While many people purchase homes for the sole purpose of renting them out, others purchase their homes thinking that they will live in them long-term. Life circumstances can sometimes alter those plans, however, and a home that someone purchased as a primary residence can – and often times does – wind up as a rental, and when it does you need to know how to insure your property correctly.
Unfortunately, most ‘accidental landlords’ aren’t aware of the fact that once their home becomes a rental property, their homeowner’s insurance policy may no longer be valid. Rental properties require different insurance coverage than owner-occupied homes and the premiums, on average, are about 20% higher. This is because there’s a higher likelihood of the property being damaged. Insurance on a home is like any other type of insurance policy: the higher the risk, the higher the premium.
Understanding the Types of Rental Properties
To navigate through the maze of insurance policies available, it’s important to first understand the different classifications of rental properties.
Short-Term Rentals – Short-term rentals include renting out your home for a few weeks every year. In many cases, your regular homeowner’s insurance policy will cover this type of scenario. It’s important that you contact your insurance company, however, since special endorsements may be needed. If you rent your home out more frequently, even if just for short periods of time, this constitutes a business, which is no longer insurable under your existing policy.
Long-Term Rentals – Long-term rentals include scenarios in which your primary residence is rented out on a more permanent basis (typically at least 6 months) or your second home or vacation house is used as an income generating rental property.
Choosing the Right Insurance Policy
The first step to insuring your rental property is to choose the type of policy that best suits your budget and your needs. Policies for rental properties are categorized by classification based on how extensive the coverage actually is. See Below:
• DP-1 policies are the most basic and cover the simple things like a fire and vandalism.
• DP-2 is somewhat broader in scale than DP-1, and covers damages from hail, windstorms, vandalism and fire. Most DP-2 policies also cover damages caused by vehicular collisions.
• DP-3 is an ‘open-peril’ policy, which means that anything that causes damage to the property is covered by the policy, minus a few that are specifically named. Excluded perils typically include damages caused by earthquakes, power failure, war and nuclear hazards.
Landlord protective policies are also available, which cover equipment breakdowns, on things like hot water heaters, furnaces and air conditioners.
Other Things to Consider
Loss of Income – When renting out a property, it’s important to consider a policy that will cover you when there is a loss in rental income, either due to a lack of tenants or because the property is being repaired. Most accidental landlords don’t know that there are insurance policies out there that can cover this loss of rental income.
Liability Insurance – Equally important is to have proper liability coverage in place. This will protect you if you’re sued for damages for anything from a dog bite to a slippery sidewalk. It’s ALWAYS better to be safe than sorry.
Renters Insurance – Experts recommend that you require your tenants to carry a renter’s insurance policy, which covers the loss of their personal belongings in the event something happens to the house.
Whether you’ve set out to build a real estate empire or have found yourself in a situation where renting out your primary residence has become a necessity, having the correct insurance policy in place will prevent claims from being denied should something ever happen your property.