Rent Guarantee Insurance Explained: What It Can Do For You?
When you’ve invested money into your business and rental properties, it makes sense to want to protect them. Landlord insurance makes it possible for you to protect your building from environmental damages while also protecting yourself from liability; renters insurance allows tenants to protect their belongings at the unit.
How does rent guarantee insurance help to protect your business?
Though only seen internationally in the past, rent guarantee insurance is becoming more popular in America, and it’s easy to see why once you learn about it. This affordable insurance option just makes sense for many landlords; are you missing out?
Let’s talk more about rent guarantee insurance and what type of benefits it can offer you.
What Is Rent Guarantee Insurance?
Let’s cover the basics first: what is rent guarantee insurance?
Rent guarantee insurance is a type of insurance policy for landlords that covers the rent when it is not paid by tenants. Unlike insurance policies that cover rent that is missed out on because of external factors like fires, this insurance policy works when rent is not paid because the tenant stops paying.
This type of insurance was invented because landlords with nonpaying tenants were missing mortgage and other important payments (because of the missing rent payments).
Since it can take months for a landlord to be able to evict a tenant for nonpayment, clean up the property, and market it to a new tenant, the insurance company picks up what the tenant has missed out on paying.
How Are Rent Guarantee Insurance Policies Taken Out?
Rent guarantee insurance policies are taken out on specific leases as opposed to on specific properties; this means you will need to take out a specific policy for each tenant you sign on to one of your rentals.
These policies can usually only be taken out on rental agreements that have tenancies which already started or that will start within the next 30 days. They cannot be taken out before that, and they cannot be taken out on a general unit without having a specific tenant signed on.
How Does Rent Guarantee Insurance Payout?
In most cases, a claim can be filed as soon as the tenant has shown that they will not be paying rent or have not paid rent even after you send them an official notice. Most rent guarantee insurance plans do not cover the first month of unpaid rent, but they will cover up to six months starting from the second month.
Remember, however, that every insurance policy is a little bit different. This means that while the terms outlined above are a good representation of most policies, you should always check the terms of your specific policy for the most accurate details.
What Does This Insurance Cover?
This insurance is made to cover the base rent, without any other fees, for a limited period after a tenant stops paying rent. There does not need to be any physical damage.
What Types Of Rentals Qualify?
Rent guarantee plans may be available as both residential or commercial landlord rent guarantee insurance in your area. There isn’t a limitation on the type of property, but some plans are limited on what range of rent will be covered. For example, many popular plans in the US are only applicable to rental units with rent between $800 and $5,000 monthly.
Additionally, many insurance underwriters will take into consideration the creditworthiness of the tenants on the lease before offering this type of policy. You may need to sign an agreement that states you ran a credit check before signing the lease before you qualify for a rent guarantee insurance policy.
How Expensive Is Rent Guarantee Insurance?
The cost of coverage is going to be a factor for many landlords like you when deciding whether or not adding this type of coverage makes sense. Unfortunately, the cost is going to vary widely depending on where you are and what the offerings in your area are.
Regardless, you may be able to balance the cost of adding this type of insurance into the base monthly rent depending on your area and profit margin. The insurance is a reasonable expense for your business if you consider the protection it adds, so factoring this cost into your rent calculation is something to think about.
Many property management companies offer this type of insurance through a third-party with their services, so that is something to consider as well if you use or plan to use a property management company.
When it comes to being able to file an insurance claim for the loss of rental income, there are two types of policies that can usually be applied.
Rent Loss Insurance
The first is a rent loss policy that is often included with landlord insurance or can be added on to a landlord insurance package very easily. Rent loss insurance is used whenever some casualty event causes damage to the property, and that damage makes it so that the tenant can no longer stay at the property.
In this scenario, rent loss insurance kicks in as long as the damage is caused by an eligible event. The idea is that rent loss insurance covers the risk of rent being lost due to some type of physical damage to the property.
In most cases, this type of insurance policy will only cover the fair market rental value, which might be different than what the tenant was actually paying for rent.
Rent Guarantee Insurance
The second type of rent cost insurance is the rent guarantee insurance that we have been discussing today.
The most significant way that this type of insurance differs from rent loss insurance is that it is specifically intended to be used when a tenant stops paying rent. The reason for the tenant’s nonpayment can be one of many varied reasons. From job loss to abandonment, the reason for the nonpayment doesn’t factor into the insurance coverage.
Another difference between this insurance type and rent loss insurance is that a rent guarantee insurance policy will cover the base rent amount that was being paid by the tenant monthly whereas rent loss insurance will not.
Why do landlords choose to put more money into insurance through a rent guarantee policy on top of what they’re already spending on the mortgage, landlord insurance, and other costs?
What makes this type of insurance worth it?
There are a few primary things that may help this type of program worth the money:
- Less Stress
If your tenant suddenly falls on hard times or leaves the property without notice, it is a very stressful time. With a guarantee in place, you can file a claim after as little as one month and be less stressed.
- More Time To Find Good Tenants
When a tenancy ends suddenly, you may be tempted to fill the vacancy as quickly as possible with whoever applies. That can leave you with unchecked tenants who may repeat the process, which would just duplicate your stress. With the help of a guarantee program, you can do your complete screening process with less worry.
- Beyond Physical Damages
Standard rent loss insurance policies are only focused on physical property damages that cause your income to be reduced, but that is not the case with a rent guarantee policy. You can round out your coverage by adding on this type of policy.
In addition to protecting your business through rent guarantee insurance to cover nonpayment of rent, you can also protect your business by taking the time to screen tenants carefully.
Choosing great tenants has a major effect on your rental business and your rental income.
Tenants selected through a thorough screening process are more likely to rent long-term, pay rent on time, and not miss out on payments. By making sure your rental screening process is up-to-par, you can reduce the risk of needing to deal with a nonpayment situation at all.
Of course, no amount of screening is going to completely negate that risk, and that is where rent guarantee insurance can fill the risk gap.
Buying rent guarantee insurance, like buying any other type of insurance, is about protecting your property and your investments. Any situation where you cannot collect rent becomes very stressful, so having insurance in place to reduce that burden can be a very smart move.
Remember how rent guarantee insurance can help you:
- Covers up to six months of rent due to renter nonpayment
- Can be taken out to cover specific rental policies
- Offers backup protection against sudden income loss
The world can be turbulent, and you can never predict what might happen. Consider if having an insurance policy to protect you in difficult times is going to lessen your load!
Read the full article, click here.