Investing in rental property is a sound retirement investment strategy, as Jason Hartman advises. Rental property provides a stable income from assets that only appreciate in value. So it’s essential to protect yourself and your investment with the right kind of landlord’s insurance.
Ordinary homeowner’s insurance usually covers property rented for income only if it’s part of the original home, such as a guesthouse or suite. When you purchase a separate property as a source of rental income, you’ll need to consult with an insurance professional to get the most comprehensive landlord’s insurance package for your needs.
Insurance policies for US landlords have different names, depending on the company writing them, but typically policies specifically for rental units are called dwelling policies, which are categorized as DP-1, DP-2 and DP-3, depending on the level of coverage they provide.
The most basic of the three, DP-1 policies cover common risks such as vandalism or fire.
A DP 2 policy is broader, with a list of specific covered events in addition to the basics, such as weather damage or even collision damage if a vehicle hits the home. This level of coverage provides only the actual cash value of a loss on the house.
“Open peril,” or DP-3 policies offer the most comprehensive coverage of all, including every kind of risk unless it is specifically excluded in writing. Many insurers recommend that investors purchase this kind of policy because it provides the actual replacement cost of a loss. For example, if a roof is damaged during a storm, DP-1 and DP-2 policies write off the loss based on its current value. If the roof is 10 years old, you’re allowed only the estimated current value of the roof. But a DP-3 level policy covers the cost of a new replacement.
Other variations on landlord insurance include landlord protective policies, which cover specific aspects of the rental unit such as the breakdown of equipment like furnaces or air conditioners. Liability coverage can be a good idea, too, offering protection against lawsuits for damages if someone falls or suffers another kind of injury on the property. Another possibility is loss of income coverage, which compensates the landlord if the building has to remain vacant for a time, such as during major repairs.
Landlord policies exist to protect your investment – the property itself and everything associated with it, such as fixtures and equipment like furnaces and boilers. Tenants’ personal belongings are not covered under these policies; they need to purchase their own renter’s insurance to cover those things. Landlords are not legally responsible for loss or damage of tenants’ personal property.
Landlord insurance is more expensive than standard homeowner’s insurance, but not by much. And, the premiums for almost all insurance coverage for rental property is tax-deductible, including costs of any health or workman’s compensation insurance you pay for workers you employ in connection with the property.
Rental investing can be a smart way to ensure a stable retirement income. And protecting it with the right landlord’s insurance policy is a smart strategy too. (Top image: Flickr | dvs)
The Heroic Investing Team