Rental property insurance - what you need to know and how to protect yourself as a landlord
Rental income is a hot topic these days. Everyone wants to be a real estate investor and make the big bucks. Most investors forget that protecting your assets is just as important as building those assets. Insure your rental properties correctly and be a responsible landlord.
"Rule #1, don't lose money. Rule #2, don't ever forget rule number one." - Warren Buffett.
That quote is practically a Bible verse in the investing world. You can't read anything about Warren Buffett without running into that quote. Most investors think of that quote in terms of not losing permanent capital in the stock market. They don't necessarily think about their insurance program when they hear it. You would be wise to take your insurance just as seriously as your investing. Even Warren Buffett invests heavily in insurance companies and I would bet he has some pretty good insurance policies, too!
“Your insurance policies will either be your best friend or your worst enemy at the time of a loss. Either way, you have to make the decision ahead of time so you better choose to take your insurance seriously now.”
Rental properties can be a great source of income and wealth generation, but it can also be a wealth destructor if you don't have the proper insurance.
Always require your tenants to carry renters insurance
I suggest you require this directly in your lease agreement with your tenants. However, you need to be careful with this as some states do not allow you to require it directly in your lease agreement. They allow it here in Pennsylvania, so you will want to check with your state laws to ensure it's legal. Even if you are not allowed to require it, you can still strongly suggest it. And even if it is legal in your state, you still need to do your job and obtain proof of insurance from your tenants in the form of insurance certificates. You can have your tenants sign a release document form that allows you to contact their insurance agent and ask for certificates of insurance to make sure they have the coverage in place for the entire policy period.
Renters insurance accomplishes many things that protect the tenant, the landlord, and the landlord's insurance company. Not only that, it's really cheap coverage and if the tenant bundles it with their auto insurance, often times the multi-policy discount they receive is big enough to pay for the new renters policy! The average renters policy is somehwere in the neighborhood of $100-$175 per year.
Most tenants think of renters insurance to protect their personal belongings in case of disaster at their home. That's all true, but a renters policy actually provides much more than this. It provides liability insurance, usually at least $300,000 worth, to the tenant as well. So if the tenant becomes legally liable for someone's injuries while on the property, then the liability portion of the policy would protect them. Think dog bites and trips and falls. It will also provide liability coverage "worldwide."
The tenant can also name the landlord as "additional insured." A good attorney will try to sue the tenant and also the landlord in the event something happens. If the tenant is liable, then the additional insured status the landlord has on the policy would also protect the landlord in case they are sued, too. This is a great way to protect your own policy as a landlord and show your insurance company you are a good risk manager.
Also of major importance is fire legal liability. If your tenant accidentally burns your apartment down and they don't have renters insurance, you will likely be the one footing the bill as the landlord and you and your insurance company will not be happy. If your tenant does have renters insurance and they were at fault for burning the place down then their policy would pay to rebuild the building. If it's a multifamily, it could also pay to replace the other tenants' lost contents. Again, this is a good way to protect yourself and your insurance company. This will also prevent your insurance premiums from spiking after a nasty claim.
I can't stress enough the importance of your tenants carrying renters insurance. All of this is irrelevant, however, if you don't do your job and make sure your tenants not only carry it, but keep it in force for the full policy period. That's why you need to periodically contact their agent to make sure that coverage is still in place. A tenant could get the required insurance to satisfy your needs and then cancel it a month later after they get past the move in phase. Don't get caught with your pants down when the tide roles out. Do the work! This means you will need a good tracking system for proper documentation of tenant records.
Do you own apartments and need insurance? Contact me. As an independent insurance broker with multiple carriers and a niche in apartment investing and insurance, I can help you.
Why require renters' insurance?
Although it's typically only about $150 per year and earns the multi-policy discount on car insurance; many tenants don't think about renters insurance beyond protecting their "stuff." Here are three reasons to require renters insurance:
Perhaps the most familiar rationale for renter's insurance is to protect the tenant's "stuff" like their computer, clothes, etc - if their "stuff" is protected, they are less likely to file suit against the landlord.
Fire legal liability: If tenants or their guests cause fire damage to your apartment, renter's insurance will pay for the damages and perhaps avoid a lawsuit or filing a messy claim under your landlord policy.
Worlwide Personal Liability: Often overlooked in renter's insurance, this important protection covers accidents caused by the renter, their family, pets, or their guest such as a fall, hunting accident, children on a playground, dog bites, golfing or other athletic activity. Renter's insurance will protect the individual and their family for lawsuits due to personal negligence and liability. Again, the renter's insurance pays in order to protect the renter and therefore ultimately protect the landlord and the landlord policy.
Insure your rental property correctly
Do you know how much you're insuring your building for? Do you know what perils (causes of loss) your building is protected from? What deductibles do you have? How did you come to the value your building is insured for? Have you reviewed your values lately? Do you have your buildings insured for replacement cost or actual cash value? Does your policy include business income coverage in case you lose the income from a total loss to your property? What if the sewers and drains in your apartment back up?
If you don't know the answers to these questions off the top of your head, you need to have a conversation with your agent, or me! Many investors assume all insurance policies are the same, so they are in a hurry to shop for the cheapest policy and move on. Nothing could be further from the truth. Your insurance coverage will either be your best friend at the time of a loss or your worst enemy. Either way, you have to make the decision ahead of time, so I advise you choose to take your insurance seriously and ensure you have great protection.
Here is a quick description of the coverages I mentioned above:
Building Value: This is the value your building is insured for. Depending on the building type and the valuation type, this is not necessarily the same as what you paid for the property. In fact, in most cases those values will be different.
Contents or business personal property: This is the limit of insurance that your policy will pay out for your belongings. If you own couches, furniture, office supplies, computers, etc then this is where this coverage would come in. Most landlords will not have a lot of their own property within their units, however, since the tenants will have their personal belongings in them. That's a good reason for your tenants to have renters insurance since this coverage will not provide that coverage for them.
Business income. Imagine if your rental property burnt to the ground. Now, you no longer have that monthly rent coming in. This portion of your policy would pay the lost rent while you are rebuilding the property so it doesn't wipe out your investment. This is a very important coverage.
Replacement Cost Valuation: Both your building and business personal property will probably be insured for replacement cost or actual cash value. Replacement cost just means they value it at the amount it would take to replace the property without subtracting depreciation. Actual cash value is just simply replacement cost minus depreciation. Be careful though, those two valuation differences make a huge difference in the payout you will receive at the time of a loss.
Make sure the owner of the policy is the Named Insured on the policy
I know this seems obvious, but you would be surprised how often this happens. Often times a property owner will put a policy in force and will not change anything for years. In the meantime, things change such as entity names, owners, partners, etc... It's very easy to overlook these finer details on your insurance policy. The fact of the matter is if your name or your business name is not properly listed as the "named insured" then your insurance company could deny coverage altogether. You will also want to ensure you review additional insureds as well. Do you have partners or multiple entities? There are many legitimate reasons to have multiple additional insureds on your insurance policy, such as other entities that may have an interest in your property.
What is Fire Legal Liability?
Fires can cause major disputes between landlords and tenants. Fire legal liability refers to who is ultimately and legally responsible for paying for damages related to a fire.
Imagine that you rent a downtown storefront to sell wedding dresses. One night an employee accidentally leaves a steamer plugged in. After everyone has left for the night, the steamer catches on fire, sending the whole building up in smoke. By the time local firefighers stop the blaze, the building has suffered $75,000 worth of damage. The landlord or their insurance company demands the renter pay for the repairs, since your business ultimately caused the fire due to negligence. In this case, fire legal liability protection in renter's insurance would pay for the losses.
Will you insure it for replacement cost or your investment value?
Insurance can be tough in the landlord business. It's not uncommon for the replacement cost of a building (the cost to rebuild the building if it burnt down or was destroyed from another disaster) and the market price that an investor paid for the property to be wildly different. For example, the estimated replacement cost on a similar square footage duplex of the one I own is over $300,000, but I only paid $55,000 to purchase the building! So, why in the world would I want to insure the building for $300,000 and pay all of that extra premium? That's not good for cash flow. The fact is, a lot of landlords find themselves in this situation and in a lot of cases they will have to insure it for that higher value. That's because insurance is designed to make you whole. Not to put you in any better or any worse of a situation than you were before the loss. Therefore, 99.99% of insurance companies make you insure your property for full replacement cost.
There is one company I sell for, however, who takes a little different approach. They are Millville Mutual Insurance. They understand the challenges that property owners face and they are willing to cover properties for their market value. This allows them to stand out in the market place as most insurance companies are unwilling to do this. I insure my duplex through Millville and it was half the price of other insurance companies and I still have great coverage.
This topic warrants its own article, so stay tuned to learn more!
Q&A About Landlord & Renters Insurance
New landlords are often surprised by the amount of work their role requires. While most focus on fixing problems and collecting rent, there is another aspect of being a landlord that is often overlooked: Insurance.
Q: What types of insurance are required for landlords?
A: If they have a loan on their property, landlords are required to carry insurance until the loan is paid off. They will also be required to carry insurance if it is stipulated in a contract. Additionally, just like any other employer, landlords must have workers' compensation insurance for any employees.
Q: What landlord coverages are recommended and why?
A: Building, rental income protection and general liability are must if landlords want to protect their assets. Optional coverages that are recommended are mechanical & electrical breakdown, building ordinance or law, sewer and drain backup, and off-premise utility interruption. Landlords tend to have many records with tenants personal information, so data breach coverage is also recommended.
Q: What types of insurance is a renter required to carry?
A: Nothing is required by law, but most leases require renters' insurance cinluding contents and/or personal liability. some leases also require the tenant to insure the building. We recommend tenants carry renters insurance, which covers contents, fire legal liability (see explanation), and personal liability to protect their possessions and assets.
Q: Other insurance guidance you would offer landlords?
A: As a good business practice, landlords should always require in their lease that tenants carry personal liability insurance and name the landlord as an additional insured. Be careful though, as some states don't allow you to require it within your lease agreement. For example, in the event a tenant accidentally starts a fire in your building, the the tenant could be legally responsible to you for the cost to restore the apartment. The tenant could also be liable to other building residents. Or if the tenant somehow causes an injury on the premises, the landlord could be held liable; therefore the additional insured status on renters' insurance can protect the landlord for lawsuits based on the actions of a tenant. For these reasons, many landlords try to ensure that all residents have insurance to protect them and the residents of the community.
How to prepare for an insurance quote
People are often suprised at the amount of information that is required to obtain quotes. To properly underwrite your business and your properties, agents and brokers need to dig into the details of your business. Here is a list of items and information you should have on hand when going to get quotes.
Your current policy. An agent or broker will want to see your current policy so they can compare the quotes and give you a proper coverage review. There are a lot of people out there who are reluctant to give this information out because they believe agents and brokers play games. If you're really worried about it then you should white out all of the premium information.
I advise against that, however. Most agents and brokers out there are good people and they are trying to earn your business and make sure you are properly covered from an insurance standpoint and withholding information just makes their job more difficult. It's also a waste of time for you and the agent. Giving them the full policy information, including what you are paying, saves everyone valuable time. It will also allow the agent to perform a full coverage review and advise you from a risk standpoint.
Details about the property or properties
An agent will need to know the details of your properties. This will include building details such as construction type, age, age of the updates such as the roof, electrical, plumbing, and heating. Other things an agent might need to know include the number of exits from each unit, whether there are smoke and CO2 detectors in each unit, and whether you have fire extinguishers in each unit. If you are answering no in your head to these questions then these are items you need to ensure are there within your properties.
The agent or broker will also need to come out to the property to gather pictures. If they are not doing this, then they are not doing a thorough risk management job. Your insurance agent or broker should also be acting as your insurance adviser. If they are not providing valuable information to you to help you run your business better and more safely then you need a new agent!
Download the landlord insurance guide from Rossbacher Insurance
Be sure to visit the "Document" section of my website and download the Landlord 101 guide. Please feel free to download and save to your computer in your insurance file. You should reference this often when reviewing your insurance program.
Five Things to tell a new renter
As a landlord, you are responsible for sharing important information with your renter to make sure you're both ready to make this relationship successful.
Developing a checklist is a valuable tool to document your conversations.
Be sure to speak with your new renter about:
Safety first. Make sure your tenant knows where all of the safety equipment is on the property. Point out smoke and carbon monoxide detectors and highlight the fire extinguishers. If there is a security system, teach the renter how to use it and make sure all the keys are handed over, even for all of the deadbolts. Then always document your conversation on your checklist.
Paying the rent. Your relationship is a business transaction. The renter is paying rent to live at your property, so determining how they will pay the rent is very important. Let your renter know when the rent is due and how you want that payment (check, cash, credit, etc.). This should be contained on your checklist.
Mind the neighbors. Tenants reflect the quality of your property and your property-management abilities, so make sure they are aware of rules with respect to the neighbors. This is where you can outline your expectations for upkeep of the yard and home as well as concerns about avoiding loud parties or large groups of people frequently visiting. Again, document the conversation on your checklist.
Require renters' insurance. I discussed this above, but it's so important it's worth mentioning again. Many tenants mistakenly believe they are covered under a landlord's insurance policy. But tenants need to purchase renters insurance to protect their possessions and personal liabilities in the event of a fire, theft, accident, or natural disaster. it's very affordable and offers peace of mind.
Reporting a problem. If tenants stay for any length of time, it's likely they will have to report some kind of problem. That's why it's good to discuss how you will handle repair and replacement work ahead of time. Let tenants know how to contact you if something breaks and how quickly you will be able to handle the problem.
Be a landlord tenants actually like
The landlord-tenant relationship can be tumultuous, very successful and everything in between.
A great landlord goes a long way in keeping great tenants and maintaining relationships with them. Fortunately, you can take steps to become a landlord every tenant would like to have.
Know your rights. Real estate laws differ in every state, so speak with a real estate attorney or your local housing authority to learn the laws in your area. Your tenants will respect your decisions if they know they come from existing legal guidelines. This can also protect you from lawsuits in the future.
Know your codes. Just as you need to know your real estate laws, you also need to know the property codes and safety and health regulations.
Outline the guidelines. Most tenants will respect your rules if they know about them ahead of time. Establish written policies and share them with tenants before they sign their lease so they know what is expected of them.
Solve problems. Things will break at your rental property just as they do at your residential property. Great landlords respond quickly and make good repairs when things break.
Create a sanitary environment. Remove the trash and keep communal areas clean. If you want to keep great tenants, this is non-negotiable.
Create a safe environment. You can't control what happens outside your rental property. But ensuring the property has locks, fire and security alarms, sufficient parking and bright outdoor lighting will help your tenants feel safe coming home each night.
Respect their privacy. Yes, it's technically your property. But you want your tenants to feel like they own it, too. You can foster that feeling of ownership by respecting their privacy and giving notice before you plan to enter their home.
Collect rent in an organized fashion. If you want your tenants to pay their rent on time, establish an easy, dependable system that they can follow and put it in writing.
Are you a landlord and want to work with me on your insurance program?
I'm a licensed agent in the state of NY and PA. If you have a rental property business and you would like to work with me on your insurance, contact me at Nick@CoinStackFinancial.com.
If you enjoyed this article, please help me out and share with your friends and family. Also, connect with me on all the social media platforms for more great content. If you know someone who invests in rentals, please forward this article to them! Until next time, I'm Nick with Coin Stack Financial, cashin' out!