At San Diego Purchase Loans, we are not property-investment experts nor property-management professionals. We provide mortgages.
But we work with many landlords and property investors; we talk with these people and try to understand their goals and challenges as best we can. One thing we have noticed throughout the years is the importance of landlord insurance.
What is Landlord Insurance?
Your property is a financial investment, and landlord insurance is simply there to provide compensation if that investment is destroyed. Landlord insurance, which is similar in many ways to typical homeowner’s insurance, provided financial protection if your rental property is damaged, becomes completely unlivable. Depending on the details of the policy you select, landlord insurance will provide financial compensation after damaging fires, storms, or if someone is hurt on the property.
I Have Homeowners Insurance on the Property, Do I Still Need Landlord Insurance?
If you have homeowners insurance, you might think you are covered if damage occurs to your property. And in some cases, you may be. Landlord insurance, however, takes the process a little further, providing more complete coverage for your property.
So the answer is yes, even though you have coverage for the property, because of the unique nature of a rental property, you still should consider having landlord insurance to protect your investment.
What Types Do You Need?
Basic vs. Special Form
For landlord insurance, there are two basic forms you first need to consider. Each one will cover a different type of loss on your property.
The first type is “basic.” This is a “named peril” policy, which basically means that the cause of the damage (the “peril”) must be specifically named in the insurance policy. If if is not written in the policy, it likely won’t be covered by your insurance company.
The second type is “special form.” This is the coverage type that works in the opposite direction; unless a cause of damage is specifically listed as not being included, it will be covered.
Actual Cash Value vs Replacement Cost
Now that we have covered the two overarching types, we can look at another factor that should be considered when selecting landlord insurance: actual cash value or replacement.
The differences are fairly simple; actual-cash-value policies repay you for the market value of whatever has been lost, while replacement-cost policies repay you for the cost that is would take to completely replace the item. It sounds like it should not make a difference, but it does.
To clarify the differences, let’s consider a simplified example. Suppose you have a property valued at $300,000. If that property were destroyed, and you had an actual-cash-value policy, you will likely receive a check worth around $300,000.
However, if you had a replacement cost policy, you and your insurance company, along with the help of a few experts, would have to figure out how much it would cost to completely replace the property. This means finding out how much it would cost to rebuild the structure, which obviously includes many factors, including planning, construction materials, labor, and other factors.
With a replacement cost policy, you first get a check for the actual value of the property minus a deductible, in most cases. This value is usually based on the adjuster’s report. Once you complete the repairs and rebuild the structure, you submit the costs to your insurance company and wait for a payout.
Actual cost is the preferred policy for landlords who want to reduce their overall expenses. But the financial compensation in the event of damage is less, which means you have to be willing to accept a little more risk. Replacement cost, on the other hand, is better for people who want to minimize risk and don’t mind spending extra cash to do so.
For most insurance policies, your property needs to be in good condition to qualify for replacement cost. The property needs to have a decent roof, good paint or siding, quality gutters, and other important factors. Some factors that may disqualify your property include a lack of good gutters, uneven pavement, or even debris in the yard. (So don’t let renters leave appliances or vehicles in the yard, an inspector could pull the policy!)
Loss of Rent
Another potential coverage policy you can consider is not one that covers damage to the property, but instead covers loss of rent money if a property is damaged. In some cases, these can be combined with your overall insurance policy, but you’ll need to talk with your insurance agent to find out.
Essentially, if you are unable to receive rent checks because your property is now unlivable, this policy will provide compensation that makes up for the loss. Depending on your policy, it may not cover the entire lost income, but it will help you through the process.
Insurance for Other Structures
Detached structures, such as garages and shed, may also need coverage. If they are not listed in the policy, they may not be covered. Also, if you have any personal property on the site, such as yard equipment, furniture, or vehicles, you may need to have these covered by your policy as well.
Additions to Typical Policies
In addition to most policies, you also need to consider additions. If anything is excluded from your policy, you can pay extra to have that covered. For example, if flood damage is specifically excluded from your coverage, and your home is damaged because of a flood, it may not be covered on a typical policy. Adding this as an addition can help.
What is Not Covered By Landlord Insurance?
It’s important to remember that some items may not be covered. Specifically, your landlord insurance does not cover the renters’ property. If their furniture, appliances, and possessions are damage, they’ll need to have renter’s insurance in place to receive compensation. (Some landlords require tenants have renters insurance; it’s a policy worth considering.)
Dedicated, Honest Support for Your Investment Loans
While we can’t supply the landlord insurance, we can provide assistance with investment loans that make owning property more affordable. Contact our team and find out how we can help with your next purchase!