Landlord’s Insurance vs. Homeowner’s Insurance

Those who are new to investing in multifamily real estate may equate the insurance they need as landlords with the typical homeowner’s policy, but they are very different animals. Landlords need to protect not only property but also their rental business. And the risks that real estate investors typically need protection against are further compounded by the presence of tenants.

That being said, landlord’s insurance and homeowner’s insurance have much in common. They both provide protection against property damage as well as liability coverage for accidental injuries occurring on the premises. They provide coverage for many of the same potential losses, such as theft, vandalism, fire, loss of personal possessions, as well as for medical bills and legal expenses associated with accidental injuries.

However, real estate investors need additional protection beyond what the average homeowner needs. The primary reason for the additional protection is that an investment rental property is operated as a business that must generate a specific amount of rental income and entails certain expenses. It’s not only the property that is at risk; it’s also the property owner’s livelihood that could be compromised.

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Rental Loss Coverage for Landlords

Rental loss protection (also known as income loss coverage) replaces income lost when one or more units in a multifamily rental property become uninhabitable for some reason, perhaps while repairs are being made after a fire or severe storm. Rental loss coverage provides no protection unless it is necessary for the tenants to vacate their unit and relocate elsewhere, which clearly would have a negative impact on the owner’s income from rents for as long as those units must remain unoccupied.

Tenant Default Coverage

Rental loss protection does not cover a loss of income from tenants who are not paying rent and could be facing eviction. As long as a unit is not generating rental income, it has the same effect on rental income as any other vacancy. Tenant default coverage is a good idea for landlords who would have a hard time making mortgage payments without the income from rents.

Protection for Personal Property

A landlord’s insurance policy does not cover the personal belongings of tenants. That’s why it’s important for rental property owners to consider requiring tenants to purchase their own renter’s insurance to cover the contents of their units. That requirement is a standard feature of many lease agreements.

Coverage of the landlord’s personal property often is included in higher-end landlord insurance policies. Such personal property can include items such as major appliances or furniture that are located in tenant units or in common areas and are owned by the landlord, not by tenants.

Coverages to Include in a Landlord’s Policy

Multifamily real estate investors are well-advised to consider the following coverages when insuring a new acquisition:

• – Basic property protection for the structure itself
• – Personal property protection for contents owned by the landlord
• – Liability (medical and legal) protection against the cost of injuries to tenants and others while at the property
• – Rental loss protection for uninhabitable units
• – Flood (this often is not a standard coverage), which lenders often require for properties located in areas with a higher than average risk of flooding
• – Acts of God (sometimes called acts of nature), such as tornadoes, earthquakes, hurricanes, lightning strikes, tsunamis, etc.

Some of the above coverages are included in the basic landlord’s insurance policy, but some are add-ons that increase a policy’s cost. And what is included in one company’s standard policy may not be included in another’s. That’s particularly true of the coverage for acts of God. It’s extremely important for real estate investors seeking insurance for a multifamily property to do their research and give careful thought to the coverages they need and are willing to pay extra for.

The Cost of Landlord’s Insurance

You can expect to pay more to insure a multifamily rental property than your own home. Nationwide, the cost of landlord’s insurance runs about 15% higher than the cost of homeowner’s insurance.

Many factors go into the cost calculation beyond what coverages are included. An older structure generally costs more to insure than a newer one, although the condition of the property also enters into the picture. Location of the property, the number of units, and the presence of fireplaces, swimming pools, and other potential hazards all are cost considerations.

Certain features can bring the cost of landlord’s insurance down—security systems, smart home monitoring systems that warn of potential problems, fire suppression systems, and the presence of safety equipment (such as fire extinguishers or automatic defibrillators) all can reduce risk and therefore reduce the cost of insurance.

Should I Use an Insurance Broker?

Licensed insurance brokers help real estate investors identify their coverage needs and cost constraints. Because they work with multiple carriers, they will look around to find you the landlord’s policy that best fits your needs and your budget.

Get in touch today to find out how we can help.