What Is Rent Guarantee Insurance—Do Investors Need It?

In This Article

Rental properties are a fantastic source of income as long as your tenants pay rent. Unfortunately, even the strictest tenant screenings are imperfect, and even the most responsible renters can be hit with unpredictable, life-altering circumstances. That’s when rent guarantee insurance comes in handy. 

Rent guarantee insurance provides financial protection if your tenants fail to pay rent. In the occasionally unpredictable real estate environment, rent guarantee insurance helps you minimize risk, so you don’t have to worry as much when collecting your monthly rent payment. 

In this article, we’ll discuss rent guarantee insurance, how it works, and how to find the best insurance policy for you.

What is Rent Guarantee Insurance?

Rent guarantee insurance is specifically for when rent isn’t paid because a tenant stops paying it. Rental property owners often use rental income to cover some or all of their monthly mortgage payments. Rent guarantee insurance exists to help keep landlords from falling behind on these payments because their tenants fell behind on theirs. 

Even if you have the funds to cover your mortgage, evicting your tenants is a long and arduous process, often taking several months. During this time, there’s no guarantee that the tenant will respect your property, meaning you can evict them and then have to make costly repairs before someone else can move in. Then, you have to account for the time it takes to find a good tenant. With rent guarantee insurance, you’ll at least be covered for the months your property has a tenant living in it, regardless of whether or not they’re paying rent. 

What Does Rent Guarantee Insurance Cover?

You can get rent guarantee insurance coverage for both single-family and multifamily units. This insurance covers the basic rent payment for a limited time period after your tenant stops making rent payments. Depending on your policy, it can also cover:

• Property damage caused by tenants, their guests, or their pets.
• Lease guarantees if your tenant breaks their lease.
• Legal fees if you have to evict a tenant.
• Maintenance costs. 

What Are the Limitations of Rent Guarantee Insurance?

As you can imagine and may have experienced, insurance companies won’t just pay out to anyone. For instance, if your tenant has a history of not paying rent on time, you’re unlikely to get approved for rent guarantee insurance. This is one of the many reasons why you should always perform a thorough background check before approving a rental application. 

Insurance companies may also look to see if:

• The tenant had a steady job when applying to move into your property.
• Your tenant earned enough to comfortably afford their monthly rent payment.
• The tenant has a decent credit score.

If your tenant doesn’t meet their qualifications, the insurance company may require them to have a guarantor in place with the financial means to cover delayed or unpaid rent. Without one, you’ll have difficulty obtaining rent guarantee insurance if you want to accept that tenant’s application. 

Assuming your insurance company approves your rent guarantee insurance, it usually takes one full month of non-payment before they cover you. You may also experience some pushback from your insurance company if they decide to argue that your renter’s security deposit is sufficient enough to cover that month. 

Rent Guarantee Insurance vs. Rent Loss Insurance: What’s the Difference?

While rent guarantee insurance focuses on when a tenant decides to stop paying rent, rent loss insurance is for if there’s damage caused to your property that makes it so your tenant can no longer live there (e.g., fire, natural disaster, a car drives through a wall, etc.). 

Typically, rent loss insurance covers your property’s fair market value, which may differ from your monthly rental income. We recommend getting rent guarantee insurance with a rent loss insurance add-on for the best landlord rent protection measures. 

Rent Guarantee Insurance: Pros and Cons

By now, you’re probably already identifying some of the benefits and drawbacks of rent guarantee insurance. Here are the three main pros and cons of each:

Pros:

• Peace of mind. If you’re worried that your tenant may fall behind on payments or decide to stop making them, you can rest easy because rent guarantee insurance will kick in as quickly as one month after not receiving payments. Depending on your policy, you may also have coverage if you evict your tenants. 
• Goes beyond property damage. While rent loss insurance and other forms of landlord insurance usually only focus on physical property damage, rent guarantee insurance protects you from your tenant not paying rent. Add rent loss insurance to your rent guarantee insurance policy for the best landlord rent protection measures for additional coverage, getting the best of both worlds. 
• More time to find quality tenants. If your current tenant breaks their lease or if you have to evict them, it’s advantageous to find a new renter as soon as possible. Unfortunately, you may end up with another bad tenant and repeat this process. With rent guarantee insurance, you can take a little more time screening tenants because you’ll have additional coverage for a specified period after your previous tenant leaves. 

Cons:

• Insurance isn’t cheap. Rent guarantee insurance equals 5% to 7% of your annual rental income. Some landlords offset costs by including insurance in the cost of the rent. However, doing so runs the risk of it being more expensive than competitive rental properties. 
• No guarantee you’ll need it. Insurance is meant to safeguard from the “what ifs” in life. However, many rental property owners rent out their homes for dozens of years without ever having a tenant fail to pay rent or start the eviction process. 
• Your application could get rejected. If you fail to properly screen your tenant, your insurance company may deny your claim even if your tenant stops paying rent. 

Who Are Guarantee Insurance Providers?

There are multiple companies that offer rent guarantee insurance to small landlords. Compare their offerings on the BiggerPockets loans tab. When you do, here are a few things you should look for:

• What’s covered: Carefully read the policy details to know exactly what’s covered and what isn’t. Insurance policies are famously difficult to understand, and you don’t want to end up buying a policy that doesn’t include the key protections you need. 
• Length of coverage: You’ll usually want to choose a policy that covers at least several months of rent. This will give you the cushion you need during months of nonpayment, and if you evict your tenant, time to find a new one.
• Eviction protection: Some municipalities have strict eviction laws. If you live in an area that doesn’t allow you to start the eviction process until 90, 120, or even 180 days, you’ll want the cost of evicting a tenant covered.
• Payment terms: Many rent guarantee policies have you pay the premium up-front, while others require multiple, smaller installments. 
• Reputable provider: Your policy should be from a legitimate insurance carrier that specializes in rent guarantee insurance. Do your research, and don’t hesitate to ask insurance agents specific questions about their policies. 

How to Find the Best Insurance Policy for You

When finding the best policy for you, you have no shortage of resources at your disposal. Start by contacting other landlords you know and ask what’s worked for them. Their needs may differ from yours, but it’ll help you narrow your scope. You can also connect with real estate agents and lenders in local or online networking groups or by asking industry professionals in the BiggerPockets forums. 

Once you have three or more solid leads, research each of them and compare their rates and offerings. Contact their insurance agents to answer any questions you might have that you can’t find on their site. Then, analyze all the information you’ve gathered from each policy and select the best-fitting one for your needs. 

Is Rent Guarantee Insurance Worth It?

Some landlords will never need rent guarantee insurance, but they’ll never know for certain. Rent guarantee insurance can be expensive, but it can also give you peace of mind and save you a lot of money if you end up having a tenant that stops paying rent or if you have to evict someone. Also, having rent guarantee insurance means that you may not need as much saved in your “contingency fund” because you’ll have rent covered. 

Whether or not you decide to purchase rent guarantee insurance, we strongly recommend you do your research before selecting a policy and clearly understand everything you’re getting. If you do end up needing it, you don’t want any surprises. 

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