Part 1: The Nuts and Bolts of Residential Rental Property Insurance

We had to split this subject into two podcasts so that our listeners wouldn’t get too overwhelmed with all the info we are throwing at them.

This week we are discussing everything we know about rental property insurance for all sized residential investment properties.

We talk about when you can and when you cannot use a traditional homeowner’s policy for your rentals, which kind of rental policy is best and what your decision should be based on.  

We couldn’t give you nuts and bolts about rental insurance without addressing umbrella policies and our varying thoughts on when those are best put to use.

Who doesn’t learn best by listening to stories of what other rental property owners have experienced?  We have a few juicy stories to share too!

Finally, we talk about a few other options that are available to enhance your coverage.

The bottom line about any insurance is it comes down to liability and risk assessment. 

So, tune in and listen to our thoughts about rental property insurance policies!

NEXT WEEK: In Part 2, we do a Q & A with our insurance broker/agent who just so happens to be among the top insurance agents in the US.  

LINKS

👉Read our Blog: Why Landlords Should Require Renters Insurance

👉Read our Blog: The Who, What, When, and Why of Residential Vacancy Insurance

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Transcript

Kevin: 0:00

We also want to stress it's a great idea to have an ongoing relationship with your insurance broker or agent.

Stacie: 0:07

Wow, have a relationship with them? Really? Okay,

Kevin: 0:11

Stace. Not that kind of relationship. Geez. All right.

Stacie: 0:16

Sorry.

Kevin: 0:17

What I mean is to have regular communication with them that better.

Stacie: 0:21

Yes much better

Kevin: 1:17

hey landlords, thanks so much for tuning in and listening to our podcast. My name is Kevin and I'm here with my wife, Stacy, who'd rather be laying on a beach somewhere.

Stacie: 1:29

Hell yeah, I would. This is typically the week that we're in Hawaii and I am missing it big time.

Kevin: 1:35

Okay. Me, me too stays, but we have traveled nearly two of the last three months.

Stacie: 1:40

I know. And we saw a lot of beautiful and really cool things, but I'm really missing that downtime, you know, and laying around re energizing myself.

Kevin: 1:51

Yeah, I get you, but we are going to Tahoe for about a week with the family soon, so you can rest there. Yeah,

Stacie: 1:58

but that's different when it's your own home. There's always stuff to get done and cleaning and I'm cooking and all that kind of stuff.

Kevin: 2:05

Okay, you done whining? Can we start the episode? Yes.

Stacie: 2:10

Tell the listeners what's in store for

Kevin: 2:11

today. I will. Today we are discussing rental property insurance. We'll go over all the different kinds of policies for all the different types of rental properties. But first, the disclaimer. We are not experts in the field of insurance. This podcast is to provide you with information about differences in policies, which depends on the kind of rental properties you own and where they're located. You should always consult with your agent or broker. About what the best possible insurance coverage is for your scenario and not depend solely on the information provided on this podcast.

Stacie: 2:53

Yes, very important stuff there. Let's start with the fact that homeowners policies, which is if you own your own personal home, that's the policy we're talking about. Homeowner's policies are not typically the right fit and not intended for use with homes that are being rented out. So, let's say you live in a single family home or a condo, and you decide to move to a nicer, bigger home in a new neighborhood. Or maybe you inherit the property, uh, but regardless... You have the intent of turning this additional home into a rental property. If you're no longer living in the home, you must change the policy from a homeowners policy to a rental property or a dwelling policy. We will go into details of each of those in just a minute. And why do you need a dwelling policy? One, the home is deemed a business and has a higher risk or liability that's not covered by a regular homeowners policy. If you have a mortgage, your lender may require rental insurance if the owner is no longer residing in the property. And also, tenants have the right to request a copy of your insurance policy to make sure that the building that they are moving into is covered properly. Now this rarely happens, like in apartment buildings, but it is more common in single family home rentals.

Kevin: 4:14

Okay, so let's talk a little about house hackers. So, let's say you buy a three bedroom home with the intent of renting out two of the bedrooms to help compensate for the mortgage. If you can handle living with other people and sharing common space like the kitchen, this is a fantastic way to build the equity in your home by paying down the mortgage or by saving the rent money to use as a down payment on your next rental property. It's important to note that if the owner lives in the property, generally they can keep the homeowner's policy just as long as they understand the contents of any renter. Living in the home is not covered. Only the homeowner's personal contents Also, they may want to increase liability because it's usually not enough to cover the increased risk that comes with renters in the home or units versus being occupied by a traditional homeowner. Why is this? Because as an owner, you have more control over who visits. With renters, you do not. Homeowner policies generally offer minimum liability for guests if they get injured. If house hacking and keeping your homeowner's policy, you should add an endorsement or an umbrella policy to increase liability coverage. Now with that being said, for renters living with the house hacker, they should take out their own renter's policy to cover liability and damage caused by them or to their belongings, like a flood or a fire. We will be doing a whole podcast on why landlords should require tenants to have renter's insurance sometime soon. But if you're interested in learning more about that now.. We wrote a blog all about it and we'll link it in the show notes. I

Stacie: 6:05

think that it's important to touch briefly on the difference between. Single family home and condominium coverages. So, single family home rental policies cover the dwelling and any other dwellings that are on the property, like detached garages and ADUs, because those are getting pretty popular now. They also cover personal property that is provided by the landlord for tenant use, like appliances, or items that are left at the property for their personal use, the landlord's personal use, during maintenance, like lawnmowers. And more so than with homeowners, a dwelling rental policy has an elevated amount of general liability coverage in case of injury on the property. Lastly, it covers the loss of rent in case the dwelling gets damaged to the point of being uninhabitable and forces your tenants out while repairs are being made. So the amount depends on your policy. This is a good question to discuss with your insurance agent. Now the only difference between single family homes to condos is the coverage is not for the whole dwelling, but the area of the actual unit, not the common areas. So it covers walls, flooring, ceilings, fixtures, appliances, and the HVAC units. Condo insurance also covers damage that your unit may cause to a neighboring unit, like water leaking to the condo below, or vice versa. Liability coverage is typically lower for condos, given the smaller amount of space, and there is a less likelihood of injury of a guest. Like, say, a delivery person tripping on a hose that was left

Kevin: 7:44

out. Okay, I'm trying to remember if I put the hose away when we were up in Sacramento last week. I hope so. I'm pretty sure I did. Okay, everyone has to be aware these days. Cover yourself in as many ways as possible. Now, if you provide any items at the property for tenant use, like a hose or a barbeque, make sure you write in your addendum that they are responsible for the use and care of those. That they must put the hose away after use, or make sure the barbecue is turned off when they're done using it. I say off because you shouldn't allow a wood or briquette fired barbecues on your property unless you direct your tenant to use them on dirt or gravel surface and dispose of the coals properly. Again, use an addendum to define all rules using a barbecue. Now I think we have mentioned them before, but if you are in need of landlord forms to use for your rental property business, we like Easy Landlord Forms. They offer leases, forms, as well as tenant screening with a free rental application to use. Because their team is made up of real estate investors and landlords, they know a landlord's work isn't done once you sign the lease agreement. That's why they have over 400 property management forms covering every phase of the landlord's cycle, including over 200 free landlord forms. We'll put a link to check them out in the show notes.

Stacie: 9:18

I think the things that landlords need to remember is that anything can happen at any time when it comes to accidents. This is why having proper insurance for your rental property is so important. People who get injured and sue for damages. They don't care about how they get that money. They just want to be compensated for their medical expenses and for the distress that's been caused. If you do not have enough insurance to cover the payout, it can put you in a position of having to sell one, if not all, of your rental properties. And this can be for something you think you have no control over. But if you own a property in a litigious state, and you allow your renters to have a dog, and that said dog gets out and bites the child next door, disabling their arm for life, you can bet your ass you're going to pay heavily for that. So do yourself a favor and speak with your insurance agent and make sure that your property is properly insured for all levels of issues that can arise.

Kevin: 10:17

Now we really don't mean to scare you, but we've just seen a lot and we want all landlords to be prepared before the fact so they don't lose what they've worked so hard for. Okay, let's move on to Multifamily Residential Buildings, which are... Rentals between two and four units. Even if you reside in one of these units, it is strongly recommended to obtain a comprehensive rental property policy. With each additional unit and tenant who resides in your building, your risk, and thus cost of liability, will increase. This is unless you live there. It is assumed there's less chance of wild parties, drug dealing, bonfires, etc. with the homeowner keeping an eye on the comings and goings of the property. Usually, homeowner and residential policies do not provide comprehensive liability insurance that covers you if someone gets injured in or on the property grounds. The level of liability coverage is typically for commercial properties of five or more units. umbrella policy if you feel you need more coverage and insure for the value of your property, unless it's under an LLC. with other rental properties, they can get coverage for the value of all assets under that company. Now with commercial rated residential buildings that have five or more units, policies have a broader scope of coverage due to the increased number of residents occupying the property. For apartments, insurance companies refer to coverage as the building and premises. Not dwelling, as they do for single family homes or condos up to a fourplex. Apartment coverage also includes storage buildings and its contents, swimming pools, patio furniture, fencing, gates, furniture, decor in common areas, you know, stuff like that. And the complex's main building, such as where the leasing office might be. Personal property extends to whatever is provided by the landlord for tenant use, plus materials left on site for repairs and maintenance. It does not cover any personal property of the tenant, for instance, if they have a portable A. C. unit to cool their bedroom, now your commercial rated policy will cover loss of income as well as tenant move back expenses in the event a unit is damaged and cannot house the tenant for an extended period of time. It's great coverage to have when a tenant must move out temporarily in order for repairs to be completed. This can be from something more long term and devastating as a fire, or more of a short term, like a heater unit has gone out in the dead of winter, leaving the tenant to stay in a hotel until the repairs are made.

Stacie: 13:18

I think these are things landlords don't really think much about, but it's nice to be covered for these unforeseen circumstances. So let's briefly discuss the different kind of dwelling policies, or DPs, that are available for single family homes through fourplexes. It's important for you all to know that different dwelling coverage levels are available. Policy ranges from basic Coverage to comprehensive or that would be a DP 1 thru a DP 3. A dp1, dwelling daily policy level 1, usually will only cover named Perils typically fire. This means that a risk or a disaster specific identity must be clearly written in the policy, or else there's no coverage for the damage, like water damage. Additionally, these policies often reimburse you on actual cash value basis, meaning that your insurer will pay you for the covered damage, minus depreciation. Landlords could choose this level for properties with up to four units, and if so, we highly recommend they require renter's insurance for all their tenants. A DP2 policy provides a slightly broader coverage than level 1 dwelling policy. Like DP1, the DP2 coverage tends to be on a named peril basis. However, DP2 coverage will generally extend to a wider range of perils. For example, an insurer might offer coverage for burglary damage in his DP2 policy, but not in DP1. The DP2 form also improves the DP1 by typically providing coverage on a replacement cost basis, meaning it covers damages at the current market prices without accounting for depreciation. This factor is essential when the cost of billing supplies have gone up exponentially, as have contractor rates. DP three is the most expensive policy and provides the broadest range of coverage. Of the three a DP three level policy will give extensive peril coverage protecting against all perils, except those explicitly excluded in the policy, and exclusions are usually natural disasters like floods, earthquakes, or wildfires, and like the DP2 policy, it provides coverage on a replacement cost basis, which is much more

Kevin: 15:40

beneficial. Wow, that's actually pretty interesting. You know, until we owned a single family rental, I didn't know there were different levels of dwelling policies. Alright, now I want to talk about vacancy insurance. I won't go into a bunch of detail here, but we wrote a blog all about it and we'll link it in the show notes. So, we had no idea this even existed until about 3 or 4 years ago. So, suppose your rental, usually a single family home or condo, will be vacant for more than 30 days. In that case, it is imperative you contact your insurance broker and either add a vacancy endorsement or switch to a vacancy insurance policy. Vacant homes are much more likely to have events like break ins, vandalism, water damage from a broken water line. You see, the problem is, if the home is vacant, most insurance carriers will not cover the damage. Apparently, there's an increased risk of higher damage since no one's there to monitor the property and seek help in the event of a fire or a broken water pipe or even a break in. How do we know? Stacy's brother lived in the rental owned by her parents. He'd been ill and sadly passed away. Let's say his home was in an area that was not known for the high quality of residence. So, soon after his passing, the home was unfortunately broken into and robbed extensively. They broke windows, doors, they stole his work trailer, after loading it up with a bunch of his personal belongings. Even worse, the home nearly caught on fire When they used his acetylene torch on his gun safe and tried to open it. Of course, the safe had been emptied prior, so there were no contents in there. But they caught the carpeted interior on fire, which caused flames and a lot of smoke that engulfed the whole home. Because the smoke detectors were all going off. They got on ladders, they swung crowbars to break them off the high ceilings.

Stacie: 17:54

I mean, that was a huge mess to contend with, and a lot of serious damage, and we had to toss so much of that stuff because of the intense smoke smell, not to mention painting the walls. We spent a small fortune on a special primer just to cover up that smoke

Kevin: 18:09

smell. Yeah, I just want to mention here, if you do ever need to paint a unit that's been smoked in, uh, we recommend. Zinsser B. I. N. Advanced Primer with Ultimate Stain Blocker. We'll put a link in the show notes. we thought we'd have to replace all the drywall in the home, but we found this and gave it a try. Man, it worked great. Generally, it is only available at paint stores. So we had our painter get it with his discount, which really helped. This whole unfortunate circumstances happen. And of course, we're still grieving the loss of her brother. So we call our insurance agent to let him know what happened and where he is very sympathetic. But he tells us the home is not covered. Because it was vacant. Fortunately, this triggered us to add a vacancy rider to our policy for our single family home rental in Chico, California that was vacant after our son moved out after college. And, boy, are we glad we did this. Because, a couple months later, right after renovations were completed, and we're ready to rent the home again, the water supply line to the toilet in the bath, located in the middle of the home, burst and water ran throughout the home for what we estimated was about three days. There was damage to about a third of the home, and it would have cost us in the tens of thousands of dollars out of our own pocket, had we not had that vacancy coverage added on there. So, we suggest you try it out if you plan to remodel, go on extended vacation, or just have an extended vacancy that lasts longer than 30 days on your single family home, rental or not.

Stacie: 20:01

Yeah. I mean, talk about getting kicked in the gut twice. It was no fun. That was a, that was a not a fun couple of years to have to deal with. So one of the last policies we want to discuss today are umbrella policies. Umbrella insurance is extra insurance that provides protection beyond existing limits and coverage of your regular policies. They can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations for anyone on your property or caused by someone or something stemming from your property. Think about if a tree falls through a neighbor's home and severely injures or kill someone, or if you have a deck that falls when a tenant has too many people on it, or if someone drowns in your ungated pool or hot tub, or like we mentioned before about a tenant's dog getting loose and injuring someone. Now, those are pretty drastic, but lawsuits can arise even if you have uneven concrete and a tenant or a guest trips on it, causing a broken ankle or a leg or a hip, and that puts them out of work for an extended period of time. Maybe you hold your property in an LLC, and the purpose of this is to protect your personal assets, correct? For those landlords who have extensive personal assets, speak to your agent about this. Where your personal assets may be covered, if the damages you have to pay from a lawsuit are really high, you may be forced to sell that property to pay the damages. An umbrella policy can cushion the blow of a lawsuit and may save you from the stress and worry of this kind of ordeal. You especially want to consider an umbrella policy if you have an LLC and you hold more than one property under it. All assets under that LLC are up for grabs in a lawsuit. So make sure the amount you hold in your umbrella policy is enough to cover the total market value of all the properties you own under the LLC.

Kevin: 22:01

Now, I'm going to jump in here and let you know that we were advised to limit the number of properties we held under our LLC. Amount meaning value, not physical properties. If you hold all the properties you own under one LLC, you chance them all being subject to a lawsuit that arises from just one of the units owned. The value depends on where you live, of course, where the rental properties are located, as well as the value of your personal assets. We live in California, which is a highly litigious state. It was recommended to us that we do not hold more than two and a half million dollars worth of rental property in our LLC and that we should carry a five million dollar umbrella policy. Now for those in the Midwest, where the states tend to be a little more landlord friendly with less lawsuits, your value may be much less. So, this is where you should speak with your lawyer and insurance company to determine the right amount for you. Each time you reach a new threshold on your LLC, you must create a new one and take out an additional umbrella policy to cover it.

Stacie: 23:13

And that leads me to the next issue about rental property insurance. It can be so expensive, and we cannot stress this enough. Know your numbers. Calculate your expenses before you purchase or convert an existing home into a rental. Do not rely on the amount shown in the offering memorandum or disclosures, which are generally provided by the current owner. Most realtors will post lower cost estimates or use often outdated policy amounts in their marketing to help the property yield a higher return in their ad. FYI, this is sometimes true of property taxes as well. So, rental property insurance can cost up to 25% more than typical homeowner's insurance. For example, right now, 2023, the average homeowner policy is, was about 1428 for a home valued at 250, 000. This would make the average landlord or rental property insurance for a single family home around 1785. And if you do not account for the difference in rates and are only yielding 100 a door, This 357 increase is going to kill your bottom line. By the way, apartments with five or more units are commercial policies, and the cost will be exponentially more expensive than a single family home through four plex size units. To give you an idea, we spend upwards of 6, 000 annually for our sixplex, which also happens to be in a flood zone. Even though the location of this property is in midtown of a major metropolitan city, we opted not to take out terrorist coverage to cover damages from the result of riots and things like that. For us, the risk was not worth that at an expense.

Kevin: 25:00

Nope, and neither was earthquake insurance. Okay, so we're almost done. Let's finish up with some additional notes about rental property insurance. If you allow pets in your rental properties, check with your insurance agent to see if there are limitations on coverage of pets. Some insurance companies set limits on the size, number allowed, and different breeds. depending on the insurance company you hold your policy with. Equipment breakdown is an endorsement you can potentially add to your policy. It assists to the extent that it may reimburse expenses should you temporarily place a tenant in a hotel due to a heater or water heater malfunction. There is pretty much insurance coverage for anything a landlord may need. Appliances, lease guarantees, terrorist attack, flood, wildfire, earthquake, building codes, vacancies, I mean the list goes on and on. Remember to weigh these additional costs against consistently saving to your reserve account each month. You can pay an insurance company for peace of mind or you can create ample reserves to cover way more than this one issue. We also want to stress it's a great idea to have an ongoing relationship with your insurance broker or agent.

Stacie: 26:25

Wow, have a relationship with them? Really? Okay,

Kevin: 26:29

Stace. Not that kind of relationship. Geez. All right.

Stacie: 26:34

Sorry.

Kevin: 26:35

What I mean is to have regular communication with them that better.

Stacie: 26:39

Yes much better

Kevin: 26:42

if there is any change to the rental, or ownership, or your personal assets that you feel they need to know about, get in touch with them. At minimum, we recommend meeting with them once a year. As you acquire more and more rentals, you'll find yourself meeting with them often, and they'll soon become a primary member of your business team. Okay, last thing to tell you. It's a bit of a sideline, but will really help you cover yourself when you have a contractor or service do work on your property, be it a roofing company, tree trimmer, or internet installer, request a copy of their liability coverage. For most independent companies, you can request to be named as an additional insured on their policy. This way, if they get injured or injure someone else or cause damage to your rental property, their insurance is the first to pay any damages and your insurance company is used as a backup. Our lawyer explained to us why this was important with this story. You don't see too many of these anymore, but several years ago a tenant wanted to have a satellite dish installed for their use the dish company sent out an independent installer to put it up. This person was working on the roof of the home and dropped their screwdriver over the side of the home, which happened to fall directly into the head of a young child playing below. Total freak accident. Surprisingly, the child was okay. But, who do you think the tenant went after to pay for those medical bills? Not the installer or the dish company. The rental property owner. And they had to pay a buttload too.

Stacie: 28:24

Yeah, that was a very unfortunate circumstance and thankfully everything worked out well. But do you see how owning and operating a rental property business is not passive? We see so many people saying that owning rental property takes very little time to manage and that it's an easy way to earn passive income. Even with the help of a property manager, There will constantly be assessments, evaluations, and issues that need attention. And insurance coverage is only a tiny part of that. We know we threw a lot of information at you today. So, stay tuned. For part two next week, when we sit down with our award winning brokers and have a Q and A session with one of them all about rental property insurance, we ask about what coverage you need and what you may not need. Also, we ask his opinion on if you need an umbrella policy with an LLC and a lot more. If you want the podcast link delivered to your email, we have a free newsletter called Landlord Weekly that we send to our subscribers. It comes out every Tuesday and includes all kinds of tips, early access to our blogs, landlord specific articles that are written by other industry pros, our favorite landlord products that we really do use in our business. and the most recent link to the podcast. You can subscribe at yourlandlordresource. com forward slash subscribe. That's yourlandlordresource. com forward slash subscribe, and we're also going to include a link to subscribe in the show notes. So that's our show for today. We really appreciate all of you taking the time to listen to what we have to say and and we hope you find it helpful and useful. Please share our show with other landlords to help get the word out and subscribe or follow on your favorite podcast platform. It helps us to move up the charts and get recognized by other DIY rental property owners. And if you don't mind, would you please take a moment to leave a kind review of this podcast? That's the best way for other landlords to see how great our podcast is. So, I'm Stacey, signing off with my husband Kevin, who is denying me another vacation. And until next time, you've got this, landlords.