sears may be over, but their maintenance model isn’t. As part of the research process for buying major home appliances for yourself or for a rental property, keep an eye out for warranties that pack extra value (and coverage) into your purchase.
Perhaps this goes without saying, but you should really hold onto your paperwork. Here in the digital age, if you don’t receive an electronic copy of your receipts and documents, be sure to scan and file them right away.
When Do You Need Landlord Insurance?
The question of landlord vs. homeowner insurance is complicated. Your house and investment properties are complex assets, and they should have tailored insurance that is appropriate to your arrangement.
This is the kind of thing that isn’t supposed to be simple, and (thankfully) it’s not something you have to figure out on your own. To make sure you have the right coverage, talk to your Kin agent.
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