I get it.
Real estate is filled with lots of exciting stuff, but insurance generally isn’t considered one of them. Insurance ranks right up there with property taxes... just another expense to throw on the pile.
But, as an Indianapolis real estate investor, insurance is VERY important. You hope you never need it, but you absolutely must ensure that you have the proper insurance in place.
Quite often, I get questions from some of our new investors that surround insurance. Generally, they ask:
“What type of insurance do I need as a Landlord?”
So, I thought I would spend some time discussing insurance for investment properties.
At the end of the day, there’s not a big difference in the policy you have on your personal home and the policy you’ll need for your rental property. And in many cases, you can use the same insurance carrier you currently use for your personal residence. This is especially helpful if you are converting your personal residence into a rental home.
Rental Dwelling Policy
The policy you receive for your rental home is called a “Rental Dwelling Policy.” These types of policies usually cost a little more than a standard Homeowners policy and they contain three basic coverages:
- Structural – Like the traditional homeowners policy, your rental dwelling policy will protect your home against damage caused by fire, lightening, wind, hail and other covered perils. There’s nothing different about this coverage at all.
- Liability – All rental policies also come with liability coverage. A standard homeowners policy provides personal liability, but that liability would not cover Landlord associated risks that a Rental Dwelling Policy does.
Now, in terms of liability, you need to seriously consider the proper coverage limits. A standard policy will generally come with around $300,000 of liability coverage. We suggest you increase the coverage to at least $500,000 or even more.
If you are a high net worth individual, you might want to increase this coverage to match your net worth. In addition, if you hold the property under an LLC, the liability coverage should match the assets of the LLC.
Unfortunately, we live in a litigious society. Let’s say the Tenant falls down the stairs and is severely injured, or a furnace explodes and your Tenants are injured or even killed. Your liability coverage is there to protect you against severe financial loss.
- Lost Rents – Finally, a coverage unique to a rental policy is lost rents. If your home suffers a fire, for example, and the Tenants have to relocate, your insurance company will pay you for your lost rents during the vacancy. Generally, this coverage lasts for no more than one year.
Other Insurance Considerations
There are a couple of other items I wanted to mention about a Rental Dwelling Policy.
- Deductible -- Consult your insurance agent or even a financial advisor, about the proper deductible for you. The amount of deductible you choose will greatly impact your annual premium. As you probably know, the higher the deductible, the lower the premium. Whether you choose a high or low deductible completely depends on your individual needs and wants.
- Tax Benefits -- Unlike a standard Homeowners Policy, Rental Dwelling Policies are tax deductible. Insurance is considered part of your business expenses and you can deduct that cost accordingly.
Don't Forget Renters Insurance
Finally, as you consider insurance, do not forget to require Renters Insurance from any Tenant that you place in your property. This is a very important coverage for both you and your Tenant.
Again, while insurance isn’t necessarily an exciting topic, it’s a topic that you must address and address carefully. If you have any questions about insurance or general investment questions, please don’t hesitate to contact us.
Note: Special thanks to Elizabeth Marshall at State Farm for her contributions to this blog.