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How much is landlord insurance & how can you lower the cost?

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by Jeff Rohde, posted in Investment Strategy

With the way the rents and real estate prices are rising, it’s more important than ever to make sure that a property is properly insured. Having the right insurance can help protect a landlord from financial loss due to damage or a lawsuit, and make it easier to sleep at night. 

Let’s look at the benefits of having landlord insurance, how much landlord insurance costs, and techniques to help keep a landlord insurance premium as affordable as possible. 

Key takeaways

  • Landlord insurance is similar to homeowners insurance policy, but specifically designed for a rental property.
  • Most landlord insurance policies provide liability, property, and loss of income coverage.
  • The cost of a landlord insurance policy is generally 15%-20% more than a homeowners insurance policy.
  • While a landlord insurance policy costs an average of $1,680 per year, landlord insurance costs can vary dramatically from state to state.
  • Tips for reducing the cost of landlord insurance include installing safety devices in a rental property, making claims for major losses only, and annually updating a property’s valuation to ensure that the property amount of coverage is purchased.


Why do investors purchase landlord insurance?

Landlord insurance is similar to a homeowners insurance policy, but with coverage specifically designed for rental property. Most landlord insurance policies offer protection from 3 types of losses:

  • Liability coverage to protect from legal and medical expenses associated with a tenant, a tenant’s guest, or other person sustaining an injury while on the rental property. If a landlord is found to be legally liable, landlord insurance liability coverage will generally pay a claim amount in excess of the policy deductible.
  • Property coverage provides protection if a rental home or detached outbuildings are physically damaged by a covered natural disaster such as a fire or hail storm. Personal property such as kitchen appliances or landscaping equipment owned by a landlord and used in the rental home that are damaged by a covered peril may also be covered by landlord insurance.
  • Income loss or loss-of-rent coverage compensates a landlord for lost rental income if a tenant has to move out while repairs are made to damage caused by a covered peril. For example, imagine the roof of a home is blown off during a wind storm and the home is uninhabitable while repairs are being made. Income loss coverage pays for the rent payment that would have been received, provided that a wind storm is a covered peril.

A landlord insurance policy may be purchased for all types of rental property, including a home rented to a tenant on a long-term lease, a short term rental rented by the week or month, and for a property that is used as a seasonal vacation rental. 

Generally speaking, a landlord insurance policy is not available for a primary residence, even if part of the home is rented out to a tenant. Real estate investors who house hack may wish to speak to their insurance provider if only part of a home, such as a spare bedroom, is rented.


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How much is landlord insurance?

Landlord insurance usually costs 15%-20% more than homeowners insurance, according to this blog post on HouseLogic from the National Association of Realtors. For example, if the average cost of a homeowner insurance policy is $1,680 per year, a landlord insurance policy for the same home used as a rental might run between $1,932 and $2,016 per year. 

However, unlike a primary residence, a landlord can include an insurance premium as part of a rental property’s operating expenses to be deducted from rental income received from a tenant.

ValuePenguin recently researched the average cost of homeowners insurance in all 50 states. These are the states with the highest and lowest annual landlord insurance costs calculated by adding 20% to the cost of homeowners insurance, based on the report:

Most expensive states for landlord insurance

Colorado – $4,060

Oklahoma – $3,985

Tennessee – $3,636

Kansas – $3,136

Texas – $3,065

Least expensive states for landlord insurance

Idaho – $1,266

Maine – $1,178

Pennsylvania – $1,079

Vermont – $990

Delaware – $937


Factors affecting the cost of landlord insurance

In addition to where a rental property is located, there are several other factors that may influence landlord insurance rates.

Factors related to the property

Property-specific factors that affect the cost of landlord insurance include the age of a home, the construction materials used, and special features such as a swimming pool or spa. For example, an older home generally has more structural wear and tear, even when it is well maintained. 

Building materials such as wood are more susceptible to termites or fire, while amenities like a pool can be a potential hazard to a tenant and their guests. Also, while offering a pet-friendly rental may be a good way to quickly find a qualified tenant, a pet that is classified as a dangerous or aggressive breed may result in a higher insurance premium.

Factors related to the owner

There are also factors not specific to a property that may affect landlord insurance costs. Claims history can have a significant impact on landlord insurance rate, because the more claims made the higher future rates will be. In fact, an insurance company may reserve the right to terminate or decline to renew a landlord policy if the claims history for a landlord or property is too high. 

Other factors that may influence the cost of landlord insurance include the deductible amount, coverage limits for personal property and liability, and the dwelling coverage limit. A policy with a high deductible usually has a lower rate, because a landlord pays more money upfront if there is a claim. The amount of coverage for personal property and liability also impacts the cost of landlord insurance, because the higher the coverage is the greater the annual premium will be. 

The type of dwelling coverage also affects landlord insurance rates. Choosing coverage based on actual cash value (ACV) may result in a lower annual premium but may not cover the actual expense of rebuilding a home at today’s current construction costs. That’s because less cash is paid out due to a home’s age and wear and tear. On the other hand, a landlord insurance policy with replacement cost value (RCV) coverage may cost more, but will also cover the current cost of rebuilding a home.


Types of landlord insurance policies

An investor who is shopping for landlord insurance will usually have a choice of three different types of dwelling policies or “forms.” As a rule of thumb, the higher the dwelling policy number is, the higher the coverage is:

  • DP-1: Most basic and least expensive landlord insurance policy that generally only provides coverage for perils that are specifically listed. If a disaster such as hail damage is not specifically named, a landlord may be unable to file a claim if a rental property is damaged by hail. Oftentimes, reimbursement is made based on actual cash value, which is the actual cost of the damage minus wear and tear, or depreciation.
  • DP-2: Provides a wider range of coverage, although perils may still need to be specifically named. This policy number generally pays out on a replacement cost basis, which means that no deduction is made for depreciation or wear and tear.
  • DP-3: Most expensive but also the most extensive of the three types of dwelling policy coverage. Generally, a DP-3 landlord insurance policy will provide coverage against all perils, except for those specifically excluded. Reimbursement is also made on a replacement costs basis, similar to a DP-2 policy.


Tips for lowering the cost of landlord insurance

Insurance companies generally don’t offer the same type of discounts on landlord policies as they do for auto insurance or multiple policy discounts such as auto and homeowners insurance. However, there are still things that a landlord can do to help lower the cost of landlord insurance:

  • Install safety devices such as hard-wired burglar and fire alarms, carbon monoxide detectors, and child-safe windows to provide more safety and security to a tenant and a property.
  • Investors who own more than one rental property may ask about the possibility of a discount for landlord insurance policies from the same company.
  • Avoiding making claims for minor items that may lead to a landlord insurance rate being increased or even being declined for renewal at the end of the year.
  • Inquire about a discount for paying a landlord insurance premium annually instead of every month.
  • Use the new property valuation feature from Stessa to regularly update a rental property’s value, including any safety-related improvements, to make sure the right amount of coverage is purchased each year.
  • Choose an insurance broker who specializes in rental property and real estate investors.


Closing thoughts

Landlord insurance is one of the normal operating expenses that come with owning and operating a rental property. While the cost is slightly higher than a homeowners insurance policy, the monthly premium can be paid with rent collected from a tenant. 

However, it’s still important to shop around for landlord insurance by getting quotes from different brokers and reading each policy to understand the perils that are covered, and those that are excluded. With the right landlord insurance policy, an investor will be able to rest easier knowing that a rental property is properly insured and protected.


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