14 most common types of insurance for real estate investors

Latest update on January 19, 2023.

There are various types of coverage and insurance options available for real estate investors to help cover against a lawsuit arising from the wrong insurance for your rental property, which could result in a sudden end to your investing career and the loss of both personal and business funds. These options can also provide coverage to protect you against claims from tenants or full or partial loss of the property.

By opting out of purchasing unnecessary coverage, you can minimize the chances of facing unforeseen damages by obtaining suitable insurance for your rental property.

Below are 14 of the most frequent varieties of insurance plans and extra coverage choices for individuals investing in real estate.

Although there is a long list of other items you may want to consider, it is important for investors with rental property experience to talk to a few different insurance brokers in your local area. This is why it’s crucial to market your property investment depending on where it is located.

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1. Landlord insurance

Landlord insurance, also known as rental property insurance, typically covers a variety of different types of real estate investments. This type of insurance policy may include coverage for income loss, hazards, and liability.

In many states, you can require a tenant to pay for and obtain their own renter’s insurance policy. One thing to note is that the landlord’s insurance doesn’t cover the items that belong to your renter.

2. Liability insurance

Liability insurance allows you to safeguard standard liability coverage and also provides protection for your repair individuals, including tenants, their visitors, and any incidents that occur on your property involving individuals.

  • In the event of an injury or theft.
  • In the event of an incident that took place on your premises and there are medical and recovery expenses.
  • If an individual chooses to initiate legal proceedings, this includes any compensation granted that you are required to cover.
  • 3. Hazard and fire insurance

    Typically, fire and hazard coverage are included in a basic insurance policy. Hazards such as theft or damage to the structure from fires or storms may be included as well. When reviewing your insurance coverage for your rental property, many investors prefer to insure the property for the cost of replacement, not just its current cash value.

    4. Sewer and water line backup

    Adding coverage for sewer and water line fractures or blockages to your insurance policy is typically possible. A sudden cost that you may have to incur is a fracture in your primary plumbing line. If a fracture happens on your portion of the property boundary, it is your responsibility, rather than the city’s, to engage a licensed contractor for the repair. The majority of obstructed lines can be effortlessly cleared. In numerous localities, a fracture in your primary plumbing line can be an unforeseen expense that you have to bear.

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    5. Flood insurance

    “If you are concerned about an unexpected catastrophe that could cause damage to your rental property, such as flooding from a broken pipe, many insurance policies do not cover water damage from sources outside, such as a hurricane or a ‘100-year flood.’ However, if your property is located in a designated flood zone, flood insurance is typically required.”

    6. Tenant rent default insurance

    7. Pet coverage

    Offering a rental property that allows pets can lead to increased rental prices and reduced vacancy rates. Nonetheless, if you choose to rent to a tenant who owns a pet, it is advisable to confirm that the tenant’s renters insurance includes coverage for their pet, provided it is permitted by the local landlord-tenant laws. This precaution is necessary as you could potentially be held responsible for any harm or damages caused by the tenant’s pet.

    8. Loss of income coverage

    Loss of revenue insurance might be a wise decision for your business (based on your individual circumstances) as your collection of rental properties expands and your earnings rely on the rent you receive. However, if you only possess a single rental property and a manageable mortgage, you may be capable of covering your costs even if your property remains unoccupied for a few months. Loss of revenue insurance safeguards you in the event that your rental property becomes uninhabitable for an extended duration, for instance, due to fire or a natural calamity.

    9. Partnership insurance

    Instead of continuing to work with an unknown business partner, the business decides to work with a new and unknown partner.

    10. Builder’s risk insurance

    If there is a significant delay in completing the project, some builder’s risk insurance policies may also cover you against income loss. If you are renovating a vacant property that you have purchased, you should consider whether to obtain builder’s risk insurance policy to cover you against liability claims, fire hazard, contractor injury, property damage, theft, and vandalism.

    11. General contractor insurance

    If workers are injured while working on one of your rental properties, or if construction equipment is damaged or stolen, real estate investors who choose to do their own renovation work instead of hiring a contractor may obtain this type of insurance, which covers general contractor liability.

    12. Worker’s compensation coverage

    Worker’s compensation insurance protects employees who have incurred injuries or caused injuries to other employees, covering expenses such as medical bills. Additionally, real estate investors often obtain insurance to protect themselves from potential lawsuits filed by injured employees or tenants.

    13. Umbrella insurance

    An umbrella insurance policy may cover lost wages and medical expenses related to an injured person, as well as the costs of legal defense if you’re involved in a lawsuit. For example, if the limits of your standard liability policy have been exceeded, umbrella insurance provides secondary coverage that protects you.

    Tips for Choosing the Right Insurance

    Choosing the wrong insurance coverage for a rental property can be an expensive mistake. It could mean that you are not covered when a natural disaster strikes, implying that selecting the wrong policy may result in financial loss. Therefore, you don’t really need to overpay for unnecessary extra coverage, as it could negatively impact your cash flow.

    Here are a few crucial guidelines for selecting the appropriate insurance and supplementary protection for your rented property:

    1. Be truthful.

    Some investors try to cut corners and save a few dollars by not telling the insurance company that the rental property is more expensive than a residence that is owner-occupied.

    Insurance companies generate revenue through two primary methods: policy cancellations and denied claims, highlighting the importance of considering these two aspects when considering their profitability.

    2. The distinction between actual cash value and replacement cost.

    Actual cash value (ACV) refers to the amount that the insurance company will reimburse you for the property, excluding the value of the land. On the other hand, replacement cost provides insurance coverage for the complete expense of any damage, regardless of whether you need to reconstruct the property.

    If you own a rental property in a market where property prices are rapidly rising, make sure to renew your policy fully before the end of each year to ensure that you are adequately covered and to stay updated with the current sales comparables.

    3. Policy category.

    If you have recently completed renovations on a property and are preparing to rent it out, it is important to consult with your insurance broker to inquire about coverage for lost rent, tenant liability, and pets. Additionally, you should update your insurance policy accordingly. A house that is currently undergoing significant rehabilitation work would require Builder’s Risk coverage, while a property that is being renovated but is unoccupied would require Vacant coverage. On the other hand, if you have already rented out a property, it would fall under the Landlord category. These are the three primary classifications for property insurance policies.

    4. Deductibles are important.

    Insurance companies have deductibles to help limit the number of claims policyholders make, so be sure to have some ‘skin in the game’ by filing a claim each time you pay a deductible amount.

    Ensure you have money reserved in an account to pay your deductible if and when you make a claim. As a general rule of thumb, having a higher deductible will lower your annual premium.

    5. Insurance agent versus broker.

    An insurance broker can represent several insurance companies, and there may be creatively difficult ways to insure a property. Similarly, insurance companies work in the same way to satisfy lenders.

    On the contrary, real estate investors should ensure that they have additional insurance coverage and should verify the expertise of insurance agents or brokers in dealing with rental properties, such as State Farm or Liberty Mutual, who exclusively work with a single insurance provider.

    6. Assertions can cause harm.

    It becomes challenging to insure your property due to the high expenses policy and limited insurance options. However, policyholders should file claims to ensure they receive the worth of their money, as filing claims can result in an increase in annual insurance premium or not getting the annual insurance premium if they decide not to renew their policy with the same carrier, which many investors find concerning.

    7. Obtain discounts on policies.

    When it comes to your business, insurance companies are frequently willing to create a discounted bundle for real estate investors. While searching for insurance carriers, inquire with the company that insures your house or car about the availability of rental property insurance. Insurance carriers, like everyone else, appreciate repeat business.

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    Final Thoughts

    Having insurance for your real estate can help protect you against unexpected, large losses while keeping your cash flow healthy. You don’t need to pay for coverage if you’re not keeping your estate in good health.

    It is important to have a trusted insurance broker as part of your real estate team if you are under-insured, as it usually leads to disaster when a late make is changed. If your insurance coverage needs to be upgraded, it is important for your trusted insurance broker to understand your existing policies.