As long as your tenants pay rent, rental property is a great source of income. Unfortunately, even the strictest tenant screenings are imperfect, and even the most responsible renters can be affected by unforeseen, life-changing circumstances. only then rent guarantee insurance comes in handy.
Rent guarantee insurance provides financial protection if your tenants fail to pay rent. In this sometimes unpredictable real estate environment, rent guarantee insurance helps you mitigate risk, so you don’t have to worry as much when collecting your monthly rent payment.
In this article, we will discuss rent guarantee insurance, how it works, and how to find the best insurance policy for you.
What is rent guarantee insurance?
Rent guarantee insurance is specifically for when rent is not paid because a tenant stops paying it. Rental property owners often use rental income to cover some or all of their monthly mortgage payments. Rent guarantee insurance exists to protect landlords from falling behind on these payments because their tenants have fallen behind on their tenants.
Even if you have the funds to cover your mortgage, evicting your tenants is a long and difficult process, often taking several months. During this time, there’s no guarantee that the tenant will respect your property, meaning you could evict them and then have to make expensive repairs before someone else can move in. Then, you have to factor in the amount of time it will take to find a good tenant. , With rent guarantee insurance, you will be covered for at least the months a tenant lives in your property, regardless of whether they are paying rent or not.
What is Rent Guarantee Insurance Cover?
You can get renter guarantee insurance coverage for both single-family and multi-family units. This insurance covers basic rent payments for a limited time period after your tenant stops paying rent. Depending on your policy, it may also cover:
- Property damage caused by tenants, their guests, or their pets.
- Lease guarantees if your tenant breaks their lease.
- Legal fees if you have to evict a tenant.
- maintenance costs.
What are the limits of rent guarantee insurance?
As you can imagine and experience, the insurance companies will not pay anyone. For example, if your tenant has a history of not paying rent on time, you are unlikely to be approved for rent guarantee insurance. This is one of the many reasons why you should always run a thorough background check before approving a rental application.
Insurance companies may also look at whether:
- The tenant had a stable job at the time of applying to move into your property.
- Your tenant has earned enough to comfortably afford their monthly rent payment.
- Tenant has a good credit score.
If your tenant doesn’t meet their qualifications, the insurance company may require you to have a guarantor with the financial means to cover delinquent or unpaid rent. Without it, you will have a hard time getting renter guarantee insurance if you want to accept that tenant’s application.
Assuming your insurance company approves your renter’s guarantee insurance, it typically takes a full month for you to go unpaid. You may also experience some pushback from your insurance company if they decide to argue that your renter’s security deposit is sufficient to cover that month.
Rent Guarantee Insurance vs. Rent Loss Insurance: What’s the Difference?
While rent guarantee insurance focuses on when a tenant decides to stop paying rent, rent loss insurance is for when damage to your property causes your tenant to no longer live there (eg , fire, natural disaster, a car goes through) a wall, etc.).
Typically, rent loss insurance covers the fair market value of your property, which may differ from your monthly rental income. We recommend getting rent guarantee insurance with rent loss insurance add-on for the best landlord rent protection measures.
Rent Guarantee Insurance: Pros and Cons
By now, you’ve probably identified some of the benefits and drawbacks of rental guarantee insurance. Here are the three main pros and cons of each:
Pros:
- peace of mind, If you are concerned that your tenant may fall behind on payments or decide to stop making payments, you can rest assured because Rent Guarantee Insurance will kick in as soon as one month after non-payment. Depending on your policy, you may also have coverage if you evict your tenants.
- goes beyond property damage, While rent loss insurance and other forms of landlord insurance usually focus only on physical property damage, rent guarantee insurance protects your tenant against non-payment of rent. For additional coverage add rent loss insurance to your rent guarantee insurance policy for the best landlord rent protection measures, get the best of both worlds.
- More time to find quality tenants, If your current tenant breaks their lease or if you have to evict them, it is beneficial to find a new tenant as soon as possible. Unfortunately, you may end up with another bad tenant and have to repeat the process. With rent guarantee insurance, you can take a little longer to verify tenants because you’ll have additional coverage for a specified period of time after your previous tenant moves out.
Shortcoming:
- insurance is not cheap, Rent Guarantee Insurance covers as much as 5% to 7% of your annual rental income. Some landlords offset the cost by including insurance in the cost of the rent. However, doing so runs the risk of being more expensive than its competing rental properties.
- There’s no guarantee you’ll need it, Insurance is meant to protect against the “what ifs” in life. However, many rental property owners rent out their homes for dozens of years without any tenant failing to pay rent or initiating eviction proceedings.
- your application may be rejected, If you fail to properly screen your tenant, your insurance company may deny your claim even if your tenant stops paying rent.
Who are Guaranteed Insurance Providers?
There are several companies that offer rent guarantee insurance to small landlords. Compare their offers on the BiggerPockets Loan tab. When you do, here are some things you should look out for:
- what is covered: Read the policy description carefully to know exactly what is covered and what is not. Insurance policies are famously difficult to understand, and you don’t want to buy a policy that doesn’t include the important protections you need.
- length of coverage: You will generally want to choose a policy that covers at least several months’ rent. This will give you the cushion you need during the months of non-payment, and if you evict your tenant, it’s time to find a new one.
- eviction protection: Some municipalities have strict eviction laws. If you live in an area that doesn’t allow you to start the eviction process until 90, 120, or 180 days in advance, you’ll want to cover the cost of evicting a tenant.
- payment terms: Many rent guarantee policies require you to pay the premium upfront, while others require multiple, smaller installments.
- reputable provider: Your policy must be from a legitimate insurance carrier that specializes in renter guarantee insurance. Do your research, and don’t hesitate to ask insurance agents specific questions about their policies.
How To Find The Best Insurance Policy For You
When finding the best policy for you, you have no shortage of resources. Start by reaching out to other landlords you know and ask what works for them. Their needs may be different from yours, but this will help you narrow down your search. You can connect with real estate agents and lenders in local or online networking groups or ask industry professionals in the BiggerPockets forums.
Once you have three or more solid leads, research each of them and compare their rates and offers. Contact their insurance agents to answer any questions you may not find on their site. Then, analyze all the information you have gathered from each policy and choose the one that best suits your needs.
Is Rent Guarantee Insurance Worth It?
Some landlords will never need renter’s guarantee insurance, but they’ll never know for sure. Rent guarantee insurance can be expensive, but it can also give you peace of mind and save you a lot of money if you have a tenant who stops paying rent or if you have to evict someone. Plus, having rent guarantee insurance means you don’t need to save as much in your “contingency fund” because you’ll have rent covered.
Whether or not you decide to purchase renter guarantee insurance, we strongly recommend that you do your research and clearly understand what you are getting into before choosing a policy. If you end up needing it, you don’t want any surprises.
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Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
