Why you need landlord insurance for rental properties instead of homeowners insurance

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Why you need landlord insurance for rental properties instead of homeowners insurance

Rental properties are a great way to make extra money – if you know what you’re doing. Airbnb has made it easy for anyone to rent out a room or even a whole apartment or house, but it’s important to make sure that you’re properly protecting yourself.

Do you have landlord insurance?

You may have homeowners insurance for your rental property, but that likely isn’t enough coverage for your commercial endeavor. Landlord insurance, on the other hand, provides protection for your building, your liability, and your income if you decide to make rental property one of your passive income streams.

Learn more about the what landlord insurance covers, and the differences between landlord insurance and homeowners or renters insurance.

What homeowners and renters insurance covers

Homeowners and renters insurance policies cover a lot of things – damage to your personal items, theft, liability, and more. Homeowners insurance in particular covers damage to the structure – your home – while renters insurance doesn’t (structural issues are covered by a the owner’s insurance).

However, while homeowners insurance covers your home, it won’t cover a residence you rent out. What’s more, personal liability coverage won’t extend to business activities, and neither will personal umbrella policies.

According to the Insurance Information Institute (III), some insurance companies may allow homeowners to extend their coverage to a short-term rental if they’re notified in advance, but the policyholder is better off getting a rider to their policy to make sure they have the proper coverage. If it becomes a regular business, or begins to include long-term rentals, they’ll need a policy that covers commercial use.

That’s where landlord insurance comes in handy.

What landlord insurance covers

Landlord insurance provides extra protections because it treats your rental property as a business – and since you’re making an income off of it, that’s what it is.

Landlord insurance costs around 25% more than a comparable homeowners insurance policy, according to the III, but the extra cost is well worth the extra coverage.

Landlord insurance covers the building and rental property, just like a homeowners policy does for personal use. However, it also greatly expands liability coverage, so if someone gets hurt, you’re protected from legal fees. You’re also protected from income loss, to an extent. If you’re unable to rent out a room or building when it’s being repaired from a specific covered loss, you can recoup that lost potential income for a period of time.

The factors that determine what landlord insurance costs are largely the same as what determines homeowners and renters insurance policies. Essentially, it comes down to the likelihood that the insurance company will have to pay out – how risky your building is to insure. This includes:

  • The age and condition (i.e., is wiring up to code?)
  • The location
  • The size of the building and the number of rental units
  • Whether or not there is a swimming pool
  • Security features installed, such as fire sprinklers, gates, alarms, etc

And, of course, the specific policy you purchase, from the covered incidents to the size of the policy, plays a role.

There’s good news when it comes to the added cost of landlord insurance, though: landlord insurance premiums can be written off when it’s time to file your taxes, just like many other business expenses can.

You may also see rental dwelling insurance policies available. For example, outside of State Farm landlord insurance, the company also offers rental dwelling insurance if the rental property is under two units. This has different coverage limits than a landlord insurance policy; it will cover personal property loss (for instance, if you’re furnishing a room for rent) but doesn’t cover things like "damage caused by continuous or repeated seepage or leakage of water or steam." Check with your carrier to see if landlord or rental dwelling insurance is the right policy for you.

Where renters insurance comes in

Because both cover the actual building, landlord insurance has more things in common with homeowners insurance than it does with renters insurance. However, renters insurance still plays a role.

Remember at the beginning of the article, when we said that renters insurance only covers your possessions, and landlord insurance covers the building? Well, now you’re the landlord! That means your insurance policy won’t cover tenants’ possessions. And while renters insurance isn’t legally required in any states, it’s normal for landlords to require potential tenants to have it before they’ll allow them to sign a lease. Even if you do have landlord insurance, consider whether or not you want your tenants to have their own renters insurance policy. It can save you from headaches later on down the road.

There’s a lot to consider when it comes to making rental property one of your income streams; buying a property to rent can take considerable capital up front, and you’ll have to deal with tenants and building issues (or hire someone to handle that for you). But it can be a rewarding and lucrative way to make money. Be sure to have the right insurance policy in place, though, or you’ll find those gains eaten up by incidents that would be easily covered by a landlord insurance policy.