4 Common Insurance Mistakes Investors Make and How to Avoid Them

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Making mistakes with insurance coverages when buying investment properties can cost you big time. We won’t talk here about the really obvious ones like ‘‘not taking out enough insurance’,’ or ‘’not taking out separate flood insurance,’’ because you, one, most likely have already heard about these or two, are unlikely to have made those mistakes because you can’t even get your loan without mandatory home insurance coverage. 

So, instead, let’s cover the other areas that investors tend to overlook. They can be less obvious and seem less important, but trust us when we say that they can make your life miserable if you ignore them.

1. Not Upgrading to a Landlord’s Insurance Policy

This is easily the most common rookie mistake investors make at the beginning of their careers as landlords. It can seem that so long as the property is covered by homeowner’s insurance, it doesn’t really matter who lives at the property.

Actually, it does, so much so that you may lose your claims for damages caused to the property by your tenants or other problems that occur while your tenants are living at your property.

Landlord insurance is different from standard homeowner’s insurance, and it covers both the property itself and the homeowner’s liability. So, think of common scenarios like theft and break-ins, fires, plumbing damaged by a bad storm, and the loss of rent that can arise from your tenants having to move out after such an event.

Let’s imagine another scenario in which your tenant injures themselves while they’re on the premises. If you’re not covered by landlord insurance, you could be sued by the tenant and may have to cover their medical bills.

You have to learn to think like a landlord. While most investors realize that property maintenance is their responsibility, many don’t consider the other possibilities or the fact that your tenants, to a certain extent, are also your responsibility. Landlord insurance is the easiest way to keep peace of mind in case something does happen.

Of course, landlord insurance only goes so far in terms of what it will cover. Landlord policies, like other insurance policies, come with deductibles, and coverage is typically limited to what are known as covered perils. Fire damage, burglaries, and bad weather are typically included on that list. On the other hand, your tenant damaging your furniture is not, a point we’ll elaborate on shortly.

A quick look at the declaration page of your insurance will tell you if you have standard homeowner’s or landlord’s insurance. You can also call your insurance agent to clarify and discuss switching to the right kind of insurance if necessary.

2. Not Understand the Limitations On Coverage

The second most common mistake investors make is assuming that landlord insurance will cover just about anything that happens at the rental property, including your tenant spilling red wine on a couch you put in your short-term rental.

This is a costly mistake as you most likely will end up having to clean/replace the couch yourself.  As a general rule, damage to personal property by tenants is not covered by landlord insurance. Now, if the damage was caused by a covered peril, say, the couch burned down in a fire (that the tenant did not cause), then you will be able to claim for it. 

This isn’t a cause for panic. If you own furnished short-term rentals, you can get personal property damage covered via AirCover and other platform-specific programs for short-term rentals. You’ll just have to purchase them separately from regular landlord insurance. 

If you want to educate yourself further on what’s covered by landlord insurance and what isn’t, Steadily recently made a valuable video that breaks down some of the common landlord policy coverages that you need to know. 

Bonus tip: We mentioned ‘‘loss of rent’’ in our first point, and let’s reiterate that the only loss of rent that landlord insurance will cover is the loss of rent related to a covered peril. So, a situation where a tenant has to move from a fire-damaged building qualifies. One where a tenant just stops paying you rent does not.

3. Not Realizing Vacancy Clause Time Limits

Most landlord insurance policies include a vacancy clause. This clause will cover the landlord in case it is impacted by several commonly recognized ‘’perils’’ during vacancy. These include vandalism, theft and break-ins, water damage, and sprinkler leaks. 

Many new landlords don’t realize that this vacancy clause has a time limit, typically 30 or 60 days. What that means is that once the property has been vacant longer than the time period specified in the policy agreement, you won’t be covered for any of the ‘‘perils’’ outlined above. 

Many landlords who rent out their homes long-term may feel that they don’t need extra vacancy insurance because their rental never stands empty for longer than a couple of months. However, if you own a short-term vacation rental, you’re much more vulnerable to the time-sensitive nature of standard vacancy clauses. In that case, getting extra vacancy insurance is a very good idea. This applies to home flippers, too, as properties that are being renovated can easily be unoccupied for many months at a time.   

It is always very important to disclose all of the specifics when taking out vacancy insurance because the coverage and the terms will vary depending on why you anticipate vacancy periods at your investment property. You also want an insurance product that will cover you for the right risks. Steadily, for example, has specific products for properties under renovation, fix-n-flips, and long-term vacant dwellings.

4. Not Including Insurance Costs in Deal Analysis

Last but not least, not factoring insurance into your deal analysis can cost you a lot. Depending on where your investment property is located, the costs can vary considerably, and you really can’t just ballpark-guess it. State-by-state premium fluctuations are significant. For example, if you live in Arizona, you may only pay $839 per year, but if you live in Florida, the annual landlord insurance cost will be closer to $1,722 per year. That’s a huge gap. 

And geography isn’t everything here. The age of the property and even what type of roof it has can significantly alter the premiums. Obviously, any investor worth their salt needs to know in advance whether landlord insurance will set them back an extra $800 or $2-3k.

So, always factor landlord insurance premiums into your prospective investment analysis. Using a landlord insurance calculator or getting a property-specific quote is crucial for investors performing deal analyses on properties. And bear in mind that landlord insurance, because of all the extra coverage it offers, can cost 25% more than home insurance policies. If you’ve been budgeting for standard homeowner’s insurance up till now, you’ll have to revise all your figures.

Conclusion

Landlord insurance is essential for protecting your rental property against many common problems that can go hand-in-hand with having tenants. Insurance is always about calculating risk, and when someone lives at a property who isn’t the owner, that risk goes up. It’s not just because rentals often get damaged but because there are many logistical difficulties, such as when a rental property is damaged and a tenant has to move out, or when a rental stands empty for long periods of time. 

Because of the higher risks, landlord insurance will cost you more as an investor than standard homeowner’s insurance would cost you as a homeowner. However, If you only take away one important point from this list of common mistakes with landlord insurance, it’s this: don’t choose not to take it out. Landlord insurance protects you against the most unexpected events at your rental, which are often the costliest. It could even save your entire business.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.