How to Protect Your Rental Property With the Right Insurance
Many people recognize the potential of making some extra money by renting out a home — or some space in their home. From short-term vacation rentals to long-term leases, rentals continue to draw interest even from people who are not experienced in real estate investment.
If you have toyed with the idea, you certainly should consider the pros and cons of this investment as well as its insurance implications. Insuring a home that will be rented out requires specific insurance coverage to protect you from potentially significant loss. The coverage you need largely depends on whether the rental is on your primary residence or in a separate location.
If you reside on the same property as your renter, you may be able to get the protection you need by tweaking your current homeowners coverage with a special add-on called an endorsement. This is especially true if you rent out your place very infrequently — for example, if you rent your home as a vacation rental when you’re out of town. In this case, the service you use to rent out your home also may offer its insurance free of charge. For example, Airbnb offers “host protection,” and VRBO offers $1 million in liability insurance, both of which work hand-in-hand with your homeowners insurance.
If you have a basement apartment, duplex or outbuilding on your property that you rent out more frequently — or full-time — it’s a bit more complicated, and you probably will need additional coverage. This is because your rental activity may be considered a business, and business-related losses typically are not covered by standard homeowners insurance. The definition of what qualifies as a business varies widely among insurance companies and policies. So if you’re planning on renting out your home — short- or long-term — definitely talk with your agent first.
If you do not reside on the same property as your renter, insuring this type of rental is a bit more involved. You should purchase a separate policy for your rental home, and a standard homeowners policy probably isn’t ideal. Here are some tips to keep in mind as you consider your coverage options:
Don’t extend your own homeowners policy liability to cover a rental. Although it is possible to modify your primary-residence homeowners policy to cover a separately located rental property, this is almost always a bad idea. Keep your rental home insurance totally separate. Otherwise, if a significant injury occurs on your rental property, the resulting liability claim could affect your ability to insure your primary residence in the future.
Personal-property coverage is less important. Personal property coverage is part of almost every homeowners policy, with the amount of coverage based on a percentage of the overall property value. For a full-time rental, you don’t need nearly as much coverage, as most of the personal property within the home will belong to your renters. Note: Personal property is defined differently on a rental policy. The only personal property typically included involves things that are meant to maintain the property.
- You don’t need loss-of-use coverage. Loss-of-use coverage is a vital type of protection included in most homeowners policies, which pays for living costs incurred while your home is being repaired or rebuilt. This type of coverage isn’t necessary on a full-time rental property, because you don’t live in that home — your renters do. Instead, you’ll need loss-of-income coverage, to protect against the loss of rental income.
- Premises liability coverage is key. Standard homeowners insurance includes two types of liability coverage: personal and premises. Personal liability protects against injuries caused by your actions; premises liability protects against injuries that occur on your property, even if you’re not present. It’s easy to see why premises liability coverage is much more important than personal liability coverage when insuring a rental. You need strong protection against injury claims by your renters, but you won’t personally be at the property very often. Plus, the personal liability insurance on your existing homeowners policy covers you no matter where you go.
- A dwelling fire policy or landlord protector is a great option. Many insurance companies offer products that combine appropriate rental home coverages into one convenient package, called a dwelling fire or landlord protector policy. Because these policies are specific to rental properties, they offer strong coverage at a great value. Just be aware that every rental property presents its own unique set of risks and liabilities, so you still need to work with an experienced agent to customize a dwelling fire/landlord policy.
- Require your renters to purchase renters insurance: A renters policy offers benefits for both the renter and the landlord. The renter gains coverage for their personal property and liability; the landlord gains a “first line of defense” against many types of insurance claims. This is because the renters policy often is the primary policy used to pay out a claim, leaving your landlord policy — and your deductible payment — out of the equation.
Renting out a home may be a good source of income, but be smart about how you protect your investment. Meet with an experienced insurance agent and discuss your plans to rent to ensure you are covered no matter the situation.
—Written by Jim Davis, last updated in December 2022.