Homeowners Insurance for a Rental Property

Maybe you’re renting out your house on Airbnb so you can travel the world. Or perhaps you just invested in a long-term rental property. As soon as you rent out a property, you will need insurance to cover it.

One reason is the potential for damage to the property. Renters may not be as likely to stay on top of tasks like a leaky faucet or cracks in the floorboards, or what Justin Pogue, a Dallas-based real estate asset and property manager and author of the book Rental Secrets, calls “little things that change the risk profile from an insurance standpoint.” After all, a small incident, like a toilet overflowing on the third floor, could, for instance, damage other apartment units below it. “The bill for that can really add up,” says Pogue.

Insuring your rental can also protect your tenants if there’s an accident. “If you’re renting and someone slips and falls on your property, that can be something they sue you—the owner—for,” says Pogue. “Or you may have to pay for it as the owner, especially if any negligence can be proven on your part.” A regular homeowners policy may not cover a situation like this if you’re renting out the property, he adds.

In short, you should consider insurance to protect you as a landlord. Here’s a primer on the types of coverage you need for managing a rental property.

A homeowners policy is likely to cover friends and family who stay with you for free, but renting your home to paying guests is considered a business activity. You may have some protection from your homeowners policy, but if you live in your home and rent it out for 62 days a year or less, it’s a good idea to add short-term rental coverage to your homeowners policy. This covers your property in the event of:

Property loss: Short-term rental coverage can help protect your personal belongings and appliances if anything is damaged or stolen on the property.[1]

Accident or injury: It also covers liability, in the event you are sued by renters for personal property damage or bodily injury while they are renting the property.

If you’ve purchased a rental property that you will not live in, you likely will need landlord insurance, also known as rental property insurance. This will usually include dwelling coverage for the actual building and other structures on the property as well as personal property used to service the rental, like a lawnmower or snow blower. This type of policy also covers your rental property if:

• It suffers damage from tenants.

• It becomes uninhabitable because it is harmed by wind, lightning, hail or another type of storm.

• Someone gets injured on your property.

• The tenant can’t stay in the property because of damage and you can’t collect rent. That loss of rental income could be covered.

One thing to keep in mind is that landlord insurance does not protect the tenant’s belongings. “Their clothing, TV, appliances and computers—none of that is covered by the property insurance the landlord has,” says Pogue. Because of this, many landlords require that tenants provide proof of renters insurance before signing the rental contract.

You never know when these policies can come in handy.

For instance, when personal finance writer Elizabeth MacBride and her former husband moved to an apartment in New York City, she bought a renters insurance policy. That decision proved to be well worth it when a dust cloud from the 9/11 attacks filled the apartment and made it uninhabitable. “We were out of our apartment for six weeks,” says MacBride. “We had to stay in a hotel. All of that was covered. My lesson from that was to always be insured.”

Insurance companies offer a variety of policies. Speaking to a broker about the property you have will help you determine the right type for you. The coverage you select should reflect the value of the building, so you truly are protected if it were completely destroyed to the point you had to rebuild it.

“Let’s say you bought half a million dollars’ worth of coverage,” says Pogue. “If the building burns down and you require $1 million, you’ve underinsured the property.” There may be a penalty in the contract with the insurance company for doing so, notes Pogue. Here are two considerations to help you decide on how much coverage to buy:

Your property’s value: Your most recent tax assessment can help you estimate the replacement cost of the property. It will divide the property value into the value of the land plus building improvements. However, it is important to research current building costs. If building costs are high, replacing the building may cost more than the current assessed value of the building.

Your deductible: Insurance policies come with deductibles. A deductible is the amount you must pay before the policy kicks in. If you have a lot of cash in reserves, you may find it is more cost-effective to choose a higher-deductible policy; generally, the higher the deductible, the lower the premiums. However, if you would not be able to afford to pay for fixing much damage to the property or a tenant’s claim, it may be wiser to pick a lower-deductible policy with higher premiums, so you know you are protected.

Depending on where you live, the average monthly cost of landlord insurance may range from $67 to $381, according to Young Alfred, an insurance agency.[3] The cost of short-term rental insurance will be about double the cost of a standard homeowners insurance policy for your property, according to Proper Insurance, a provider of short-term rental insurance.[4]

Some home-sharing companies offer liability and property damage protection insurance, so you don’t have to make a claim through your other insurance. Whether you’re looking into landlord insurance, adding short-term rental coverage to your homeowners policy or getting insurance through a homeowners association, be sure to find out exactly what is covered before you commit.