One of the most common ways to becoming a millionaire is through real estate investment. Rental homes and investment properties allow you to earn passive income by having others pay off your rental’s mortgage for you. Additionally, when you decide to sell your rental properties in the future, investors will see huge investment returns and only pay capital gains taxes. So how do real estate investors protect their investments?
Homeowners insurance only covers homes where the owner of the property is also the primary resident. For property owners that rent homes to others, rental home insurance provides protection against the special risks that landlords may face when tenants occupy their property. Rental home insurance is not be confused with renter’s insurance – rental coverage protects the landlord or property owner, while renter’s policies protect tenants.
Homeowner’s Excludes Rentals
Homeowners insurance covers single family, owner occupied residences and does not provide coverage for rental properties. Homeowners who move to a new home and are unable to sell their previous house often choose to rent out the property. When the property is not owner occupied, the owner needs to switch to rental insurance to protect himself or herself from financial loss to due fire, vandalism, theft and other risks. It also has other advantages for landlords, including protection against loss of rent.
Rental home protection is available in named peril and all risk policies. Named perils policies cover damage only for those risks listed in the contract. All risk policies cover damages for all causes of damage not specifically excluded in the policy. Both types usually provide protection against loss by fire, vandalism, theft, wind, hail and electrical surge or lightening, but typically not against earthquakes or floods which have their own special insurance. Since there is no standard type of rental insurance, property owners should compare several company offerings to find the most comprehensive coverage available.
Replacement cost insurance policies are more expensive than actual cash value policies because they provide more protection to the property owner. If damage from a covered loss occurs, replacement cost polices pay the full amount for repairs or replacement, including rebuilding of the house. Most rental insurance secures any permanent structures on the property like garages or storage buildings, the home itself and any permanent fixtures in the home or other buildings.
Actual Cash Value
Actual cash value rental insurance defends the market value of the home and detached structures on the property. If a covered loss occurs, the insurer pays for repairs or replacement less depreciation. For instance, an asphalt shingle roof has a life expectancy of 25 years and suffers damage after 5 years. The insurer would pay for repairs less 20% for depreciation. Depreciation is based on the life expectancy of covered property so this type of rental policy does not cover the full cost of rebuilding the home if it is destroyed by a covered risk.
What Does It Cover?
Rental home insurance covers the actual building structure, detached permanent structures on the insured property and permanent fixtures in the home or structures. Permanent fixtures are those contents that are permanently affixed to the structure like plumbing fixtures, lighting fixtures, built in appliances, cabinetry and countertops. In areas where the law requires property owners to supply appliances like refrigerators or stand-alone ranges for tenants in rental properties, these items may also be included.
What Is A Covered Loss?
A named perils home insurance policy lists all the risks that are covered and any damage caused by a named risk will be paid for by the insurer. If the risk is not named in the policy, the loss is not covered. All risk policies secure losses for any risk not specifically excluded in the contract. Common exclusions include acts of war, civil insurrection, nuclear accident, earthquakes, volcanoes and floods. Property policies do not insure against floods, but separate flood insurance can be purchased through the U.S. government.
All insurance policies that cover property, whether it is an automobile, a home or a commercial building, have a deductible. The deductible is the amount of damage for which the insured person is responsible before the insurer pays for repair costs. The deductible is typically $1000 and damages that are under $1000 do not need to be reported since the property owner will have to pay for the repairs. When the insurance company pays for repairs, they will deduct the $1000 from the total repair costs.
Loss of Income Coverage
Many landlords owe money on the property they rent to others and depend on the income from tenants to pay a mortgage. If a rental property is rendered uninhabitable due to a covered loss, rental home insurance has loss of income protection to help pay the monthly costs until the property is repaired and rented again. Loss of income coverage does not apply if tenants move out unexpectedly and rental income protection coverage does not cover ordinary maintenance that is customarily performed between occupancies.
Rental vs. Homeowners Rates
The risks of insuring owner occupied properties are usually less than those of insuring rental properties since owners are more likely to take steps to protect their property from damage. For this reason, the cost is usually about 20% higher than the cost of a homeowner’s policy on the same property. Rental insurance does not support contents except permanent fixtures in the home but the liability protection provided by the policy does help protect property owners from lawsuits.
Free Insurance Quotes
The best way to get quotes for rental property insurance is to visit a website that offers instant rate quotes from multiple insurance companies. This allows consumers to compare rate quotes side by side without visiting dozens of websites. Since there is no standard form for rental home insurance, it is smart to compare policies before deciding which insurance company offers the best value. It only takes a few minutes to complete a short questionnaire and get rate quotes from top ranked companies.
Most people who invest in real estate know the advantages of rental insurance, but property owners who have never rented to tenants may not be aware of the need for this special coverage. Rental home coverage protects a property owner’s financial investment and will help cover mortgage payments when the unexpected happens. Any property owner who is considering renting a home should know about this important type of coverage.