Must I get Landlord Insurance?

Question

I recently rented out my home and became a landlord. Do I have to have Landlord insurance? I got it, and my escrow when up $150.00 on my recent house rental. It is killing my cash flow what can I do? Can I drop the Landlord insurance and just go back to basic homeowners? Please give me some advice.

Account Closed · Answer

That's outrageous. Is that standard for the location? My policy is not called any kind of landlord policy but it is geared towards rental property. I pay $550 a year on a 4-plex and that comes with $2MM general liability and income-loss protection.

I would start shopping for a new carrier ASAP.

Derek Lacy · Answer

Dennis as a local insurance agent, yes you need "landlord's insurance."  There is no real policy named landlord's insurance, but any agent can decode that for you, to mean I need a house covered, but not homeowners coverage.

As Bogdan points out, if liability is your only concern you can usually add an additional residence - rented onto the liability as a rider on the homeowners policy, do be aware this only works if the name on the rental's title is your personal name.  And it also does not cover loss to the property itself (it burns down, you're not covered for that, just third party lawsuit).

In my opinion you may be paying too much, but I cannot know without seeing the facts and pulling a proposal.  Thanks!

Bogdan Cirlig · Answer

Well, I have Liberty Mutual and I have a"rental rider" on my homeowners policy. This works up until 5-8 or so depending on each insurance company policy. But, do buy an Umbrella Liability.. for $1MM it costs barely $200/year.

LL is expensive and definitely worth it but if you go over the number and are considered "commercial" from the insurer's perspective.

Elizabeth Colegrove · Answer

Our landlord insurance is cheaper or only "slightly" more expensive baed on the state. That being said, DO NOT skimp on landlord insurance. The last thing you want to do is invalidate your policy.

Karen Rittenhouse · Answer

You absolutely need non-owner occupied insurance which is for the structure only. The tenant gets renters insurance which covers their contents.

Beyond that, ask your insurance agent and real estate attorney as some of these things can vary by location. We are a large company with a lot of properties and even have errors and omissions coverage for our contracts.

What you need will change over time but always ask your professionals. For legal questions, I prefer to ask a litigating attorney because they will defend me in a court of law. If you own real estate, you will end up in court. Take the time to get professional counsel; don't rely on advice from friends and family.

Jon Holdman · Answer

Ah, I see in an older post you were paying $850 PITI and getting $1200 in rent and using a (pretty cheap) property manager.  That's probably cash flow negative.  A lender would evaluate that as 75% * rent ($900) less PITI = cash flow of $50 a month.  With your new PITI you're in the hole $50 a month.  I would apply the 50% rule:

cash flow = (rent * 50%) - P&I  (just the P&I part of your payment)

to estimate cash flow.

I do expect that your escrow amount will drop back down somewhat in a year.  Rental expense scan vary from year to year.   The 50% rule works for a portfolio of properties over the long term.  Any particular property in any particular year can be somewhat better (taxes and insurance are the bare minimum expenses, you often have others) or a LOT worse (e.g., my sewer line replacement that ate 50% of a years rent all at once.)  Its that bad ones where having cash reserves is essential to survival in this business.

Jon Holdman · Answer

Changes in escrows amounts aren't always directly tied to the costs.  They're based a projection of incoming amounts into the account, payments going out, and the minimum your state allows them to have in the account.  When there's a change, like this switch from homeowners to landlord, they may have to pay out an unexpectedly large amount.  So, they will run an analysis and figure out the adjustment to bring the projected minimum up to the allowed minimum. That might produce a very large jump.  A year from now, they will redo the analysis, and the payment may drop down.

So, how much is your landlord insurance, how much was homeowners, and how much is the house worth?  For example, landlord insurance on one of my rentals is about $1000 a month for a $150K (replacement value) house.  HO is similar on my house even though the replacement value is roughly double.

Hopefully you realize @Dennis Standers that (rent - PITI) is nowhere near your expected cash flow.  You have a LOT of expenses beyond taxes and insurance on a rental.

Jason Bott · Answer

@Dennis Standers

A homeowners policy excludes business operations.  So as @Jon Holdman

eludes to, any claim related to the rental of the property will most likely be denied.

Jon Holdman · Answer

Landlord insurance or nothing.  Homeowners on a rental may result in denied claims.  The only benefit to homeowners is the mortgage company won't slap you with a force placed policy, which will be even more expensive.  But it isn't really giving you any insurance.

Is your landlord policy really $1800 a year more than the homeowners?  Its more expensive, but not that much.  You might want to shop around.

Paul Ewing · Answer

Most homeowners will not pay if it is a rented property.  Plus you really need the extra liability that comes with the LL policy.