Renting out a part of your home is a good way to supplement your earnings. All you need is a spare room, garage, or any extra space in your house, and it earns you a passive income with minimal effort. It can also put a more expensive property within your reach. The higher monthly mortgage of a better house can be offset by renting out a part of that house upon purchase.
The benefits of renting out, however, do not come caveat-free. The homeowners’ insurance that usually covers costs incurred in the event of a natural disaster, accidents, or any other damaging situation will no longer apply the moment you rent out. This is where the commercial landlord insurance comes in.
What is Landlords’ Insurance?
When you start renting out a part of your property, you are transforming from a plain homeowner to becoming a businessman. Renting out is no different than any other business in that there are financial ramifications involved. It is this financial component that you have to protect, something that your traditional home insurance could not do.
Why Do You Need a Landlord’s Insurance?
A comprehensive landlords’ insurance can give you protection against financial losses due to damage to property, loss of income, and liabilities.
- Property damage
This component of the insurance policy covers damages incurred by your real property and everything inside it. In the event of fires, earthquakes, or even negligent tenants, the building structure and its permanent fixtures are insured. All equipment outside the house but within the bounds of your property is also protected. So are all personal property inside, such as furniture and fixtures, appliances, and furnishings.
There are three ways with which you can be compensated in the event of property damage. First is with the replacement cost or value, which is the current value of the property that was damaged and needed to be replaced. This value fluctuates over time, depending upon the behavior of the market or the financial weather. Its final value is determined through a process called the replacement valuation.
The second mode of compensation is using the actual value or actual cash value of the damaged property. Its sum is the replacement cost at the time of the loss or damage minus its depreciation. It can be likened to the price you would be asking if you sell it as is, prior to being damaged or stolen. The last method of most insurance companies is a predetermined sum of cash.
- Loss of Income
When your house becomes temporarily unfit for habitation, this component of the insurance policy will come into effect. In the event of a fire, flood, a sinkhole incident, and other similarly insured incidents that could force your tenants off of the rented part of the property, the landlord insurance will give you temporary compensation and protect you from losing income due to the non-payment of rent.
Loss of rent insurance has you covered for the duration of repair on your property if an insured event damaged it. However, when your tenant refuses to pay for any reason or leaves without paying months of rent, insurance may not cover this. There is another layer or supplemental insurance option that can help you in these situations: the rent guarantee. It compensates you for the fair rental value of the space you are renting out without the other expenses, such as utility bills. It generally pays up to 12 months.
Injuries that occur within your property have legal implications on you as the landlord, regardless of whether you are directly at fault or not. It could be a visitor who happens to slip or trip on something, a tenant who gets hurt because of maintenance issues or even a trespasser who gets injured while within the premises of your property-any of them could file a lawsuit for liability claims.
If you are found liable, the insurance will cover the medical costs, legal fees, or settlement costs, whichever applicable. The insurance policy could also reimburse the cost of the tenant’s belongings if they were damaged within your property. For instance, if the tenant’s valuable collection of vintage sports cards incurred water damage due to a leaking pipe, this layer of the landlord insurance policy will protect you from their liability claim.
Protect Your Property and Business
Business is synonymous to risk, and renting out is no exemption. While it is true that leasing or subletting is one of the more straightforward businesses to get into, it is not without any financial perils. Insurance is one of the many practices a responsible businessman should not neglect, and neither should you.
Author – Audrey Cunningham