Do you rent out your home? Here's why you need "landlord insurance".
Renting out part of your home or other property you own to tenants is a great way to earn extra income. For many, owning and renting properties is a unique way to invest in real estate that can yield a significant ROI. If you're considering becoming a landlord, or if you already are one, you're well aware of the challenges involved. There's maintenance, finding potential tenants, and ensuring those tenants are honest, trustworthy, and will make their payments on time. Real estate can be a substantial investment, and you wouldn't want it to go to waste.
Enter landlord's insurance. No, it's not the same as homeowners insurance, nor is it an extension of homeowners insurance. Homeowners insurance, by definition, protects a house, assuming that you, the owner, will live in it and take good care of it. It covers your personal liability, your belongings, and everything inside. Unfortunately, this won't apply to a property you don't live in—that is, a place you rent out.
What is homeowner's insurance?
Landlord insurance is a type of insurance policy that, while it can vary depending on what you need to cover and your exact provider, protects landlords against financial losses related to their rental properties. It typically covers items very similar to homeowners insurance, from the physical property and its contents (which you own – not the tenant) to any liability that may arise from appropriating the property. Some policies will also cover lost rental income.
Essentially, a homeowner's insurance policy can cover:
- Rental income replacement if your tenants have to evacuate due to an insurable loss.
- Insuring your property against physical damage, including fixtures, floors, walls, HVAC systems, furniture, etc. – all subject to the terms of your individual policy. Different policies cover different risks and will contain certain limitations.
- Your legal responsibility, if someone holds you liable for material or bodily damage resulting from your ownership of the rental property.
Landlord insurance may exclude items you would expect, such as any of your tenant's belongings (they will need their own tenant insurance for that) and your tenant's liability. It may also exclude things like acts of war, civil unrest, flooding (without land-based water approval), infestation, and so on.
What if I only rent out part of my house?
Depending on your rental situation—for example, if you rent out a basement or a room in your house and not the entire property (and you live in the other part of the house)—you might be able to get by with a standard homeowners insurance policy. However, you should check with your provider to see if your policy terms include any restrictions in this regard. Landlord's insurance may only be required if you own a separate property and don't live there. Also note that even if landlord's insurance isn't mandatory, if you have a mortgage on your rental property, you will likely need coverage.
Do tenants need to have their own tenant insurance?
Tenants may not be legally required to have tenant or landlord insurance, but be aware that your landlord's insurance won't protect your tenants' belongings or their personal liability if someone sues them for damages caused by their actions. Tenant insurance can cover clothing, electronics, furniture (that isn't part of the rental property), and their personal liability should something happen. It's highly recommended that they have it, and you can even include a clause in your lease agreement stipulating that they must purchase it. Tenant insurance can be cheaper than two coffees a month.
How much does homeowner's insurance cost?
- Where you are located in Canada
- The size of the property
- If the property is located near significant risk factors
- Prior claims
- Rental history
- Personal information
Note that landlord insurance will generally cost you more than your average homeowners insurance. This is because managing and operating a rental property is generally much riskier than living in a house, as you won't be there every day to monitor the situation, and some tenants are much less inclined to take care of a rental property than something they own.
To keep your insurance premiums affordable, it's highly recommended that you conduct thorough due diligence on tenants and conduct background checks. Require your tenants to purchase tenant insurance and choose providers you approve. Dealing with non-payment is one thing; addressing potential physical damage to your rental property is another.
Panda7 can explain whether landlord insurance might be beneficial for you and your situation. If you own a property and only rent out one floor or a room, discuss your coverage options with our expert and friendly brokers today.