Do You Need Rental Property Insurance?

Torn paper with word are you covered

Investing in a rental property is a great way to earn passive income, grow your real estate portfolio, and enjoy tax benefits. However, it’s always important to make sure that your investment is protected.

Rental property insurance (also referred to as a “landlord policy”) covers the unique risks associated with renting out a residence for long periods of time, like property damage, liability costs, and loss of income. Whether you own a multifamily complex, a condo, or a vacation home, rental insurance offers an essential safeguard against financial risk.

How is Rental Property Insurance Different From Homeowners Insurance?

Like homeowners insurance, rental property insurance usually helps to cover the building (and other structures on the property, like shed or fences) if there’s damage from a covered loss.

To purchase homeowners insurance, however, you must live in the home. You may be able to rely on homeowners insurance if you live in a single-family home and rent a room out to tenants, depending on how many people are renting from you and how long they intend to stay at the property.

However, rental property insurance includes special protections for landlords; coverage can vary based on the policy and insurance provider, but in general, you can expect:

  • Physical damage to the dwelling and any additional buildings on the property. Physical damage refers to the actual structure of the home, such as the walls and roof. Coverage will only extend to certain types of damage covered in the policy, such as fires or lightening damage, so it’s important to understand which types of damage your policy covers.
  • The landlord’s personal property. Rental property insurance doesn’t cover tenants’ personal property, but it often includes coverage for a landlord’s personal onsite property. This includes items like fixtures, lawnmowers, or appliances. However, keep in mind that if an appliance was damaged in a fire, for example, you would need to have fire damage included in your policy to file a claim for it.

When shopping for rental property insurance, you should ask whether personal property coverage is included in the insurer’s standard policy. If it is included, be sure to ask about the extent that it will cover your property. Personal property coverage is sometimes only offered as an add-on by some insurers. In other cases, it may only be offered as appliance insurance, which would cover appliances like refrigerators or washing machines only.

  • Liability. Liability coverage offers protection in case someone (a tenant or guest) gets injured on your property. If you are found at fault for the incident in some way, liability insurance can help cover the medical and legal costs up to your policy limits.
  • Loss of rental income. Loss of income coverage protects you against the loss of rent payments if your property becomes inhabitable due to an issue that your policy covers. For example, if you have fire coverage, and your property was severely damaged by a house or wildfire, you would be covered for the rental payments that your tenant is no longer obligated to pay.

This type of coverage is typically for a defined amount of time, such as up to 12 months after the damage occurred. Loss of rental income isn’t automatically included in all rental insurance policies, so make sure you ask questions before purchasing a policy if you’d like this type of coverage.

Optional Rental Property Coverage

In addition to the above coverage items, you may also have the option of adding on additional types of coverage, including:

  • Vandalism coverage. This usually covers deliberate damage to your property, such as graffiti.
  • Ordinance or law coverage. This type of coverage covers the costs to rebuild or repair a home that has been damaged, as well as the cost to upgrade it so that it meets the most up-to-date building codes after a covered loss.

What if You Have Homeowners Insurance?

Although it depends on how long you intend to lease your property, homeowners insurance generally isn’t a substitute for rental property insurance. The type of insurance you’ll need will be based on how long the tenant will be living there, which can be broken into three categories:

  • Long-term renting. Generally speaking, if you have an investment property that you’d like to rent out for 6 months or more, you’ll need to have rental property insurance.
  • Infrequent short-term renting. If you only plan to rent out your property for a week or a few weekends, you may be covered by your homeowner’s insurance. Depending on your insurance provider and policy, this may either come standard or be an add-on option. If you’re not sure whether you have this coverage, it’s best to contact your insurer before committing to short-term renting.
  • Frequent short-term renting. If you plan to rent your property to a variety of people for short periods (think AirBnb or VRBO), your property may be considered a business. In this case, you wouldn’t be covered by homeowner’s insurance or rental property insurance—you would need to purchase commercial property insurance in order to cover the associated risks. These types of policies generally include features that you might associate more with a hotel, such as bed bug coverage or identity theft protection. Keep in mind that although service providers like AirBnb may offer limited coverage, it won’t be as comprehensive as home share insurance offered by an insurance provider.

What Are the Costs for Rental Property Insurance?

Costs will vary based on the provider and policy, but rental property insurance is typically 25% more expensive than an equivalent homeowners policy. So if you were spending $1500 on homeowners insurance, you could expect to spend approximately $1875 for rental property insurance. The higher rates reflect the additional risks a landlord faces versus a live-in homeowner, like liability coverage or loss of rental income.

Rental Property Insurance Isn’t the Same as Renter’s Insurance

Despite the similarity in the names, rental property insurance is not the same as renter’s insurance. Homeowners or rental property insurance won’t protect your tenants’ belongings or provide them with liability protection, so if that’s a concern for you, you may want to make renter’s insurance a condition of your lease.

Before purchasing any insurance policy, it’s best to think about what you would like to have included in your policy and make a list of questions to ask the agent to make sure you have the information you need to make the most informed decision.

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