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Why insurance policies are critical to your rental business

Opinions expressed by australiabusinessblog.com contributors are their own.

As an investor, taking calculated risks is part of your job. Not every investment is profitable and you don’t always know what risks you are taking when buying real estate. Problems may not arise until years later. For example, an apparently healthy building can develop infrastructure problems after several years of ownership. Or an unpredictable argument between tenants could turn into a liability issue that you could not have foreseen.

For this reason, it is essential to protect yourself from risks by taking out insurance. Both you and your tenants must have coverage to protect you should something unpredictable happen. But how much does your coverage cost? Why do your tenants also need insurance?

Let’s explore these questions and find out why insurance policies are critical to your rental business.

Related: The Beginner’s Guide to Investing in Rental Properties

landlord insurance

Like any insurance coverage, landlord insurance protects you and your rental company from potential losses and liabilities.

Here’s how it works: When you buy a home, you work with an insurance company to decide which home policy (DP) you want. Home policies are insurance plans for property owners with varying levels of coverage.

For example, the cheapest home policy may only provide basic coverage for fires or storms. More substantial housing policies can add other types of natural damage, lost rent if those disasters render your units uninhabitable, or liabilities.

What does the landlord insurance cover?

A typical landlord insurance plan covers three types of losses:

  1. Property damage to your building or equipment, including those caused by natural disasters, fires, wind, lightning or criminal burglaries

  2. lost rent of months in which your property is uninhabitable due to any of the above damage

  3. debts, or legal claims (including medical bills, legal fees or legal fees) brought against you, usually as a result of an injury on the property.

These three types of coverage are standard in many insurance plans. However, you also have the option of taking out additional coverage. These supplemental policies may cover vandalism, building damage or upgrades to comply with changes in building or health regulations.

Another thing to note is that flood and eviction insurance is not included in a typical landlord housing policy. Coverage for these losses must be purchased separately.

When determining your coverage, think about where your property is located. Is the geographical area vulnerable to flooding, forest fires or earthquakes? Is crime in the neighborhood high? Then you can consider taking out more extensive insurance.

What does landlord insurance cost?

The average cost of landlord insurance is about $1,200-$1,300 per year, paid in monthly installments. This is about 25% more than a typical homeowner’s insurance policy with the same coverage – because renters tend to take on more risk.

However, costs ultimately depend on several factors, including the age of the building, the materials used to build it, the presence or absence of pets, the housing policy you choose, and the location of your property.

In general, home policies that use the replacement cost (RCV) are valued higher than those that use the true cash value (ACV). RCV represents the cost of rebuilding your property at current construction rates, while ACV represents the current, true value of your property. Coverage based on RVV leads to higher premiums.

Why take out landlord insurance?

If you take care of your belongings, do you really need to be insured? The landlord’s insurance is very valuable and usually worth the monthly fee. Here are some of the top reasons for getting landlord insurance:

  • Protect your investment: You cannot predict what may happen to your properties or your tenants. It’s best to be prepared.

  • Get a better interest rate on your mortgage: Some lenders require landlord insurance.

  • Take advantage of tax deductions: Landlord insurance premiums are usually fully deductible as a business expense that you can deduct from your taxable income.

Related: Getting Your Feet Wet in the Rental Industry

Tenant insurance

If landlord insurance protects your properties, what does tenant insurance cover? Your landlord coverage does not cover every loss related to your rental properties. Your tenants also need insurance for their losses.

What does the renters insurance cover?

Like landlord insurance, tenant insurance typically covers three types of losses:

  1. Personal property and tenant property, such as clothing, electronics or valuables

  2. debt due to a renter’s responsibility for injury or property damage

  3. cost of living in the event that a tenant’s unit becomes uninhabitable and he must seek alternative accommodation until the repair is completed

You can choose to offer your renters a standard renters insurance package, but they may also want to purchase their own coverage. For example, if a renter keeps particularly valuable items in their unit, they may want to add scheduled coverage for personal property or valuables.

Renters can also purchase theft coverage to cover their cars, boats, or trailers; credit card coverage for unauthorized transactions; or other add-on policies.

What does renters insurance cost?

Tenant insurance is relatively cheap for renters. The average cost is about $15 per month. However, these costs vary depending on the level of coverage.

Ultimately, the benefits of renters insurance are well worth the monthly premium. Your renters may not appreciate the extra upfront fee, but they’ll be thankful they have coverage if something happens.

Why need renters insurance?

Many landlords require tenants’ insurance to rent their units. This is generally a smart move, and here are our top reasons why:

  • Avoid resentment for damage: Your tenants are less likely to sue or file lawsuits if their insurance policy covers the loss.

  • Be transparent: In the event of a natural disaster, for example, your tenants can expect your landlord’s insurance to cover their household effects. They will be surprised to learn that it isn’t. It is better to inform your tenants in advance.

  • Avoid unnecessary complications with your insurance: If an accident occurs with your properties, chances are your renters insurance will kick in first. This saves you the hassle of communicating with your insurance company until you need to.

Related: 5 Real Estate Mistakes That Can Make You Lose Money

Insurance tips and tricks

If you’re ready to get started with landlord and tenant insurance, here are a few tips and tricks:

  • If your property management software offers tenant insurance as a secondary function, use these: This saves your tenants the trouble of finding a policy on their own and allows you to determine what type of coverage your tenants think they need.

  • Insurances of tenants follow: Remind renters to renew their policies before their coverage expires.

  • Avoid claiming minor damages: Save your coverage for heavier losses and keep your rate from rising.

  • Request a discount if you own several buildings: You never know what deals are available until you ask.

Disasters and accidents can be completely out of your control. However, if you prepare in advance, you will know that you are protected in the event of a major loss or accident in your rental business. Both you and your renters will appreciate the peace of mind and protection of insurance.


Shreya has been with australiabusinessblog.com for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider australiabusinessblog.com, Shreya seeks to understand an audience before creating memorable, persuasive copy.

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