When financing a rental property, or any property for that matter, the lender will require an insurance policy. Not to say you should ever consider not insuring a home, but the lender will not just require insurance but also a minimum amount of coverage. Who sets these minimums? States can have different minimum requirements but in general, the coverage must be enough to pay for damage to the home.
Covered hazards include wind damage, hail, and storm, and fire. In most instances, the insurance company will take a look at the square footage of the home and start from there. Insurance can also be different based upon the structure of a home. A home with brick all the way around and a metal roof should have a lower premium cost compared to a wooden home with asphalt tile shingles.
You want coverage but when a home is financed the mortgage company also has a legal interest in the property. Insurance coverage protects the asset, which is the structure itself. Insurance won’t cover the lot as there is nothing that could damage the lot. It’s the physical structure. To start, the insurance company will imagine rebuilding the home from the ground up. Rebuilding costs are a major factor when pricing a policy and calculated by a per-square-foot building cost.
In general, you can expect a landlord insurance policy to be anywhere from 20 to 30 percent higher than a homeowner’s policy. What are some of the factors beyond square footage and rebuilding costs? They include:
- The location of the property such as being in an urban area or rural
- If you currently own other rental properties
- Do you allow tenants to smoke?
- Building up to code?
- Fire sprinklers and smoke alarms installed?
- Is there a swimming pool on-premises?
- Is there a security system?
- In some states, your credit score can also impact your premium
- What deductible will you take? More? Less?
- Do you have other policies with an insurer? Auto? Motorcycle?
A standard homeowner’s policy will also cover personal property. Because the mortgage company doesn’t have any stake in your personal belongings, these things aren’t covered. You should, however, take a thorough inventory of your personal property and arrive at a value. Each item should be given a fair price.
A standard homeowner’s policy will cover such items if listed and priced into the policy. Liability coverage is also needed. This protects you if someone is visiting your home and slips and falls on the sidewalk, spraining an ankle.
Landlord insurance also covers primary hazards such as wind, hail, and fire. What policies, both homeowners and landlord, do not include flood insurance. Each property is identified as to whether or not the structure itself is listed being in a flood plain. A survey or abstract will show any flood lines. There will also be a flood certification that states whether or not the property is in a flood zone. If a part of the lot is indicated by a survey that it is indeed in a flood zone, most lenders will still finance the home if the structure itself is nowhere near the flood line.
Any personal property within a rental property such as furniture or a computer. Covered personal property items must be on the property used by the tenants. A sofa would be covered because the tenants use it. A furnished rental property should have personal property coverage. And, like a standard homeowner’s insurance policy, liability coverage is also typically included. This covers anyone visiting the home, but it also can protect you against any claims by a tenant who was injured on the property including medical and legal fees. Landlord insurance is not the same as renter’s insurance. Renter’s insurance is paid for by the tenants and protects their personal property.
There are also landlord policies that pay you an equivalent monthly rent while the home is being repaired as the result of a covered hazard. Policies typically do not pay the landlord when a home is vacant because the lease expired and is being marketed once again to find new tenants.
Your new landlord policy will show the amount of coverage as well as listing the mortgage company as having a legal interest in the property. The insurance policy will be reviewed by the mortgage company to make sure the policy complies with the lender’s guidelines. Your loan officer can help you estimate what your policy might be, but it’s your insurance agent who will provide the final number.
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