The surest way to derail any real estate deal is to fail to protect yourself and your assets. Insurance isn’t the most exciting topic, but if you don’t adequately cover yourself, your corporate entity, and your property, you can put your entire financial well-being at risk.
Homeowners require a different type of insurance product than regular homeowners, and even then, there are nuances to consider depending on your particular situation and location. Today, we’ll demystify some of the most important aspects of homeowners insurance to ensure you and your assets are protected.
Reading: How much landlord insurance cost
Disclaimer: All real estate investors should discuss their particular situation with a licensed and experienced real estate insurance broker. The content in this article is for informational purposes only and should be used in conjunction with the advice of an insurance professional.
difference between homeowners and homeowners insurance
As a landlord, you need landlord insurance instead of owner-occupied home insurance. If you own a rental property business, there are additional protections you need to make sure you have on top of those that a primary homeowner may need. A homeowner’s policy will cover standard responsibilities such as fire, flood, protection of personal belongings, theft, among others. While many of these are important to real estate investors, there are additional protections you may need.
As a landlord, you will not need to insure the contents (personal property) of your units, that will be the responsibility of your tenants; many landlords make this mandatory. That said, you may need additional coverages, such as loss of income coverage in the event of loss of rental income as a result of flood, fire, or significant renter damage to your property.
homeowners insurance 101
There are three standard insurance policies that homeowners should be familiar with: dp-1, dp-2, and dp-3. the standard dp-1 policy generally covers less than dp-2 and dp-3. For example, DP-3 policies cover most risks, such as theft and vandalism, and liability coverage, while DP-1 and DP-2 policies may not. In the case of liability coverage with DP-3 policies, if a renter is injured on his property, he can use his policy to cover legal or medical expenses.
As stated above, most homeowners insurance policies do not cover the contents of the units; this is the tenant’s responsibility. That said, most DP-3 policies cover contents owned by the owner, such as appliances or furniture. dp-3 policies also include loss of rental income, that is, if the unit is off the market while you make repairs. Here are some common insurance policy features you’ll want to consider:
- property protection (structure)
- protection of personal property (content)
- protection against loss of rent (only if the unit is uninhabitable for various reasons)
- acts of nature (be sure to ask your broker what is covered and what is not)
- security features
- age and condition of property
- smart home devices that provide early warning of potential problems
- number of rental units
- security team on site
- high-risk features such as wood-burning fireplaces, swimming pools, and hot tubs
- long-term vs short-term renters (different coverage is needed for each case)
rent loss covers loss of income when the property becomes uninhabitable and generally does not protect against tenant default or vacancy. You can purchase additional insurance to cover tenant default, which may be worth considering if you can’t cover your mortgage without rental income and you think it will be difficult to find a new tenant and/or evict a tenant you’re retaining. rent due to causes beyond your control.
It’s worth noting that if you have a hoa, there will be insurance associated with the ownership structure of the hoa. For example, a condominium building with a HOA will have its own insurance to cover certain things. In this case, it’s important to work with your broker to make sure you don’t duplicate coverage that’s already under a hoa policy.
My prepaid policy does not expire for many months?
Don’t worry, you can switch insurance providers at any time and you’ll get a prorated refund for unused coverage. talk to your insurance broker or new insurance provider for details. don’t let your current policy hold you back!
so what is the cost of homeowners insurance?
The general rule of thumb is that homeowners can expect to pay approximately 15% more for homeowners insurance than for a standard homeowners policy. According to insurance.com, the national average cost of a homeowners policy is $1,288. therefore, most homeowners can expect to pay approximately $1,481 a year for homeowners insurance.
The higher cost is because insurers are taking on additional risk for homeowners insurance due to the presence of renters. Here are some other factors that affect the price of your homeowners insurance:
questions to ask your insurance broker
It is essential that you speak with a licensed insurance broker before purchasing any rental property. You should also get insurance quotes. Consider using a broker if you haven’t already gotten a deal package from an insurance provider because brokers can shop around for the best prices and policies. however, a single insurance provider can offer you a massive deal if you work with them alone. be sure to explore both options.
Not only should insurance be part of your investment due diligence, but many lenders also require it as part of the financing process. When you talk to your broker, here are some questions that may be worth asking:
- Are there any improvements/repairs I can do to this property to lower my insurance costs?
- Does this policy cover flooding and what type of flood (natural disaster, sewer overflow, or tenant error)?
- What are all the deductibles on my policy?
- Are there additional coverages I should add given my location?
- Are there any insurance discounts that may apply to my situation?
- Does my policy cover short-term and long-term rental periods?
- What happens if my property is damaged by my tenant’s negligence or criminal acts?
- How is replacement cost or cash value calculated under this policy?
- Does my policy cover other structures on my property, like a shed or cottage?
- Should I get a separate umbrella policy to cover me if I max out my liability coverage?
- will having security equipment on the premises lower my homeowners insurance premium?
- what is not included in my landlord insurance?
- Is my policy covered in the event of a terrorist event?
Be sure to do your due diligence with your insurance broker and talk to other homeowners in your area to better understand the most common scenarios that could arise.
6 essential tips when looking for homeowners insurance
Tip 1: Make it mandatory for your renters to have renters insurance. You can make this part of the application process or ask them for proof of a renters insurance policy when they sign the lease. Fortunately for renters, the cost of renters insurance is quite low and can be as little as $20 a month.
Tip 2: Consider going with the same insurance provider for all your rental units to get a bundle discount.
Tip 3: Add short-term rental coverage to your insurance policy so you have the flexibility to rent your unit for short periods if needed.
Tip 4: If you have a net worth greater than your insurance policy’s liability coverage (for example, $1 million), you should consider getting a separate policy to cover yourself. same or to llc if they require more coverage if necessary. For example, if your liability coverage is only $1 million but your net worth is $5 million, you don’t want to max out your liability coverage and then leave yourself personally responsible for the rest. you can get a second policy that will cover your assets if this is the case.
Tip 5: Make sure your rental loss coverage is the same as your gross rents for the entire home to ensure there is no loss of income.
Tip 6: Consider additional insurance items if they are not on your current policy, such as floods, wildfires, theft, earthquakes, terrorist events, and vandalism.
There is no question that adequate insurance coverage can make or break your real estate investing business. If 10 years ago there was flooding on your street and the sewers backed up, then you need to make sure you have that coverage. Plus, if a tenant slips and falls on the steps and you’re responsible but don’t have any liability coverage, you’re putting your business and personal finances at risk.
Get different quotes, talk to experts in the field like local insurance brokers, and do your due diligence with a professional insurance professional. that way, you can go to sleep at night knowing that whatever happens, you and your business will be covered.