Investor’s Guide: Landlord Insurance vs Homeowners Insurance Explained

Making a profitable real estate investment does not end with buying a property that has the potential to earn a lot of income. Next, you have to make many important decisions related to the management of your income property, and one of them is deciding between landlord insurance vs homeowners insurance.

Although beginners tend to use them interchangeably, these are two distinct types of insurance. While both protect real estate properties, they are used in different cases, have different coverages, and incur different costs.

In this article, we’ll cover everything you need to know about these two kinds of property insurance and help you make the right choice which one to opt for in your specific case.

Key Takeaways

• Landlord insurance is specifically designed to provide property and liability coverage for rentals.
• Homeowners insurance provides dwelling and liability protection when the owner resides in the house. It can work out for investors renting out part of their home.
• While there are some similarities between the two, there are also important differences between these insurances.
• Insurance for landlords costs more, but the extra cost is worth it for the additional protection.
• You need to consider a number of factors to choose the right insurance type and policy for your income property.

Navigating Insurance Choices as an Investor

Running a positive cash flow rental property business is largely about striking the right balance between rental income and rental expenses. Whether you realize it or not, a lot of things can go wrong with your investment property, much more than with your primary home.

This is because renting out is associated with additional risks due to extra tear and wear, home, furniture, and appliances damage caused by the tenant, responsibility for the safety and wellbeing of renters and their guests, and others. Paying out of pocket – when the need arises – for these items can cost you a lot of money and result in low return on investment or even negative cash flow.

The good news is that having the right rental home insurance can protect you against many of these dangers and perils.

Thus, it’s crucial to do proper research and select the optimal policy for your rental properties and for your as a landlord. In other words, you have to carefully answer the question: What insurance do I need as a landlord?

It is true that good insurance can cost a couple thousand dollars per year (we will discuss the price in detail in a bit), but at the same time it can help you save hundreds of thousands of dollars should a covered event occur on your property.

When choosing the right policy for your rental home, there are multiple considerations you need to take into account, and knowing the difference between homeowners insurance vs landlord insurance is important.

In the following sections, we’ll discuss the similarities and differences between the two insurances and help you choose the best one for yourself and your investment.

Understanding Homeowners Insurance for Real Estate Investments

Homeowners insurance is a type of insurance policy that protects a real estate property and its belongings from damage and loss and the owner from liability.

This kind of insurance is usually meant for primary residences, but it can also work in specific cases of renting out. For homeowners insurance to work, the insured (the real estate investor) has to reside on the property.

For example, you can use this coverage if you’re renting out a room or extra space in your home, whether on a short term or long term basis, and you remain present on the promises during the rental period.

The common homeowners insurance coverage includes:

• Dwelling coverage in case of fire, wind, water, hail, lightning, and other natural disasters including the main building and additional structures included in the policy
• Owner’s personal property such as furniture, electronics, appliances, and clothing in case of fire, theft, and other covered perils
• Personal liability for which you are responsible, no matter where exactly it occurred

In addition to this common coverage, most insurance companies allow you to add additional coverages that usually include:

• Extra contents coverage
• Personal property extensions
• Replacement cost (rather than actual cash value which is the replacement value minus depreciation)
• Flood insurance
• Earthquake insurance

Meanwhile, one of the main things which this insurance does not cover is the tenant’s personal belongings. This is protected by the renters insurance.

If you’re wondering what is the difference between homeowners insurance and renters insurance, the former protects the property, the landlord’s belongings, and the investor against liability, while the latter protects the renter’s personal property.

Savvy landlords should encourage their tenants to get renters insurance to provide the necessary protection for both parties and avoid troubles down the road. 

Eventually, the exact kind of insurance for which a homeowner opts should depend on their property, location, use of the home, tolerance to risk, and budget.

Exploring Landlord Insurance: A Must-Have for Rental Properties

A landlord insurance is a home insurance for rental property in specific. Also referred to as rental property insurance, it works when the insured (property owner) resides away from the home. In a way, it functions as homeowners insurance for rental property.

This investment property insurance is especially designed to cover the needs of properties purchased with the goal of being rented out. Let’s be clear. This is not a legal requirement in the US rental market, but it is a must for investors who want to protect both their investment house and themselves.

The standard landlord insurance coverage comprises:

• Property damage in case of fires, hail, hurricanes, windstorms, tornadoes, etc.
• Landlord’s personal property that is used for running the rental, such as furniture, appliances, equipment, tools, and others
• Liability coverage if tenants or their guests get injured while they are on the property, no matter if it is the fault of the landlord or not. This includes both legal expenses and medical costs.
• Loss of rental income in case the rental property becomes uninhabitable as a result of a covered event.

Common additional coverages for rental house insurance include:

• Extra natural disasters coverage like floods and earthquakes
• Vandalism and theft

Meanwhile, what is not included in landlord insurance policies is:

• Wear and tear
• Some property owner’s personal belongings
• Tenant’s personal property
• Acts of negligence

In other words, renting home insurance is quite comprehensive and can protect investors against the majority of potential losses and threats. While it adds to the recurring operating expenses, it keeps your rental business and you safe and helps you avoid occasions that might cost you multiple thousands of dollars.

Comparing Landlord vs Homeowners Insurance: Key Differences

The landlord insurance and homeowners insurance are two distinct types of policies that serve different purposes.

The latter is meant to protect primary residences. It can also work in case of occasional renting of parts of a home when the landlord is present on the property.

However, if you rent out your entire home and are not present on site, this turns into a business, so it requires the proper level of coverage provided by the former type of insurance. Landlord insurance covers more items and more events relevant to real estate investors and their income properties.

Comparing between the two kinds of insurances, in terms of dwelling coverage, they provide very much the same level of protection. They cover the primary building plus additional structures.

At the same time, both kinds of policies do not cover the personal belongings of the tenant which are taken care of by renters insurance.

Having said that though, further comparison of landlord insurance vs homeowners insurance reveals some major and significant differences.

Property Owner Personal Belongings Coverage

A standard home insurance protects the personal property of the investor in specified events such as fire, theft, and others.

Insurance for landlords, on the other hand, covers the personal belongings of the owner that are used for serving the rental property.

Liability Insurance

The liability coverage of homeowners insurance depends on who is responsible for the damage. As long as the damage is the responsibility of the property owner, it’s covered, regardless of the location.

Rental property insurance, meanwhile, provides landlord liability insurance coverage for bodily damages that occurred on the premises of the home, no matter whose responsibility it is.

Lost Rental Income Coverage

Naturally, home insurance does not cover rental income loss as it is not intended for properties that are rented out to third parties.

In contrast, specialized investment property insurance protects against this as it serves as a business insurance too.

When Homeowners Insurance Works for Investors

Although home insurance is not intended to protect rental properties, which are treated as businesses, there are some occasions in which it can work for investors in real estate.

These cases include:

• Single family homes, townhouses, or apartments where the owner rents out a room or a floor of the property while remaining present on the premises. This can refer to running an Airbnb business or a long term rental business as long as the landlord lives in the property.
• Duplexes, triplexes, quadruplexes, or other small multi family homes where the owner lives in one unit and rents out the rest. However, such property types typically require special types of insurance.

In other words, if you own a primary residence and would like to make extra cash from renting out a room from time to time, a homeowners insurance will do just fine. But remember that you have to reside in the home for this to be valid.

For example, imagine that you have recently bought a new house in the Los Angeles real estate market, which is expensive. You have recently graduated from college and started a job. Now you have to cover the mortgage payments as well as all other expenses related to living in an unaffordable city.

Since you still have a small family, you have some extra space in your home, and you decide to rent out a room to students studying in LA. Your homeowners insurance technically might suffice in this case.

Nevertheless, whether you rent out on a part-time or full-time basis, it might still be a smart idea to get specialized insurance as this will cover additional damages and liability.

To decide whether you need homeowners vs landlord insurance, you need to conduct rental property analysis. This should factor in the cost of the required insurance policies and how it will affect your bottom line.

Why Landlord Insurance Is Essential for Rental Properties

As we said above, there are certain cases when homeowners insurance might work out fine for rentals. But under most circumstances, you need to get separate real estate investor insurance.

Here are the cases that are not covered by home insurance:

• Full-time long term rental properties when the landlord does not live on the property.
• Short term rentals of remote Airbnb hosts. In this case, you should obtain an Airbnb insurance, which is a special type of landlord insurance covering the needs of vacation rentals.

In other words, if you own an investment property with the purpose of running a rental business, you need to get special insurance. This is the only way to have your property and yourself adequately protected.

For instance, imagine your tenant falls while going down the stairs of your single-family rental home that you do not occupy. You might be liable for thousands of dollars of legal fees and medical expenses for the caused damage, and your homeowners insurance will not cover these costs because you don’t reside in the home. Meanwhile, insurance for landlords would have you covered and save you all the additional expenses.

Or, alternatively, if there is fire on your investment property and it requires major repairs, it could spend months being vacant, which means that you will be losing months worth of rental revenue. This is not something that the home insurance will cover, but it is an item included in a standard rental property insurance. So, as a business owner, you will continue getting cash flow even when your property is temporarily unfunctional.

These are just two examples that emphasize the importance of having the right policy as an investor.

Cost Analysis: Premiums, Deductibles, and ROI

Since these two kinds of insurance offer such different coverage, they come at different price points too. Next, it’s time to compare the landlord insurance vs homeowners insurance cost.

Homeowners Insurance Cost

The price of home insurance depends on multiple factors, the most important ones being:

• Property type and size
• Home age
• House current market value
• Home condition
• Market: Cost of living, real estate prices, natural disaster risk, crime rates, etc.
• Covered events
• Liability coverage
• Additional coverages
• Deductibles
• Claims history

The combination of all these factors will determine the insurance premium.

According to NerdWallet, the average cost of homeowners insurance in the US housing market is $1,820. Other sources quote figures ranging between $1,400 and $2,800 as the averages. It all depends on the company, the insurance agent, the home value, the location, and the provided coverage.

Landlord Insurance Cost

The pricing of rental property insurance is even more widely varying than the cost of homeowners insurance as there are even more things to consider.

In addition to all above-listed factors, you also need to take into account:

• Short term rental vs long term rental (short term rental insurance costs more than long term rental insurance)
• Monthly rental income
• Landlord-friendly vs tenant-friendly state

As a result, the average landlord insurance cost is about 20-25% higher than the home insurance for the same property. Additionally, Steadily quotes the average rates to be between $595 in Oklahoma and $2,419 in Delaware.

Reducing the Cost

Regardless of which insurance ends up being the optimal choice for your investment needs, there are things you can do to reduce the cost of the policy.

Here are a few tips to minimize the price without compromising the coverage:

• Keep your property well maintained and safe for tenants
• Install a reliable security system
• Do not keep expensive personal belongings in the house (after all, you are renting it out)
• Do not file unnecessary claims
• Customize the policy to exactly what you need
• Bundle different types of insurance into a single policy
• Make annual premium payments rather than monthly payments
• Work with a specialized insurance company for investment properties

As a savvy investor, you have to contact a few different insurance companies or agents and get multiple quotes to choose the best balance between coverage and cost. Then, you need to include the cost in your investment analysis to ensure positive cash flow properties with strong ROI.

Selecting the Right Insurance for Your Investment Portfolio

When choosing between landlord insurance vs homeowners insurance, there are a number of factors that you need to consider.

To make the right decision, answer the following questions:

• Do you live on the property?
• Do you rent out full-time or part-time?
• Do you rent out to long term tenants or short term guests?
• How much rental income do you generate?
• Do you have a lot of valuable personal property in the home?
• What is the local rental legislation?
• Is your market prone to natural disasters and/or crimes?

Most importantly, analyze how the cost of each insurance – and the costs in case of absence of adequate insurance – will affect your return on investment in real estate, whether you look at the cap rate or cash on cash return.

As a general rule of thumb, if you rent out space in your primary residence occasionally, you can rely on your homeowners insurance.

If you run a rental business away from home, you need landlord insurance.

Policy Enhancements: Optional Coverages and Endorsements

Which type of rental home insurance you need depends on all the factors discussed above. However, regardless of your choice, there is no one-size-fit-all insurance policy for investors. In either case, you should customize the policy to reach enough coverage without increasing the cost unnecessarily.

The policy customization and enhancement should be determined by your specific house, your preferences, and your market. Importantly, you should take into consideration whether your location suffers from high risk of natural disasters and crime rates.

In addition, you need to factor in whether you rent out occasionally or most of the time. It also matters whether you have a traditional rental or a vacation rental business.

To boost your insurance policy, it’s best to speak to a few companies that specialize in working with landlords and discuss different options to select the best balance between coverage and cost.

Claims Process and Investment Scenarios

Despite some differences between homeowners insurance vs landlord insurance, the claim process is the same.

You need to follow these steps:

1. Submit the claim as soon as possible. This is usually done through an online form on the insurance company’s website or by calling one of their agents.
2. Document the damage by taking clear photos.
3. Communicate with the agent and provide the necessary documentation.
4. Have your property inspected, if needed.
5. Talk to the adjuster.
6. Ask for advice from the company on how to proceed.
7. Get quotes from a few contractors.
8. Keep all documents and receipts.

Thus, the process of filing a claim should not play a major role in your decision of what type of insurance to get.

Conclusion: Empowering Investors with Informed Choices

Deciding between landlord insurance vs homeowners insurance is a major consideration in order to operate a rental business that is both well protected and profitable. While the latter can be enough if you rent out a part of your primary residence on a part-time basis, the former is needed when renting out an entire house full-time.

While rental property insurance is 20-25% more expensive than comparable home insurance, the additional cost is worth it for the extra dwelling and liability coverage that it provides.

In all cases, it’s a must to get quotes from a few companies and agents to compare the coverage and the cost before choosing the optimal policy for your needs as a real estate investor.