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As an investor, take calculated risks is part of your job. Not all investments are profitable and you cannot always know the risks you are taking when buying a property. Problems could arise many years later. For example, an apparently sound building could develop infrastructure problems after several years of ownership. Or an unpredictable dispute between tenants could turn into a liability issue that you could not have foreseen.
For this reason, it is essential to protect against risk by taking out insurance. You and your tenants should have coverage to protect you if something unforeseen happens. But how much will your coverage cost? Why do your tenants also need insurance?
Let’s explore these questions and find out why insurance policies are essential for your rental business.
Related: The beginner’s guide to investing in rental properties
Like any insurance coverlandlord insurance protects you and your rental business against potential losses and liabilities.
Here’s how it works: When you buy a property, you work with an insurance provider to decide which home insurance (DP) policy you want. Home policies are insurance plans for homeowners with different levels of coverage.
For example, the cheapest home insurance policy may only provide basic coverage for fires or storms. More substantial housing policies can add other types of natural damagelost rent if these disasters render your dwellings uninhabitable or passive.
What does homeowner’s insurance cover?
A typical homeowner’s insurance plan covers three types of losses:
Property damage to your building or equipment, including those caused by acts of God, fire, wind, lightning, or criminal break-ins
lost rent from month when your properties are uninhabitable due to any of the above damage
Liabilities, or legal claims (including medical bills, legal fees or court costs) made against you, usually resulting from injury on the property.
These three types of coverage are standard in many insurance plans. However, you also have the option of purchasing additional coverage. These add-on policies can cover vandalism, building damage, or upgrading to meet changes in building or health code policies.
Another thing to note is that flood and eviction insurance are not included in a typical homeowners home insurance policy. Coverage for these losses must be purchased separately.
When deciding on your coverage, consider the location of your properties. Is the geographic area vulnerable to flooding, Forest fires or earthquakes? Is the crime rate in the neighborhood high? If so, you might consider purchasing more comprehensive insurance.
How much does landlord insurance cost?
The average cost of homeowner’s insurance is around $1,200 to $1,300 per year, paid in monthly installments. That’s about 25% more than a home insurance policy with the same coverage – because tenants tend to introduce more risk.
However, the cost ultimately depends on several factors, including the age of the building, the materials used to construct it, the presence or absence of pets, the housing policy you choose, and the location of your property.
In general, home insurance policies that use Replacement Cost Value (RCV) have a higher value than those that use Actual Cash Value (ACV). RCV represents the cost of rebuilding your property at today’s construction rates, while ACV represents the current, actual value of your property. Coverage based on RCV will lead to higher premiums.
Why buy landlord insurance?
If you take care of your belongings, do you really need to be insured? Homeowner’s insurance is very valuable and is usually worth the monthly fee. Here are some of the top reasons to purchase homeowners insurance:
Protect your investment: You cannot predict what might happen to your properties or your tenants. It is better to be prepared.
Get better interest rates on your mortgage: Some lenders require homeowner’s insurance.
Benefit from tax deductions: Homeowner’s insurance premiums are generally fully deductible as an operating expense that you can deduct from your taxable income.
Related: Getting your feet wet in the rental real estate sector
If homeowner’s insurance protects your properties, what Tenant insurance cover? Your landlord coverage will not cover all losses related to your rental property. Your tenants also need insurance for their losses.
What does tenant insurance cover?
Like homeowners insurance, renters insurance generally covers three types of losses:
Personal property and renter’s personal effects, such as clothing, electronics or valuables
Passives due to a renter’s liability for injury or property damage
Living expenses in the event that a tenant’s unit becomes uninhabitable and they must find alternative accommodation until repairs are made
You may decide to offer a standard insurance package to tenants for your tenants, but they may also wish to purchase their own coverage. For example, if a tenant keeps particularly valuable items in their unit, they may wish to add coverage for personal property or valuables.
Renters can also purchase an extended theft warranty to cover their cars, boats or trailers; credit card coverage for unauthorized transactions; or other complementary policies.
How much does tenant insurance cost?
Renters insurance is relatively cheap for renters. The average cost is around $15 per month. However, this cost varies depending on the level of coverage.
In the end, the benefits offered by renters insurance are well worth the monthly premium. Your tenants might not appreciate the extra up-front costs, but they’ll be grateful to have coverage in case something goes wrong.
Why require tenant insurance?
Many landlords require tenant insurance to rent their units. It’s usually a smart move, and here are our top reasons:
Prevent resentment for damage: Your tenants are less likely to sue or sue you if their insurance policy covers the loss.
Be transparent: In the event of a natural disaster, for example, your tenants can expect your landlord’s insurance to cover their belongings. They will be surprised to learn that this is not the case. It is best to inform your tenants in advance.
Avoid unnecessary complications with your insurance: If an accident occurs at your properties, your tenants’ renters insurance is likely to kick in first. This saves you from having to interact with your insurance company until needed.
Related: 5 real estate mistakes that could cost you money
Insurance tips and tricks
If you’re ready to get started with landlord and tenant insurance, here are some tips and tricks:
If your property management software offers tenant insurance as a secondary feature, use it: This saves your tenants from having to find a policy themselves and allows you to determine the type of coverage you think your tenants need.
Track tenant insurance policies: Remind renters to renew their policy before their coverage expires.
Avoid making claims for minor damages: Keep your coverage for larger claims and avoid your premium going up.
Ask for a rebate if you own several properties: You never know what deals are available until you ask.
Disasters and accidents can be entirely beyond your control. However, by preparing for it in advance, you will know that you are protected in the event of a major loss or disaster in your rental company. You and your tenants will appreciate the peace of mind and protection offered by insurance.