Understanding Homeowners Insurance for Rental Property: A Guide for Investors

A profitable real estate investing journey starts with buying a high-potential property and continues with managing it in an optimal way. One of the most important aspects of rental property management is getting the right insurance in order to protect both your investment against damage and yourself against liability.

This article covers everything you need to know about homeowners insurance for rental property. We’ll go over the basic and optional policy components, the importance of having a properly insured property, the cost calculations, and how to choose the best coverage for your needs. We’ll also show you the best companies for investors in the US market.

What Is Homeowners Insurance for Rental Property?

To begin with, it’s important to define the difference between landlord insurance vs homeowners insurance in real estate. These are two distinct policies that apply to separate situations in the housing market.

The Difference Between Homeowners and Landlord Insurance

Homeowners insurance is meant to protect a primary home or a primary residence from different types of damage and loss while also protecting the homeowner and their family members from general liability. This is used when the owner lives on the property.

On the other hand, landlord insurance covers investment properties that are rented out to tenants who pay a certain rental rate in exchange. They serve cases in which there are paying renters and in which the owner does not reside on the property.

The only exception to the situations described above are cases when an owner lives in a property full time and rents out a room or another part of their home to short term or long term renters. Some companies would agree to insure such properties under their homeowners insurance for rental properties.

Key Coverage Elements of Rental Property Insurance

The coverage of the homeowners insurance for rental property can vary, with both obligatory and optional elements.

The common landlord insurance coverage includes:

• Physical property damage including the primary structure as well as additional attached and detached structures such as a garage, a shed, a swimming pool, and others
• Landlord personal belongings including appliances, electronics, furniture, and others
• Landlord personal liability including both medical bills and legal fees in case a tenant, a tenant’s guess, a property manager, a contractor, or someone else gets injured on site
• Loss of rental income when the property becomes unrentable due to a covered event
• Fire, windstorm, hail, hurricane, tornado, lightning, and others
• Tenant unintentional damages

Meanwhile, depending on their location and situation, income property owners can opt in for additional coverages that usually include:

• Natural disasters including floods and earthquakes
• Vandalism and theft

At the same there, there are certain things that no investment property insurance covers, such as:

• Regular wear and tear
• Intentional tenant damage
• Tenant personal property (covered by the renters insurance)
• Damage due to intentional neglect

Because income properties are so different, it’s important to choose the right real estate investor insurance policy that covers the exact requirements of your market and the precise needs of your investment.

Why Real Estate Investors Need Rental Property Insurance

Getting rental house insurance is not obligatory by the US landlord-tenant laws, and neither is it legally demanded in any of the individual states. However, in order to run a well-protected, positive cash flow, profitable investment property business, you must get special homeowners insurance for rental property.

So, what insurance do I need as a landlord?

Protecting Your Assets from Unforeseen Events

First, rental home insurance safeguards your investment property, additional structures, and furniture against a wide range of unpredictable events. While fires, for example, don’t happen every day, they can have a devastating impact on your rental, your business expenses, your budget, and – eventually – your real estate return on investment.

In other words, a minute lack of attention on behalf of your tenant or a single natural phenomenon can end up costing you multiple thousands of dollars in damages. It can easily turn a positive cash flow property into a money sink.

Having the best landlord insurance can solve this problem.

Liability Coverage: Safeguarding Against Legal Claims

Second, homeowners insurance for rental property protects against personal liability. As an income property owner, you might be running the risk of underestimating the potential damaging effect of a tenant or someone else getting bodily injury on your house. Let’s say a tenant breaks an arm because of falling down the stairs.

In case this is proven to be your fault (and this happens frequently), you will be responsible for covering the medical expenses which can be quite costly. Moreover, if the tenant decides to sue you, you will also have to pay the legal costs, which can also amount to thousands of dollars. Once again, your profitable investment property business can turn into a real financial nightmare overnight.

But getting proper insurance can keep you and your income property on the safe side.

Calculating the Cost of Homeowners Insurance for Your Rental Property

Insuring rental homes is more expensive than insuring primary residences, and the typical difference between the two prices is about 20-25% for the same type of property. The higher rental property insurance cost is due to the more risk associated with a house that operates as a rental, so insurance providers need to make up for this elevated level of right through higher premiums.

According to Steadily, the average price of homeowners insurance for rental property in the US market is $1,478. Nonetheless, the amount can vary widely, depending on multiple factors that we will discuss below.

Factors Influencing Rental Property Insurance Rates

The cost of homeowners insurance for rental properties can run from a few hundred dollars to a few thousand dollars per year. Before you get a landlord insurance quote, it’s important to understand the features that impact the price.

The main factors include:

• Market: Policies cost more in locations prone to natural disasters and suffering from excessive crime rates. For example, landlord insurance in Florida is pricey because of the frequent wildfires, hurricanes, and storms.
• Property type and market value: Single family home coverage is more expensive than condo insurance as it covers the external walls and structures and the outside areas. Luxury properties are also more expensive to insure.
• Property age and condition: Newer houses and those that are well maintained have lower premiums due to the lower risk of an incident occurring on them.
• Short term vs long term renting: Short term rental insurance costs more than traditional property insurance for landlords.
• Coverage: The more comprehensive your policy is, the more it will cost.
• Deductibles: Higher deductibles (the amounts paid by the insured – you – in case of covered events) translate into lower prices.
• Claims history: Landlords and rental properties that have not filed claims excessively in previous years pay less.

Tips for Reducing Your Insurance Premiums

Based on the factors listed above, there is nothing you can do about your investment location and house once you’ve purchased an investment. Nevertheless, you can take actions related to the other factors in order to lower your homeowners insurance premiums for your income property.

For instance, you can:

• Customize your coverage: Including only the coverages that your investment needs can help keep the cost at bay.
• Keep your property well-maintained: A properly maintained rental house is less likely to lead to an incident, which means you will not need to file claims.
• Install a home security system: Insurance providers give favorable prices for rental homes that have properly working security and safety features and devices like fire alarms, smoke detectors, water sprinklers, and others.
• Pay premiums annually: The best insurance companies offer discounts when paying premiums annually rather than monthly.
• Keep clear claims history: Insurance agents and brokers tend to offer lower rates to individuals who have not filed a claim with them or a previous company for 5 years.
• Bundle multiple insurances together: You can get discounts if you combine your homeowners insurance for rental property and for your home, commercial landlord insurance, auto insurance, and others into a single policy.

Make sure to go through this checklist and work on as many of the items as you can in order to reduce the cost of your homeowners insurance for rental property. This will help you regulate your operating business expenses and run a consistent profit.

Choosing the Right Homeowners Insurance Policy for Your Rental Homes

Selecting the best homeowners insurance for your rental property should be based on careful and diligent research and analysis. There are hundreds of companies that offer this coverage, and their services and prices vary widely.

Understanding Policy Limitations and Exclusions

The main part of your due diligence should focus on getting quotes from multiple insurance companies or agents. You have to carefully read through and comprehend what exactly is covered and what is not under each policy. If you have any doubts or anything is not absolutely clear, make sure to speak to your insurance agent and get clarifications.

A certain homeowners insurance policy might look like a great deal for your investment property because of the affordable price, but it might be excluding important events that are at high risk in your area.

Having said that, you also need to check that the cost is not unnecessarily inflated by inclusions that do not apply to your case. For instance, while you need fire protection and flood insurance in Florida, you don’t need additional vandalism coverage as the market benefits from low crime rates.

Comparing Insurance Companies: 5 Top Providers

Another crucial part of the selection process should be comparing between different homeowners insurance companies. Each provider offers something different, at a different price. You need to find a company that covers your exact needs at reasonable rates.

Meanwhile, if you are a beginner real estate investor and don’t know where to start your research, here is a list of the best insurance companies for this type of coverage:

1. Steadily: Created as a landlord insurance company, Steadily insures both short term and long term rentals across the entire US market. Their policies are both comprehensive and adjustable, and the prices are affordable.

2. Allstate: This company has all-inclusive coverage which  is particularly beneficial for owners whose rental properties are located in high-risk areas.

3. Farmers Insurance: They offer multiple optional coverages so that landlords can truly personalize their policy based on their needs and requirements.

4. State Farm: This is a good choice for investors who own a rental apartment.

5. Liberty Mutual: This provider offers more discounts and opportunities for savings than other top insurance companies.

The Value of Insurance in Your Investment Strategy

Getting the right homeowners insurance for your rental property is an integral part of your property management strategy. While the insurance premium appears on the expenses side of your rental property analysis, it can help you save a lot of money should an accident take place at your property.

Integrating Insurance into Your Risk Management Plan

Renting out a house is a business like any other, which means that it needs an appropriate risk management plan. Indeed, renting out a home is associated with a long list of risks which include both natural disasters and man-made problems.

As an investor, you should never operate with a mindset that incidents happen only rarely and that nothing bad can occur to your property. To the contrary, you should assume the worst possible scenario and be prepared for it.

The Long Term Benefits of Being Properly Insured

While in the short term investment property insurance adds to your operational expenses, in the long run it can help save a ton of money. It might take a few years to build  your rental business: from choosing the best market and home, through buying a house and fixing it up, all the way to setting up the optional rental rate and hiring the best property manager.

You cannot afford to risk the success you’ve built over the course of a few years over a single event. Getting a good insurance policy and renewing it on an annual basis after a careful review is key to keeping and protecting your long term success.

Final Thoughts

Having homeowners insurance for rental property is the only way to provide the necessary protection for your real estate business. The policy needs to be adjusted in a way that reflects the reality of your property and your needs and be reviewed annually to make sure it stays up-to-date.

If you’re looking for the best coverage at an affordable rate, you should check out Steadily. This company specializes in short term and long term rental home insurance and is available in all 50 US states. Just click below to get an instant quote customized for your market and property.

FAQs

Is Homeowners Insurance for Rental Property Mandatory?

Rental house insurance is not legally obligatory in the US market. However, it is a must in order to run a risk-free and profitable rental business.

Can You Transfer Homeowners Insurance to a New Rental Property?

If you decide to rent out your primary residence, you cannot transfer the existing homeowners policy. You need to cancel the homeowners insurance and get a new policy dedicated to your new rental house.