Choosing the Right Insurance for Your Rental Property
The number one goal of your rental business should be to make money, not give it away. One way to protect you and your investment is to have proper insurances in place. Let me introduce you to four insurances that you should consider.
A Good Lease
The first insurance that I posses is the insurance of a good lease and a thorough move-in inspection. More than once I have referred to the pictures of a move-in inspection to counter a tenant's claim about a pre-existing condition. I remember one time during a preliminary move-out inspection I noted a cracked ceramic floor tile. The tenant claimed that it was like that when they moved in. I turned on my laptop, pulled up the appropriate picture from the move-in inspection, and proved to the tenant that the crack was in fact not there when they moved in.
The next insurance that I possess is the kind purchased from my friendly neighborhood insurance professional. However, take note that there is more to consider than just regular old homeowner's insurance. In fact, there are several kinds of insurance that you want to consider as a landlord.
When it comes to insuring my personal rental properties, I have a landlord policy on each rental unit that I own, whether that unit is paid off or not. Landlord policies have the added benefit of additional liability protection for the landlord. You also need to ensure that each policy carries sufficient coverage to satisfy your mortgage lender.
Depending upon your rental's geographic location, there are some additional property insurance policies you may want to consider. In California, many people have earthquake insurance. In other areas, you may want to investigate flood insurance. Your insurance professional can educate you on the particular hazards you might wish to insure against for your area.
The third insurance that I have is an umbrella policy, which acts like an umbrella over all of my other existing insurance policies. Examples of when this coverage may come into play include when a guest of your tenant slips and falls in one of your rental properties and is severely injured, or if a storm occurs and a neighbor's property is damaged by a tree falling from your property.
Your landlord insurance policy has a liability limit. The umbrella policy picks up after those limits are exhausted and therefore usually carries a very high deductible, usually $300,000 or higher. Those deductibles seem high until you are sued for $750,000 and lose. In this example, the first $300,000 would be picked up by your primary insurance; the balance, $450,000, would be yours to pay. An umbrella policy helps pay that off. Otherwise, virtually everything you own would be fair game against that judgment.
The fourth insurance is renter's insurance. Remind your tenants that their personal property and vehicles, or those of their guest's, are not covered by any of your insurance policies against loss or damage due to fire, theft, vandalism, rain, water, criminal or negligent acts of others, or any other cause. Coverage for those items comes only through a renter's insurance policy.
Renters insurance traditionally covers the tenant's and any guest's possessions, like furniture, clothes, computers, and bikes. Additionally, if a plumbing backup floods your property and renders it uninhabitable, renters insurance may cover the cost of a temporary place to live until the tenant can move back into your property. Some renters insurance policies may also have protection for the tenant against lawsuits.
You should always require renter's insurance when the tenant has a pet in the residence. You do not want the tenant's dog biting a neighbor kid and then have the neighbor sue you. At my office, we will not allow tenants to receive keys without proof of a paid-in-full renter's insurance policy. If the tenant does not have a policy at the time of lease signing, we make the tenant call an insurer and obtain one on the spot.
In conclusion, Insurance is all about risk management; you buy or require insurance to manage some of those risks. Knowing your real estate laws is the best defense. After that, obtaining the insurances discussed in this article is an intelligent way to begin managing your risk.