A landlord can be a small investor renting out one or two single-family homes, a significant investor with multiple commercial properties, or anywhere in between. Where the investor falls along that spectrum will likely influence how much and what kind of landlord insurance they acquire, but every landlord should have some. The Oxford Language dictionary defines insurance as “an…arrangement by which a company…provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.” Basically, the owner (landlord) pays the insurance company in exchange for financial protection against specific losses.
Individuals and companies typically buy insurance to hedge against the potential for losses that are possible risks. For example, homeowners purchase insurance to protect their homes from damage caused by fire, water, wind, and other natural causes and protect against vandalism, robbery, and financial liability. Similarly, doctors buy insurance to protect their economic interests against lawsuits based on a claim of malpractice by a patient.
A landlord with a residential rental will need homeowners’ insurance to protect against losses from potential risks like fire, wind, other weather events, water from broken pipes, other causes of flooding, theft, accidents (like automobile accidents and rampaging cattle), and more. For these investors, liability insurance is particularly critical. The owner does not want to be responsible for financial damages if a tenant or visitor is injured. If you are renovating or repairing the property, ensure that the policy protects you from accidents that may occur during the process.
Does the policy cover the tenant’s belongings?
Typically, a landlord’s policy will cover the dwelling, any outbuildings, other structures like fencing, and amenities (if specifically included) such as a swimming pool and tennis court. In many cases, items you own and leave on the property for maintenance could be covered—like a lawnmower or painting gear. However, your homeowner's policy does not protect the tenant's furnishings and personal belongings. Most likely, if you leave personal items in the rental for your tenant to use, those will also be excluded from coverage. Each tenant should obtain their own renter’s policy, and many landlords will add this requirement to the lease agreement.
One option for landlord insurance that may be worth adding is coverage for lost income. For example, suppose that the rental home sustains damage from fire. Your insurance policy will pay for the repairs. With the income loss provision, you may be reimbursed for lost rental income if the unit is temporarily uninhabitable due to the damage.
What if I own commercial property?
Some investors use NNN (triple net) leases so that the responsibility for insurance (as well as property taxes and maintenance) is shifted to the tenant. The tenant will typically obtain and directly pay for the property insurance coverage in that case. However, owners may consider adding protection for their benefit by holding a general liability policy. This decision will offer a layer of security for the landlord in scenarios where the tenant handles the insurance acquisition independently. Otherwise, be sure that the insurance the tenant obtains complies with the requirements established in your lease.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.
Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants.
