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Landlord vs. Renters Insurance — What Property Owners Should Know

Problems, disasters or accidents are unpredictable. With insurance, both landlords and renters can avoid financial loss and get peace of mind.

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As an investor, taking calculated risks is part of your job. Not every investment is profitable, and you can't always know the risks you're taking when buying a property. Problems could arise many years down the line. For example, an apparently sound building could develop infrastructure problems after several years of ownership. Or an unpredictable squabble between tenants could turn into a liability issue you couldn't have foreseen.

For this reason, it's essential to protect yourself from risk by purchasing insurance. Both you and your tenants should have coverage to protect you should something unpredictable occur. But how much will your coverage cost? Why do your renters need insurance, too?

Let's explore these questions and discover why insurance policies are critical to your rental business.

Related: The Beginner's Guide to Investing in Rental Properties

Landlord insurance

Like any insurance coverage, landlord 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 dwelling policy (DP) you want. Dwelling policies are insurance plans for property owners with varying levels of coverage.

For instance, the cheapest dwelling policy might only provide basic coverage for fires or storms. More substantial dwelling policies may add other types of natural damages, lost rent if those disasters make your units uninhabitable or liabilities.

What does landlord insurance cover?

A typical landlord insurance plan covers three types of losses:

  1. Property damage to your building or equipment, including that caused by natural disasters, fires, wind, lightning or criminal break-ins

  2. Lost rent from months wherein your properties are uninhabitable due to any of the above damages

  3. Liabilities, or legal claims (including medical bills, legal fees or court costs) made against you, usually resulting from an injury on the property.

These three types of coverage are standard across many insurance plans. However, you also have the option to purchase additional coverage. These add-on policies may cover vandalism, construction damage, or upgrading to fulfill building or health code policy changes.

Another thing to note is that flood and eviction insurance are not included in a typical landlord dwelling policy. Coverage for these losses must be purchased separately.

When deciding on your coverage, think about where your properties are located. Is the geographical area vulnerable to flooding, wildfires or earthquakes? Is the crime rate in the neighborhood high? If so, you might consider purchasing more comprehensive insurance coverage.

How much does landlord insurance cost?

The average cost of landlord insurance is around $1,200-$1,300 a year, paid in monthly installments. This is approximately 25% more than a typical homeowners insurance policy with the same coverage — because renters tend to introduce more risk.

However, the cost ultimately depends on several factors, including the building's age, the materials used to construct it, the presence or absence of pets, the dwelling policy you choose and the location of your property.

In general, dwelling policies that use replacement cost value (RCV) are valued higher 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 properties, do you really need to be insured? Landlord insurance is highly valuable and usually worth the monthly fee. Here are some of the top reasons to purchase landlord insurance:

  • Protect your investment: You can't predict what might happen to your properties or your tenants. It's best to be prepared.

  • Achieve better interest rates on your mortgage: Some lenders require landlord insurance.

  • Take advantage of tax deductions: Landlord insurance premiums are usually fully deductible as operating expenses that you can subtract from your taxable income.

Related: Getting Your Feet Wet in the Rental Property Business

Renters insurance

If landlord insurance protects your properties, what does renters insurance cover? Your landlord coverage won't cover every loss related to your rental properties. Your renters need insurance coverage for their losses as well.

What does renters insurance cover?

Like landlord insurance, renters insurance typically covers three types of losses:

  1. Personal property and tenant belongings, such as clothes, electronics or valuables

  2. Liabilities due to a tenant's responsibility for an injury or property damage

  3. Living expenses in the case that a tenant's unit becomes uninhabitable and they must find other accommodations until repairs are made

You may decide to offer a standard renters insurance package to your tenants, but they might also wish to purchase their own coverage. For instance, if a tenant keeps particularly valuable items in their unit, they may wish to add on scheduled personal property or valuables coverage.

Tenants may also purchase theft extension coverage to cover their cars, boats or trailers; credit card coverage for unauthorized transactions; or other add-on policies.

How much does renters insurance cost?

Renters insurance is relatively inexpensive for tenants. The average cost is around $15 per month. However, this cost varies depending on the coverage level.

Ultimately, the benefits offered by renters insurance are well worth the monthly premium. Your tenants may not appreciate the extra fee up front, but they'll be thankful they have coverage should something happen.

Why require renters insurance?

Many landlords make renters insurance a requirement to rent their units. This is generally a smart move, and here are our top reasons why:

  • Prevent resentment for damages: Your tenants are less likely to sue you or pursue litigation if their insurance policy covers the loss.

  • Be transparent: In the event of a natural disaster, for instance, your tenants may expect that your landlord insurance will cover their belongings. They'll be surprised to learn that it doesn't. It's better to inform your tenants upfront.

  • Avoid unnecessary complications with your insurance: If an accident occurs on your properties, it's likely that your tenants' renters insurance will kick in first. This saves you the trouble of interacting with your insurance company until necessary.

Related: 5 Real Estate Mistakes That Could Make You Lose Money

Insurance tips and tricks

If you're ready to get started with landlord and renters insurance, here are a few tips and tricks:

  • If your property management software offers renters insurance as a secondary feature, use it: This saves your tenants the trouble of finding a policy themselves and allows you to determine which type of coverage you think your tenants need.

  • Track renters insurance policies: Remind tenants to renew their policies before their coverage expires.

  • Avoid making claims for minor damage: Conserve your coverage for more severe losses and prevent your rate from increasing.

  • Ask for a discount if you own multiple buildings: You never know which deals are available until you ask.

Disasters and accidents can be entirely beyond your control. However, by preparing for them ahead of time, you'll know you're protected in case of a major loss or casualty in your rental business. Both you and your tenants will appreciate the peace of mind and protection offered by insurance.

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