"Rental Property Insurance / Landlord Insurance: Your First Line of Defense"
Rental property insurance, or landlord insurance, is your key "risk management" tactic, but it is not foolproof. You cannot completely eliminate risk from this or any other investment strategy. Your single goal is to manage – and minimize – your exposure to risk and hence potential lawsuits.
And if you're looking for low cost landlord insurance, forget it! This is one area where you get what you pay for. Of course you can and should price shop, but your primary goal is to get the coverage you need to fully protect yourself, not to save pennies.
INSURANCE: PART OF A BROADER RISK MANAGEMENT STRATEGY
Let me say this right out of the gate. While adequate rental property insurance is your first line of defense, it should represent only one pillar of your overarching risk management strategy. Other ways to manage your risk include:
- Manage your income property activity as a
real estate LLC.
- Eliminate hazardous conditions on the property as soon as you become aware of them (loose steps, loose hand rails, perpetually icy walkways, etc.).
- Hire out any repairs that could result in injury if not done properly (repairing steps on a fire escape, electrical work, structural repair, etc.).
- Do not let tenants make any substantial repairs for you.
- Make sure contractors are licensed, bonded and insured (liability & workman's comp.).
- Remember that the importance of a tenant credit check cannot be underestimated. This allows you to properly assess the risk of any tenant, in order to properly maximize profit potential.
- Do not give tenants your home address – get a P.O. box.
But again, your first line of defense is to have good landlord insurance protection to cover yourself against extensive property damage and lawsuits.
COMMERCIAL VS. RESIDENTIAL POLICIES
As a landlord of 2-4 unit
multi family houses, your investment property insurance coverage can be either a standard homeowner's policy, or a commercial policy, depending on the specific situation.
For example, I have a triplex that has 2 oversized garages on the lot that I also rent out. Because I need my liability protection to extend to the detached structures, I had to go with a commercial policy.
But most of the time you should be able to simply get a standard homeowner's policy. This is preferable because it's generally cheaper than commercial policies.
That said, both are more expensive than the policy you have on your personal residence because non-owner-occupied rental properties are considered riskier to insure. Just for perspective, a standard homeowner's policy on a rental property will cost roughly 15% more than the same coverage on your own home, and a commercial policy will cost roughly 20-25% more than standard non-commercial rental property coverage.
NAME OF INSURED: YOU OR YOUR LLC?
Contrary to popular belief, most insurers will have no problem naming your LLC as the insured even on a standard, non-commercial homeowner's policy.
If you are holding title in your own name, then your investment property insurance policy must specifically name you as the insured. But if you are holding title under your LLC, then the rental property insurance policy must be written in the name of your LLC.
If your policy names you as the insured yet the property's title is held in the name of your LLC, you could run into a problem if you have to file a claim. It can be a sticky situation, so try not to tempt fate on this one.
KEY TYPES OF PROPERTY INSURANCE / LANDLORD INSURANCE
Ok, so what specific types of rental property insurance coverage do you need? Well, you should probably consult with an insurance agent in your state to finalize your decision, but I can give you my general recommendations.
The quick answer is you'll need property and liability coverage for each property, with a blanket umbrella policy on top. Click on each link for more detail.
And remember, "low cost landlord insurance" is for suckers, so make sure you get the best coverage you can afford for each of your rental properties.
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