What Is Rental Property Insurance & Do Landlords Need It?

In This Article

Most real estate investors understand the need to protect their assets with insurance. If you’re considering renting out property, however, you may not know the difference between homeowners insurance and rental property insurance (also known as landlord insurance).  

In this article, we’ll break down what rental property insurance is, why it’s important, and how you can choose the best policy for your business.

What Is Rental Property Insurance?

Rental property insurance protects landlords from any risks or damages while renting out the space. It provides financial protection if the property is damaged or if tenants are injured on the property.  

Does Homeowners Insurance Cover Rental Properties?

While homeowners insurance covers similar things as rental property insurance, landlords should not use homeowners insurance for rental properties. Homeowners insurance only covers the policyholder’s primary residence and doesn’t cover damage if the investment property is used as a rental.

What Does Landlord Insurance Cover?

Landlord insurance covers the following:

Dwelling

The property is covered in case of any natural disaster damage, such as a fire or earthquake, or electric malfunction. We recommend choosing a policy with dwelling coverage that offers replacement cost instead of actual cash value, since older appliances and fixtures will cost more to replace than they’re worth. 

Liability

Liability coverage protects landlords by providing legal or medical costs if tenants or guests suffer injuries as a result of property maintenance, such as an icy driveway. 

Personal property

All personal property within the dwelling is covered from damage, such as furniture, tools, or a lawnmower. It’s important to know that landlord insurance only covers a landlord’s property in the space, so tenants should obtain renters insurance to protect their belongings.

Loss of rental income

This coverage protects landlords with temporary rental reimbursement if the property would become uninhabitable (severe mold, pest infestation, etc.) and renters need to move out while the issue is resolved. The landlord wouldn’t receive any payment from the tenants, but insurance would reimburse the landlord so they don’t lose that income. 

Do I Need Landlord Insurance on My Rental Property?

Landlord insurance is not required by law, but the benefits and protection of a rental property insurance policies far outweigh the costs. Additionally, your mortgage lender may require you to have landlord insurance to prevent financial risk to the loan. 

How you rent out the property dictates the kind of rental property insurance you need. 

Short-term rentals

A short-term rental is considered anything that’s rented for less than six months. If you’re planning to rent your property as a vacation rental on Airbnb, Vrbo, or another site, you’ll need short-term rental property insurance. 

Some insurance companies offer short-term rental insurance as an extension of a homeowners insurance policy. Other companies will require you to have a separate short-term rental policy. It depends on how often you plan to rent out the property. Talk to your insurance agent to see if a short-term rental insurance policy makes sense for your situation. 

Long-term rentals

A long-term rental is considered property that’s rented for six months or more. If you rent out to tenants with leases of at least six months, a traditional rental property insurance policy will fit your needs.

How Do You Choose the Right Insurance Policy?

Here are a few key terms to help you determine what kind of rental property insurance policy is right for you. 

Basic vs. special form coverage

The two most common levels of coverage are basic and special. These options determine what causes of loss are covered by the policy.

• Basic coverage only covers perils that are specifically named in the policy. Landlords will need to purchase additional coverage, like flood insurance, if that situation isn’t included in the landlord insurance policy. 

• Special form coverage offers more protections and covers any accidental or sudden loss, unless it’s listed as an exclusion on the policy.

Actual cash value vs. replacement cost

Landlords have two options for settling the claims payout in the event of a loss. 

• Actual cash value: This option pays out the amount that the property is valued at, which may be lower than the cost to repair or replace your damaged rental, since actual cash value considers property depreciation. Depending on your provider, you may be required to purchase this policy based on your rental property’s age and condition.
• Replacement cost: Based on the adjuster’s report, this payment option pays out the actual cash value settlement (minus your deductible). Then, you submit receipts for repair and replacement costs higher than your initial payout to receive the additional coverage up to your insured value. 

Loss of rents (or business income coverage)

This kind of coverage provides reimbursement for the loss of rental income if tenants are forced to move out of the rental property for a covered loss, such as a natural disaster. 

Other structures and business personal property coverages

If you have other structures on your property detached from the dwelling space, such as a garage or shed, you’ll want to make sure they’re specifically covered in your insurance policy. Ensure your policy also covers your business personal property, such as furniture in the rental, to protect those assets in the event of a covered loss.

Rental Property Insurance FAQs 

How much does rental property insurance cost?

In general, landlord insurance is higher than a typical homeowners insurance policy, since insurance companies see the property as prone to more risk. Rental properties are more likely to be damaged since tenants are less likely to care for the property like it’s their own. 

Expect to pay up to 25% more for rental property insurance than you would for a similar homeowners insurance policy. According to Insurance.com, the national average homeowner insurance policy is $2,777 a year. A 25% markup would mean the average landlord insurance is about $3,471. 

Does rental property insurance cover tenant damage?

In the event a tenant damages the property accidentally, your rental insurance policy may cover the cost of repairs. Remember you’ll have to pay your deductible to receive insurance help, and your policy may not cover the damage if it’s a maintenance-related issue, such as a broken washing machine. 

Rental property insurance doesn’t usually cover vandalism unless the landlord purchases additional coverage. If the tenant intentionally damaged the property, your insurance may not cover it.

Does rental property insurance cover the tenant’s stuff?

No. Rental property insurance only covers a landlord’s property and furnishings. Landlords should encourage tenants to purchase renters insurance to cover their personal belongings in case of damage. 

Does landlord insurance cover the cost of evicting a tenant?

Most landlord insurance policies don’t provide coverage for eviction costs. Eviction insurance can be purchased separately from your insurance agent.  

What property deductible should I carry?

Your deductible is the amount you’ll pay up to if you file an insurance claim for your rental property. This is a personal choice since it affects your insurance premiums—a higher deductible means lower premiums, but a bigger amount you’ll be responsible for if you need to file a claim. The average homeowners insurance deductible is $500, but it’s not uncommon to see $1,000 or $2,000 as deductible amounts. 

What are additional endorsements?

Endorsements are coverages that aren’t typically covered by landlord insurance and can be added on to your insurance policy, such as vandalism or theft. 

What is coinsurance? 

Coinsurance is a clause insurance companies use to ensure policyholders insure their property to an appropriate value (as determined by an adjuster). A typical coinsurance amount listed on a policy is 80%, 90%, or 100%, and the percentages indicate what amount of the property value you are responsible for covering through insurance. 

For example, a property valued at a $1 million replacement value with a coinsurance clause of 90% must be insured for no less than $900,000. If the property isn’t insured to the appropriate value, the coinsurance clause allows the insurance company to penalize the policyholder by deducting a portion of the insurance payout. 

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